Independent Director: A Critical Study

PROJECT BY:

NAME: Mukul Rathore

COURSE: B.A.LL. B (Hons.)

ROLL NO: 1742

SEMESTER: 7th

SUBMITTED TO:

Mrs. Nandita S. Jha

Assistant Professor of law

A FINAL DRAFT SUBMITTED FOR THE PARTIAL FULFILMENT OF THE COURSE
CORPORATE LAW-I FOR THE DEGREE OF B.A.LL. B

October, 2020

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYA NAGAR,

MITHAPUR, PATNA – 800001
 CERTIFICATE OF DECLARATION

I hereby declare that the research paper titled Independent director: A Critical Study submitted
by me is based on actual and original work carried out by me. Any reference to work done by
any other person or institution or any material obtained from other sources have been duly cited
and referenced.
Mukul Rathore
1742
 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Ms
Nandita Jha for her exemplary guidance, monitoring and constant encouragement throughout the
course of this project. The blessing, help and guidance given by his from time to time shall carry
me a long way in the journey of life on which I am about to embark.
I also take this opportunity to express a deep sense of gratitude to my seniors, the library staff
and my friends for their valuable information and guidance, which helped me in completing this
task through various stages.
I would also thank my Institution and my faculty members without whom this project would
have been a distant reality. I also extend my heartfelt thanks to my family and well-wishers.
 TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION....................................................................................................5
CHAPTER 2: PROVISIONS MENTIONED IN COMPANIES ACT, 2013.................................7
CHAPTER 3: COMPLIANCE WITH THE COMPANY’S CODE OF CONDUCT...................12
I. Guidelines of professional conduct:.......................................................................................12
II. Role and functions:...............................................................................................................12
III. Duties:..................................................................................................................................13
CHAPTER 4: CLAUSE 49 OF LISITING AGREEMENT..........................................................15
CHAPTER 5: KEY RECOMMENDATION OF UDAY KOTAK PANEL................................17
CONCLUSIONS AND SUGGESTIONS.....................................................................................19
BIBLIOGRAPHY..........................................................................................................................20
 CHAPTER 1: INTRODUCTION
Though the concept of independent director cannot be called a new concept but it has emerged in
a new form in recent years more so after scams such as Satyam.One of the factors that that has
been identified to be common across all these major corporate failures around the world has been
the “failure of the board of directors of a corporation to detect internal crisis early on & act in a
timely manner to put the organization back on track before difficulties become
irreversible.”1After witnessing various corporate failure, scandals & the ensuing crisis, attempts
at various levels have been made to make corporations strong & effective to counter various
problems which crop up in routine dealings. It is at this point that need of independent director
arises because through them, objectivity & rational perspective can be brought on board & they
can to a large extent ensure transparency& accountability of a board. They are expected to
enhance the standards of corporate governance. Corporate governance is a key element in
improving economic efficiency & growth as well as enhancing investor confidence. The
corporate governance should promote transparent& efficient markets, be consistent with the rule
of law & clearly articulate the division of responsibilities among different supervisory, regulatory
& enforcement authorities.”2

The Board is a group of individuals appointed by the owners of the company to run the company
in the interest of the stake holders. The representatives on the Board should run the affairs in a
transparent manner to all its stakeholders. A company is a combination of various stake holders
such as investors, employees, vendors, customers, governments and society at large. The
management of the daily affairs of the company is given to the Board of Directors. It has been
observed that the Boards have taken decisions which were against the interests of the
shareholders & stakeholders and were beneficial to only a select few thus in my project various
means and suggestions from the various committees have been listed to prevent obscurity and
promote balance of power so that fraud of the likes of Satyam Case are not committed or are
deducted.

1
Jayati Sarkar, Board Independence & Corporate Governance in India: Trends & Challenges‟ (2009) 44 Indian
Journal of Indian Relations.
2
Preamble, OECD Principles of Corporate Governance, 2004.
AIMS AND OBJECTIVES

The objective of this research project is to –

 To do comparative analysis of the role of Independent Directors between Clause 49 of

Listing Agreement and CA, 2013.
 To learn about the recommendations of Uday Kotak Panel for the positions of
Independent Directors.
 To learn about the importance of Independent Director in ensuring good Corporate
Governance.

