CENTRAL UNIVERSITY OF SOUTH BIHAR
“Independent Directors and Company Act, 2013”
SUBMITTED BY SUBMITTED TO
Md Rehaan Danish DR. P. K. DAS
CUSB1713125022 ASSOCIATE PROFESSOR
"B.A. LL.B. (Hons.) 7th Semester School of Law and Governance
School of Law and Governance Central University of South Bihar
Central University of South Bihar
Research Title:
“Independent Directors and Company Act, 2013”
Literature Review:
___________________
Research Objective
To find out the nuance of independent directors in company act 2013.
Research Question
1. Who can be an independent director?
2. What are the code of conduct on an independent director?
3. What are the loopholes in the code of an independent directors function methodology?
3. How can these loopholes be rectified?
ACKNLOWLEDGMENT
In making this project, I have taken resources from the Bare !ct, study material issued
by The Institute of Company Secretaries of India "ICSI#, Fuundamentals of Business
Law written by Avtar Singh and from some other books. Wikipedia, Manupatra and
and from some other websites
Contents
CHAPTER 1: OVERVIEW OF WHAT IS COMPANY AND ITS EVOLUTION........... 5
1.1 INTRODUCTION .......................................................................................................... 5
1.2 BACKGROUND............................................................................................................. 6
CHAPTER 2: DIRECTORS OF COMPANY ...................................................................... 6
2.1 DEFINATION ................................................................................................................ 6
2.2 NUMBER OF INDEPENDENT DIRECTOR ............................................................. 7
2.3 TENURE ......................................................................................................................... 8
CHAPTER 3: CRITICAL ANALYSIS OF COMPANY DIRECTORS ............................ 9
3.1 CODE FOR INDEPENDENT DIRECTORS .............................................................. 9
3.2 GUIDELINES OF PROFESSIONAL CONDUCT: ................................................... 9
3.3 BOARD IN ITS DECISION MAKING ....................................................................... 9
3.4 ROLE AND FUNCTIONS: ......................................................................................... 10
3.5 DUTIES:........................................................................................................................ 10
3.6 MANNER OF APPOINTMENT: ............................................................................... 11
3.7 RESIGNATION OR REMOVAL............................................................................... 12
3.8 SEPARATE MEETINGS: ........................................................................................... 13
3.9 RE-APPOINTMENT:.................................................................................................. 13
3.10 LIABILITIES OF A DIRECTOR ............................................................................ 13
CONCLUSION ...................................................................................................................... 14
CHAPTER 1: OVERVIEW OF WHAT IS COMPANY AND ITS EVOLUTION.
1.1 INTRODUCTION
The company is an artificial person and is managed by the human beings. The humans who
run it are known as Board of Directors. Directors acting collectively are known as Board. The
directors play a very important role in the day to day functioning of the company. It is the
board, who is responsible of the company’s overall performance To attain the objectives
prescribed in the memorandum of association of the company, company depends on Board of
Directors collectively and directors individually. Directors of a company are its eyes, ears,
brain, hands other essential limbs essential limbs.
Chapter XI of companies act 2013 read with companies (Appointment and Qualification of
Directors) Rules 2014 specifies regulatory prescriptions relating to appointment of directors,
directors identification number, disqualification, vacation etc., The act has brought in many
new provisions such as appointment of women director, resident director, independent
director by certain class of companies act.
1. The purpose of identifying and appointing independent directors is to effectively
exercise their best judgment for the exclusive benefit of the stakeholders. Independent
Directors are required because they perform the following important functions i.e.
2. They balance the conflicting interest of stakeholders.
3. They fulfill a useful role in succession planning.
4. They act as a coach, mentor Boar sounding for their full time colleagues
5. They provide independent judgment and wider perspective.
In fact, Independent directors are meant to serve the company’s shareholders. They are not a
representative of any regulator watch dog. The companies Act 2013 has introduced new
provisions relating to independent directors, eligibility criteria, appointment, qualification
code etc., Clause 49 of the Listing agreement has also been amended in tune with the
companies act 2013. After reading this lesson you will be able to understand the legal the
provisions relating to appointment, remuneration, code, tenure and code, tenure and other
prescriptions pertaining to independent directors.
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. An independent director can be
selected from a data bank containing names addresses and qualifications of persons who are
eligible and writing to act as independent director.
1.2 BACKGROUND
The Cadbury committee in 1992, which itself was set up following the corporate scandals
involving BCCI, Poly Peck and Maxwell, provided respectability to the concept
of independent directors, by focusing on independent directors as a part of the new practices
for better better governance. Independent directors function as an oversight body in
monitoring the performance and should raise red flags whenever suspicion occurs. They
are expected to be more aware and question the company on relevant issues in their position
as trustees of stakeholders.
