Understanding the Role and Qualifications of Independent Directors in Company Governance
Independent directors play a crucial role in corporate governance by providing unbiased oversight and strategic guidance. They are required to meet specific qualifications and criteria as per the Companies Act and SEBI regulations. The process of defining, appointing, and functioning of independent directors is outlined, emphasizing their importance in ensuring transparency and accountability within organizations.
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2 C om panies A ct, 2013 Section 2(47), 149, 150, 160 C hapter XI R ules C om panies (A ppointm ent & Q ualification of D irectors) Rules, 2014 as am ended tim e to tim e L E G A L FRA M E W ORK Schedule IV of C om panies A ct, 2013 C ode for Independent D irectors SE B I (L OD R ) Regulations, 2015
RE Q U IRE M E N T OF L A W 3 N um ber of Independent D irectors C om panies A ct, 2013 SE B I L OD R C hairm an is E xecutive D irector C hairm an is N on-E xecutive D irector L isted Public C om panies Specified C om panies A t least 1/3 Total D irectors 1/3of A t least 2 2 D irectors A t least 1/2 Total D irectors 1/2of A t least 1/3 Total D irectors 1/3of
C OM M ITTE E S & M E E TIN G S 4 Role of ID in N om ination & Rem uneration C om m ittee Risk M anagem ent C om m ittee Stakeholders Relationship C om m ittee ID M eeting C SR C om m ittee B oard M eeting A udit C om m ittee
5 D E FIN IN G TH E ID
W H A T D E FIN E S A N ID ? 6 Independent D irector is defined under section 2(47) independent director m eans an independentdirectorreferred to in sub-section (6) ofsection 149; Regulation 16 (1)(b) of SE B I (L OD R ) Regulations, 2015 defines independent director" m eans a non-executive director, other than a nom inee director of the listed entity.
7 PRE -RE Q U ISITE FOR B E IN G TH E ID
Q U A L IFIC A TION 8 L aw and Finance A dm inistration and M anagem ent 01 06 02 RU L E 5 C OM PA N IE S (A PPOIN TM E N T & Q U A L IFIC A TION ) RU L E S C orporate G overnance G overnance C orporate Research 05 03 04 Technical Operations or discipline related to com pany business Sales and M arketing
PROH IB ITION S 9 SE C TION 149(6) of Com panies A ct, 2013 who is or was not a promoter of the company or its holding, subsidiary or associate company; who is not related to promoters or Directors in the company, its holding, subsidiary or associate company; who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed, 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; none of whose relatives:- 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. 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. 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 or 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;
PROH IB ITION S 10 SE C TION 149(6) of Com panies A ct, 2013 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). who, neither himself nor any of his relatives 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; 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 firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or 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; holds together with his relatives two per cent. or more of the total voting power of the company; or 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
D E C L A RA TION B Y ID u/s 149(7) 11 Every independent director shall at the first meeting of the Board in which he participates as a director and Thereafter at the first meeting of the Board in every financial year or Whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6) of 149.
12 C OD E FOR ID SC H E D U L E V
C OD E - G U ID E TO PROFE SSION A L C ON D U C T 13 GUIDELINES OF PROFESSIONAL CONDUCT ROLE AND FUNCTIONS DUTIES MANNER OF APPOINTMENT TERM/ RE-APPOINTMENT RESIGNATION OR REMOVAL SEPARATE MEETINGS EVALUATION MECHANISM BOARD COMMITTEES
ROL E A N D FU N C TION S-IN D E PE N D E N T D IRE C TORS 14 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; bring an objective view in the evaluation of the performance of board and management; scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible; safeguard the interests of all stakeholders, particularly the minority shareholders; balance the conflicting interest of the stakeholders; 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; moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder s interest.
D U TIE S-IN D E PE N D E N T D IRE C TORS 15 undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company; 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; strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member; participate constructively and actively in the committees of the Board in which they are chairpersons or members; strive to attend the general meetings of the company; 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; keep themselves well informed about the company and the external environment in which it operates; not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board; 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; 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 are not prejudicially affected on account of such use; report concerns about unethical behavior, actual or suspected fraud or violation of the company s code of conduct or ethics policy.
Regulation 25 of SE B I (L OD R ) Regulations, 2015: Obligations w ith respect to Independent D irectors 16 No person shall be appointed or continue as an alternate director for an independent director of a listed entity with effect from October 1, 2018. The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and rules made thereunder, in this regard, from time to time. The appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. The independent directors of the listed entity shall hold at least one meeting in a financial year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting. The listed entity shall familiarise the independent directors through various programmes about the listed entity, including the following: (a) nature of the industry in which the listed entity operates; (b) business model of the listed entity; (c) roles, rights, responsibilities of independent directors; and (d) any other relevant information.
D IRE C TORS A N D OFFIC E RS L IA B IL ITY IN SU RA N C E 17 If the Independent D irector is found liable, either actively or passively, for any errors w hich have caused financial grief to any stakeholder, they w ill be held responsible. Independent D irectors m ay have to contend w ith legal im plications involving considerable financial expenses for their defense due to the sensitive nature of their w ork. D & O L IA B IL TY IN SU RA N C E POL IC Y can com e to the rescue. A D irectors and Officers L iability Policy covers the financial liability incurred by Independent D irectors for any m istakes that they com m it in the discharge of their duties. The policy covers: L itigation costs Settlem ent paid to third parties w ho filed the law suit Personal liability suffered by Independent D irectors E xpenses on regulatory or adm inistrative inquiries launched on Independent D irectors E xpenses incurred on public relations activities
18 ON L IN E TE ST FOR ID
ON L IN E PROFIC IE N C Y SE L F A SSE SSM E N T TE ST 19 CG has notified The Indian Institute of C orporate A ffairs (IIC A ) under Section 150(1) of the C om panies A ct, 2013 to conduct Online Proficiency Self-A ssessm ent. IIC A by com plying w ith below rules, as am ended from tim e to tim e, w ill conduct the test through the Independent D irector s D atabank (R ule 6 of the C om panies (A ppointm ent and Q ualification of D irectors) R ules, 2014) This test w ill be based on all relevant topics on functioning of an individual acting as an Independent D irector, such as C orporate G overnance C om panies L aw B asic A ccountancy Securities L aw Passing C riteria : A ggregate 50%