SCOPE AND LIMITATION

This project is limited in its scope due to paucity of time, multiplicity of areas to be covered due
to the inherent vastness of the subject matter and limited financial resources. However, the
researcher has aimed to keep a fairly broad scope in order to gain a complete picture of the topic.

RESEARCH METHODOLOGY
This study involves the use of doctrinal method of research. The information will be gleaned
from various books on the subject of International Trade Law, articles and published research
works.

HYPOTHESIS
In the wake of the corporate governance norms, the role of independent director has been
strengthened.
 CHAPTER 2: PROVISIONS MENTIONED IN COMPANIES ACT,
2013
Independent Director though not an uncommon concept was not defined under the earlier Clause
49 of listing agreement and 1956 Act. Companies, Act, 2013 for the first time has defined the
term “Independent director‟. The old Act of 1956 did not contain any provisions regarding this
so only listed companies had to follow this requirement as per Clause 49 of the Listing
Agreement but now independent directors have been made mandatory for unlisted large public
companies. The Act, 2013 differs from Clause 49 at various points but its requirements are far
more stringent than Clause 49.

Who is an Independent Director?

Section 149(6) of the Companies Act, 2013 defines independent director as under: An
independent director in relation to a company, means a director other than a managing director or
a whole-time director or a nominee director,— (a) who, in the opinion of the Board**, is a
person of integrity and possesses relevant expertise and experience; (b) (i) who is or was not a
promoter of the company or its holding, subsidiary or associate company; (ii) who is not related
to promoters or directors in the company, its holding, subsidiary or associate company; (c) who
has or had no pecuniary relationship, other than remuneration as such director, with the company,
its holding, subsidiary or associate company, or their promoters, or directors, during the two
immediately preceding financial years or during the current financial year*. However,
remuneration not exceeding 10% of his total income or such amount as may be prescribed will
not be considered as a disqualification for appointment as independent director**. (d) none of
whose relatives- (i) is holding any security of or interest in the company, its holding, subsidiary
or associate company during the two immediately preceding financial years or during the current
financial year: However, the relative may hold security or interest in the company of face value
not exceeding fifty lakh rupees or two per cent of the paid-up capital of the company, its holding,
subsidiary or associate company or such higher sum as may be prescribed; (ii) is indebted to the
company, its holding, subsidiary or associate company or their promoters, or directors, in excess
of such amount as may be prescribed during the two immediately preceding financial years or
during the current financial year; (iii) has given a guarantee or provided any security in
connection with the indebtedness of any third person to the company, its holding, subsidiary or
associate company or3 their promoters, or directors of such holding company, for such amount as
may be prescribed during the two immediately preceding financial years or during the current
financial year; or (iv) has any other pecuniary transaction or relationship with the company, or its
subsidiary, or its holding or associate company amounting to two per cent or more of its gross
turnover or total income singly or in combination with the transactions referred to in sub-clause
(i), (ii) or (iii).

(e) who, neither himself nor any of his relatives— (i) holds or has held the position of a key
managerial personnel or is or has been employee of the company or its holding, subsidiary or
associate company in any of the three financial years immediately preceding the financial year in
which he is proposed to be appointed. However, in case of a relative who is an employee, the
restriction under this clause shall not apply for his employment during preceding three financial
years. (ii) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of—(A) a firm
of auditors or company secretaries in practice or cost auditors of the company or its holding,
subsidiary or associate company; or (B) any legal or a consulting firm that has or had any
transaction with the company, its holding, subsidiary or associate company amounting to ten per
cent or more of the gross turnover of such firm; (iii) holds together with his relatives two per cent
or more of the total voting power of the company; or (iv) is a Chief Executive or director, by
whatever name called, of any nonprofit organisation that receives twenty-five per cent or more of
its receipts from the company, any of its promoters, directors or its holding, subsidiary or
associate company or that holds two per cent or more of the total voting power of the company;
or (f) who possesses such other qualifications as may be prescribed. Thus, nominee directors of
Banks or Financial Institutions will not be considered as independent directors as per the
Companies Act, 2013.