The institution of independent directors is a critical instrument for ensuring good corporate
governance and it is necessary that the functioning of the institution is critically analysed
and proper safeguards are made to ensure efficacy.
Companies Act 2013 mandates appointment of independent directors by listed companies
and other class of companies. It also prescribes other aspects such as maximum tenure of
independent directors, separate meeting of independent directors, tenure, their -qualifications,
liability, appointment, remuneration and , appointment, remuneration and other aspect. other
aspect.
Chapter 2: Directors of Company
2.1 DEFINATION
Sectiom 149(6) gives the definition of Independent Director, in relation to accompany, means
a director other than a manging director or a whole time director or a nominee director –
1. Who, in the opinion of the Board, is a person of integrity and possesses relevant
expertise and experience;
2. 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;
3. Who has or had no pecuniary relationship 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.
4. None of whose relatives has or had pecuniary relationship or transaction with the
company, its holding, subsidiary or associate company, or their promoters, or
directors, amounting to two per cent or more of its gross turnover or total income or
fifty lakh rupees or such higher amount as may be prescribed, whichever is lower,
during the two immediately preceding financial years or during the current financial
year.
5. 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
company in any of the three financial years immediately preceding the financial year
in which he is proposed to be appointed;
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 (CS) in practice or 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 percent more of the total voting power of the
company; or
iv. is a Chief Executive or director, by whatever name called, of any non profit
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
6. Who possesses such other qualifications as may be prescribed.
2.2 NUMBER OF INDEPENDENT DIRECTOR
Section 149(4) provides that every listed public company shall have at least one third of the
total number of directors as independent directors and the Central Government may prescribe
the minimum number of independent directors in case of any class or classes of public
companies.
Rule 4 of companies (Appointment and Qualification of Directors) rules 2014, provides that
the following class or classes of companies shall have at least two directors as independent
directors
i. The Public Companies having paid up share capital of ten corer rupees or more;
Or
ii. The Public Companies having turnover of one hundred crore rupees or more;
Or
iii. The Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceedingly fifty corer rupees
For the Purpose of this section, any fraction contained in such 1/3 rd number shall be rounded
off as one.
2.3 TENURE
Section 149(10) provides that subject to the provisions of section 152 (Appointment of
Directors, an independent director shall hold office for a term up to five consecutive years on
the Board of a company, but shall be eligible for reappointment on passing of a special
resolution by the company and disclosure of such appointment in the Board’s report.
Section 149(11) states that without contravening the section 149(10), no independent director
shall hold office for more than two consecutive terms, but such independent director shall be
eligible for the appointment after the expiration of three years of ceasing to become an
independent director.
Proviso to Section 149(11) that an independent director shall not, during the said period of
three years, be appointed in or be associated with the company in any other capacity, either
directly or indirectly.
Section 149(13) states that the provisions of section 152(6) & (7) in respect of retirement of
directors by rotation shall be applicable to be appointment of independent directors.
CHAPTER 3: CRITICAL ANALYSIS OF COMPANY DIRECTORS
3.1 CODE FOR INDEPENDENT DIRECTORS
Section 149(8) of the Act prescribes that the company and independent directors shall abide
by the provisions specified in schedule IV regarding code for independent directors. It 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 instituition of
independent directors.
3.2 GUIDELINES OF PROFESSIONAL CONDUCT:
An independent director shall:
1. Uphold ethical standards of integrity and probity
2. Act objectively and constructively while exercising his dues
3. Exercise his responsibilities in a bona fide manner in the interest of the company
4. Devote sufficient me 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
3.3 BOARD IN ITS DECISION MAKING
6. Not abuse his posion 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 acon 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 implemenng the best corporate governance pracces
3.4 ROLE AND FUNCTIONS:
The independent directors 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 and that 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
3.5 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 amend all meetings of the Board of Directors and of the Board comities 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 amend 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 committees 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 are not prejudicially
affected on account of such use
11. Report concerns about unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy
12. Acting within his 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
3.6 MANNER OF APPOINTMENT:
1. Appointment process of independent directors shall be independent of the company
management; while selecting independent directors the Board shall ensure that there is
appropriate balance of skills, experience and knowledge in the Board so as to enable the
Board to discharge its functions and dues effectively
2. The appointment of independent director(s) of the company shall be approved at the
meeting of the shareholders
3. The explanatory statement attached to the notice of the meeting for approving the
appointment of independent director shall include a statement that in the opinion of the
Board, the independent director proposed to be appointed fulfils the conditions specified in
the Act and the rules made thereunder and that the proposed director is independent of the
management
4. The appointment of independent directors shall be form aliased through a letter of
appointment, which shall set out :
a) The term of appointment
b) The exception of the Board from the appointed director; the Board-level committee(s) in
which the director is expected to serve and its tasks
c) The fiduciary dues that come with such an appointment along with accompanying
liabilities
d) Provision for Directors and Officers (D and O) insurance, if any
e) The Code of Business Ethics that the company expects its directors and employees to
follow
f) The list of actions that a director should not do while functioning as such in the company
and
g) The remuneration, mentioning periodic fees, reimbursement of expenses for participation
in the Boards and other meetings and profit related commission, if any
5. The terms and conditions of appointment of independent directors shall be open for
inspection at the registered office of the company by any member during normal business
hours
6. The terms and conditions of appointment of independent directors shall also be posted on
the company’s website
3.7 RESIGNATION OR REMOVAL
The resignation or removal of an independent director shall be in the same manner as is
provided in sections 168 and 169 of the Act. An independent director who resigns or is
removed from the Board of the company shall be replaced by a new independent director
within a period of not more than one hundred and eighty days from the date of such
resignation or removal, as the case may be.