3
Companies act of 2013, s 149.
Number of Independent Directors
There is a specific obligation on every listed public company that at least one-third of the board
of directors should comprise of independent directors & also empowers Central govt. to include
other class/classes of companies within the scope of this requirement 4. To make the process even
simpler, an independent director may be selected from a data bank containing details of persons
willing to be appointed, maintained by anybody etc. as may be notified by the Central
government5. But the hard fact remains that it is really difficult to find adequate number of
persons sufficiently qualified & also willing to take up this job.

Remuneration
Another significant step taken is that the Act also places limit on the number of shares that can be
held in the company by a relative of such a director 6. The Act also expressly disallows them from
obtaining stock options7. Profit related commission may be paid to them, but subject to the
approval of the shareholders8. The concern which arises here is wide disparity between the
remunerations & the responsibilities given to perform.

Responsibilities
The Act has imposed manifold responsibilities on independent directors. The Act requires the
individuals to submit a self-declaration confirming that they have satisfied the criteria prescribed
for the position9. It is also stated that any board meeting held at shorter notice (to transact urgent
business) requires the presence of at least one independent director & if such is not present, the
matter discussed at the board will be considered approved only once an independent director
ratifies it10. Further, they can be removed if they fail to attend any board meeting for 12 months

4
Companies Act 2013, s 149(4)
5
Companies Act 2013, s 150(1)
6
Companies Act 2013, s 149(6) (e)(iii)
7
Companies Act 2013, s 149(9)
8
Companies Act 2013, s 197(7)
9
Companies Act 2013, s 149(7
10
Companies Act 2013, s 173(3)
period with or without permission from the Board11.

Separate meetings

The Act makes it mandatory for all the independent directors to hold at least one meeting
annually, without the presence of non-independent directors & members of management 12.Here
they are expected to review the performance of the Chairperson, non-independent directors & the
Board as a whole13.
Committees
The Act has made it mandatory for independent directors to be a part of certain committees.

 Corporate Social Responsibility Committee- The Act provides that every company
having net worth of rupees five hundred crore or turnover of rupees one thousand crore or
more or a net profit of rupees five crore or more during any financial year shall constitute
a CSR Committee of the Board consisting of three or more directors, out of which at least
one director shall be an independent director 14. This provision has been included so that
independent directors can keep a check on the workings of the CSR committee.

 Audit Committee- The Act requires that the Board of every listed company & such other
companies as may be prescribed shall constitute an Audit committee which shall consist
of a minimum of three directors with independent ones forming a majority15.

 Nomination & Remuneration Committee (NRC) - The Act requires that the Board of
every listed company & such other companies as may be prescribed shall constitute an
NRC consisting of three or more non-executive directors out of which not less than one
half shall be independent directors16. The role of NRC is to (a) identify persons qualified
to become directors, (b) recommend to the Board their appointment & removal, (c)

11
Companies Act 2013, s 167
12
Companies Act 2013, Schedule IV
13
Ibid

14
Companies Act, 2013, s 135(1)
15
Companies Act, 2013, s 177
16
Companies Act, 2013, s 178
 evaluate director’s performance, (d) recommend to the Board a policy relating to the
remunerations for the directors etc.17.

CHAPTER 3: COMPLIANCE WITH THE COMPANY’S CODE OF

CONDUCT
The Code is a guide to professional conduct for independent directors. Adherence to these
standards by independent directors and fulfilment of their responsibilities in a professional and
faithful manner will promote confidence of the investment community, particularly minority
shareholders, regulators and companies in the institution of independent directors.

The Companies Act, 2013, for the first time, laid down a code for independent
directors in Schedule IV as follows:
I. Guidelines of professional conduct:
An independent director shall:
(1) uphold ethical standards of integrity and probity;
(2) act objectively and constructively while exercising his duties;
(3) exercise his responsibilities in a bona fide manner in the interest of the company;
(4) devote sufficient time and attention to his professional obligations for informed and balanced
decision making;
(5) not allow any extraneous considerations that will vitiate his exercise of objective independent
judgment in the paramount interest of the company as a whole, while concurring in or dissenting
from the collective judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its shareholders or for the purpose
of gaining direct or indirect personal advantage or advantage for any associated person;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his independence, the
independent director must immediately inform the Board accordingly;
(9) assist the company in implementing the best corporate governance practices.