Where the company fulfils the requirement of independent directors in its Board even without
filling the vacancy created by such resignation or removal, as the case may be, the
requirement of replacement by a new independent director shall not apply
3.8 SEPARATE MEETINGS:
1. The independent directors of the company shall hold at least one meeting in a year, without
the attendance of non-independent directors and members of management
2. All the independent directors of the company shall strive to be present at such meeting
3. The meeting shall:
a) Review the performance of non-independent directors and the Board as a whole
b) Review the performance of the Chairperson of the company, taking into account the views
of executive directors and non-executive directors
c) Assess the quality, quantity and timeliness of flow of information between the company
management and the Board that is necessary for the Board to effectively and reasonably
perform their dues
3.9 RE-APPOINTMENT:
1 The performance evaluation of independent directors shall be done by the entire Board of
Directors, excluding the director being evaluated
2. On the basis of the report of performance evaluation, it shall be determined whether to
extend or continue the term of appointment of the independent director
3.10 LIABILITIES OF A DIRECTOR
The liability of a director arises because of his position as officers or agents of the Company
and also for being the trustees and having a fiduciary relationship with Company and its
shareholders. Since a company and its Director are two separate entities, a Director does not
have personal liabilities on behalf of a company. Though, under certain scenarios (mentioned
below), a Director might be held liable:
1. Liability for Tax: Under the Indian Income Tax Act, where there’s tax due from any
private company with respect to an income of any previous year which isn’t recovered
from the private company, every director of such company during the relevant
previous financial year is liable, severally and jointly, for payment of such tax.
2. Misstatement in company’s prospectus: Civil liability could be imposed on the
directors for any false statement in company’s prospectus if he was the Director while
issuing of the prospectus, unless:
i. The director proves that he withdrew his consent before prospectus was issued, or
ii. That the prospectus was issued without his consent or authority or without his
knowledge, or
iii. That, once he became aware of the false statement, he withdrew his consent and
gave a public notice of the same, or
iv. He proves that he believed the doubted statements to be true.
3. Debts of the Company: Usually, a director isn’t liable personally for any of the debt
of a company until and unless fraud on part of Director could be established.
4. Fraudulent Business Conduct: A Director might be held liable personally, for debts
or other liabilities of a company in case he was knowingly a party to the fraud(s)
while carrying on the business.
5. Share application money refund: Directors of a company are personally liable
together with the company for repaying the share application money or the surplus
share application money received if it is not repaid within the specified time period.
6. Liability to pay for qualification shares: In case the Director hasn’t acquired the
qualification shares within the stipulated time frame and such company goes into the
liquidation after the expiry of this period, such Director would be called upon by
Official liquidator for paying for such shares he was supposed to acquire.
CONCLUSION
The global economic crisis we face today, catastrophic events often present lawmakers with
the exceptionally rare political opportunity to reshape entire areas of law and regulation.
Indian lawmakers may well have a similar opportunity today with regard to reshaping
corporate governance in India in the aftermath of the events at Satyam and Nimesh Gampani.
This awesome power must, however, be wielded thoughtfully and with the knowledge that
the general applicability of legislative creation will likely endure for generations (or at least
until the next crisis).
Government and law makers must endeavour to enhance Independent Director’s functioning
and efficiency so that there are both fewer frauds and better firm performance in the future.
We are hopeful that the Indian government and regulators will address the matter with a
balanced, but effective, approach to reforming corporate to reforming corporate governance
practices in India that will both address the public’s desire to see that severe corporate frauds
are detected in advance and prevented, and help India to retain a flexible corporate
governance framework that enables managers and boards of Indian corporations to continue
to foster the dramatic increases in wealth and standards of living that have characterized
India Inc. since economic liberalization.