17
Ibid
II. Role and functions: - An independent director shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on
issues of strategy, performance, risk management,
resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and
management;
(3) scrutinise the performance of management in meeting agreed goals and
objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information; financial controls and the systems
of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key
managerial personnel and senior management and have a prime role
in appointing and where necessary recommend removal of executive directors, key managerial
personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in
situations of conflict between management and shareholder’s interest.

III. Duties:

The independent directors shall—

(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and
familiarity with the company;
(2) seek appropriate clarification or amplification of information and, where, necessary, take and
follow appropriate professional advice and opinion of outside experts at the expense of the
company;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which
he is a member;
(4) participate constructively and actively in the committees of the Board in which they are
chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that
these are addressed by the Board and, to the extent that they are not resolved, insist that their
concerns are recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external environment in which it
operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the
Board;
(9) pay sufficient attention and ensure that adequate deliberations are held before approving
related party, transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and
to ensure that the interests of a person who uses such mechanism is not prejudicially affected on
account of such use;
(11) report concerns about unethical behavior, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy;
(12) acting within their* authority, assist in protecting the legitimate interests of the company,
shareholders and its employees;
(13) not disclose confidential information, including commercial secrets, technologies,
advertising and sales promotion plans, unpublished price sensitive information, unless such
disclosure is expressly approved by the Board or required by law.
 CHAPTER 4: CLAUSE 49 OF LISITING AGREEMENT

The clause 49 of the listing agreement by SEBI deals with corporate governance and lays down
various processes and disclosures to be followed by all the companies. It tells about the board
composition, compensations, committees and management. It lays down that each company has to
submit a quarterly corporate governance report along with a compliance certificate from the auditors
to SEBI. This report should be attached to the annual report as well as the fillings to the
stock exchanges.18

Board of Directors19
(i) The Board of directors of the company shall have an optimum combination of executive and non-
executive directors with not less than fifty percent of the board of Directors comprising of non-
executive directors.
(ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board
should comprise of independent directors and in case he is an executive director, at least half of the
Board should comprise of independent directors.

Independent Director20
The expression ‘independent director’ shall mean a non-executive director of the company who:
a) Apart from receiving director’s remuneration, does not have any material pecuniary relationships
or transactions with the company, its promoters, its directors, its senior management or its holding
company, its subsidiaries and associates which may affect independence of the director.
b) is not related to promoters or persons occupying management positions at the board level or at one
level below the board.
c) has not been an executive of the company in the immediately preceding three financial years.
d) is not a partner or an executive or was not partner or an executive during the preceding three years,
18
SECURITIES AND EXCHANGE BOARD OF INDIA, (https://www.sebi.gov.in/legal/circulars/oct-
2004/corporate-governance-in-listed-companies-clause-49-of-the-listing-agreement_13153.html) accessed on 8 th
September, 2019
19
Ibid
20
Ibid
of any of the following:
i) the statutory audit firm or the internal audit firm that is associated with the company, and
ii) the legal firms and consulting firms that have a material association with the company.
e) is not a material supplier, service provider or customer or a lessor or lessee of the company, which
may affect independence of the director; and
f) is not a substantial shareholder of the company i.e. owning two percent or more of the block of
voting shares. Some other requirements are: -

 Nominee directors appointed by an institution which has invested in or lent to the company
shall be deemed to be independent directors.
 Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine
years, on the Board of a company.
 All fees/compensation, if any paid to non-executive directors, including independent directors
shall be fixed by the Board of Directors and shall require previous approval of shareholders in
general meeting. The shareholders’ resolution shall specify the limits for the maximum
number of stock options that can be granted to non-executive directors, including independent
directors, in any financial year and in aggregate.
 2/3 of the members of audit committee shall be independent directors with thechairman as
independent director.
 Minimum of two independent directors should be present in each meeting of audit committee.
 The remuneration committee, which would determine the remuneration packages of the
executive directors may comprise of at least three directors, all of whom should be non-
executive directors, the Chairman of committee being an independent director.
 CHAPTER 5: KEY RECOMMENDATION OF UDAY KOTAK
PANEL

A 21-member committee on Corporate Governance was constituted by SEBI and headed by

banker Uday Kotak. It submitted various recommendations to SEBI that included major
revamping of Corporate Governance norms for listed firms.
Recommendations under Uday Kotak Panel for the role of Independent Directors are21:

 A listed company should have at least six directors on its board.

 The panel has suggested at least one independent director be a woman.
 It also proposed that directors attend at least half the total board meetings held in a
financial year. If they fail to do so, they would require shareholders’ nod for continuing.
 Companies have asked to make public the relevant skills of directors, and the age of non-
executive directors has been capped at 75 years.
 In addition, the chairperson of a listed company will be a non-executive director to ensure
that s/he is independent of the management.
 An independent director cannot be in more than eight listed companies and a managing
director can hold the post of an independent director in only three listed companies.
 The committee has proposed to increase the number of meetings to five a year.
 Every board meeting would require the presence of an independent director.
 The committee has recommended that the number of independent directors on a company
board be increased from 33% to 50%.
 Detailed reasons would need to be furnished when an independent director resigns. This
is to ensure that they remain independent of the company management.
 An audit committee is being proposed with the mandate to look into utilization of funds
infused by a listed entity into unlisted subsidiaries including foreign subsidiaries.
 The committee has also recommended that SEBI should have clear powers to act against
auditors under the securities law.
 For government companies, the committee has recommended that the board have final
say on the appointment of independent directors and not the nodal ministry.
21
Corporate Governance: A critical analysis, FORUM IAS, (https://blog.forumias.com/article/corporate-
governance-a-critical-analysis) accessed on 8th September.
 CONCLUSIONS AND SUGGESTIONS

Independent directors or non-executive directors of the company monitor and control the
chairman/chief executive; they serve as a link with external environment and provide an
international perspective. Apart from these independent directors try to improve board processes
and bring in specialist knowledge, they provide continuity, help identify alliance and acquisition.
Inclusion of independent directors is a check on the management of companies as an oversight
mechanism. Their ability to contribute to the board’s deliberations is an added bonus to voice the
minority interests. It can be concluded that independent directors help maintain an ethical climate
in the organization. However, Certain things have not been clarified in the provisions. For
instance, if it is revealed at a later date that the independent director on the Board in not in fact
independent – what would happen to the decisions of the board.

In many cases the omission and commission of an Independent Director in a fraud or scam is no
more greater than a being negligent or not being hyper vigilant and this problem is attributable to
the structure of board itself because Independent Director is not an professional investigator it
will believe whatever audits reports are being given to him by the Board of Directors, it is the job
of the auditors to verify the claims mentioned in the invoices.
Some experts have pointed out several deficiencies in the working of independent directors.
These include complaints against their inability to find sufficient time and their lack of
knowledge regarding the company affairs to fulfil the demands of their position. Solutions to
other problematic areas like the appointments which are handled by promoters, a comprehensive
and clearer understanding of the responsibilities of the Independent Directors is to be found and
the same time steps for the empowerment of the position should also be taken.
 BIBLIOGRAPHY

Books

1. Dr. G.K. Kapoor & Sanjay Dhamija, Company Law, (20th ed., 2017).
2. V. Sithapathy, Corporate Governance, (1st ed., 2006).
3. A. K. Majumdar & Dr. G. K. Kapoor, Company Law, (13th ed., 2010).
4. Avtar Singh, Introduction to Company Law, (11th ed, 2014)

Websites

1. www.vccircle.com/500/news/the-legal-implications-rajus-confession - 47k -
2. www.uslaw.com/law_blogs/?item=342048 –
3. blogs.ibibo.com/danendra12012009/can-you-suggest-ways-to-reform-and-
rejuvenatesatyam –
4. www.ibtimes.co.in/articles/20090131/satyam-receives-boost-from-govt-legal-immunity-
granted-present-board_all.htm
5. www.expressindia.com/latest-news/Satyam-scam-Raju-traceless-WB-image-
suffers/408297/ -
6. Vijaya Batth, Dr. Bhagirathi Nayak, Dr. Pratima Sarangi. (2016). Role of Independent
Directors in the Changing Business Scenario in India. Retrieved from
http://www.ijsrm.in/v4-i2/2%20ijsrm.pdf
7. Ravi Thakur, Post Satyam Case: A Study of impact on role of independent directors.
http://www.internationalseminar.org/XIII_AIS/TS%201%20(B)/15.%20Mr.%20Ravi
%20Thakur.pdf