Widened role of Independent Directors- Real vs. Deemed Independence

To facilitate enhanced transparency in the functioning of the Board and Committees, the Companies Act 2013 has brought in the much-awaited reforms. The Act broadly describes the selection criteria, roles and responsibilities, manner of appointment, and vacation of office by an Independent Director (ID). Prior to moving forward, let’s understand the term ‘Independent Director’. A person, not having any pecuniary relationship with the Company, or its promoters and directors, and is appointed by the Board as Independent Director, falls under this category. It is expected that with the enhanced recognition and capabilities of the ID, the company would handle its operations much prudently and the stakeholders are sure to benefit.

Further, the appointment of an Independent Director shall be approved in the General Meeting and it is now mandatory for every public limited company to have at least one-third of the total number of directors as Independent Directors. The Board of any company can search for suitable ID from the database maintained by various authorities, one of which is http://www.primedirectors.com/, a corporate governance initiative by NSE and BSE, and launched by the Chairman of SEBI. Professionals seeking directorships can visit the platform so as to add their candidature to the database.

The Companies Act 2013 has enumerated distinctive headings that define the roles and responsibilities of IDs. Few prominent responsibilities include (1) assisting 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) satisfying themselves on the integrity of financial information, and that financial controls and systems of risk management are robust and defensible, (3) safeguarding the interests of all stakeholders, particularly the minority shareholders, and (4) determining appropriate levels of remuneration of executive directors, KMPs and senior management, and playing a prime role in appointing and where necessary recommending removal of executive directors, KMPs and senior management.

The IDs of a company shall hold at least one meeting in a year, wherein all IDs must strive to be present, without the attendance of non-IDs and other members of the management. Herein, the IDs shall review the performance of the Chairperson, non-IDs and the Board as a whole, and shall assess the quality and timeliness of flow of information between the management and the Board. The Act also mandates the constitution of CSR Committee consisting of at least one ID, Audit Committee with IDs in majority, and Nomination and Remuneration Committee with not less than one-half of the members as IDs.

To bring in effectiveness in the functioning, the Act also mandates that no ID shall hold office for more than two consecutive terms of 5 years; however such ID shall be eligible for re-appointment after the expiration of three years. Also, an ID shall not be entitled to any stock option, and may receive remuneration by way of fee, reimbursement of expenses for participation in Board and other meetings, and profit related commission as approved by the members. Further, every ID 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 FY or whenever there is any change in the circumstances which may affect his status as an ID, give a declaration regarding compliance with the criteria of independence.

Surely, the enhanced role of Independent Directors would enable the stakeholders trust the functioning of the management as well as the Board. The Board, on the other hand, would become more vigilant while undertaking the tasks of policy making and use of funds. However, it is too early to say that every of the deficiency in the working of the company and in the utilization of stakeholders’ funds can be regulated with these measures. Incidences of selecting known professionals by the Board for the role of ID can also not be overlooked. Though the Act bestows upon the shoulders of IDs the responsibility of ensuring fair management, the target can remain unachieved as the management can come up with planned and pre-compromised professionals as IDs. Such presence would not define transparency and vigilance in real terms.

To transform the deemed independence to real one, the MCA along with regulatory bodies (SEBI and RBI) has to play a vital role in the appointment of IDs. I would suggest that the Ministry and SEBI must actively participate in such appointments in listed companies, wherein the Board is vulnerable to play with provisions. The compulsion of assent of shareholders can rarely serve any purpose. The discussion of MCA with the Institute of Directors, UK with a view to utilizing their expertise for training Indian professionals willing to become IDs is truly welcomed; however a well-staffed Committee must be set up by the SEBI that shall ensure core legitimacy and transparency, similar to the selection of Statutory Central Auditors (SCAs) undertaken by Selection Committee of GOI on basis of list forwarded by the RBI.

101 thoughts on “Widened role of Independent Directors- Real vs. Deemed Independence

  1. Easy Blog Site Income

    Hello- I am so glad I found your site. I’m really admiring the time and energy you put into your site and detailed information you provide. This is unbelievably generous of people like you to provide openly all many individuals would’ve marketed for an ebook in making some money on their own, particularly considering that you could possibly have done it if you ever considered necessary.

    Reply
  2. Deepak

    It’s actually a nice and helpful piece of information.
    I’m satisfied that you just shared this helpful info with us.
    Please keep us informed like this.

    Reply
  3. K.K. Bhandari

    Hi there everyone,
    it’s my first go to see at this site,
    and piece of writing is genuinely fruitful in favor of me,
    keep up posting these types of content.

    Reply
  4. K.V.Dugad

    An impressive one!
    Best wishes for the future work.
    Rarely do I come across a blog that’s both educative and amusing,
    and without a doubt,
    you’ve hit the nail on the head.

    Reply
  5. H.S. Dugal

    This is really interesting, You’re a very skilled blogger.
    I have joined your rss feed and look forward to seeking more of your great post.
    Also,
    I have shared your web site in my social networks!

    Reply
  6. Dilip B

    Thanks for the marvelous posting!
    I genuinely enjoyed reading it,
    you are a great author.
    I will always bookmark your blog and will come back very soon.
    I want to encourage that you continue your great work,
    have a nice day!

    Reply
  7. Kaushik

    Hello very cool website!!
    Man .. Excellent .. Amazing .. I will bookmark your website and take the feeds additionally.
    I am glad to search out numerous useful information here within the publish, we need work out extra techniques in this regard,
    thank you for sharing. . . . . .

    Reply
  8. S.L.Belavady

    Hello my friend!
    I wish to say that this article is amazing,
    nice written and come with approximately all important infos.
    I would like to see more posts like this .

    Reply
  9. Hamish

    Can I just say what a relief to discover somebody who genuinely knows what they
    are discussing on the internet. Youu definitely knjow how to
    bring a problem to light annd make it important.
    More and more people have tto look at this and understand this side of your story.
    It’s surprising you aren’t more popular givsn tthat
    you definitely have the gift.

    Reply
  10. Deepak Kapoor

    Just wanted to say how much we appreciate the tremendous amount of hard work and effort you all put in to producing this website.
    It is a great credit to everyone and I am sure will be a great success.

    Reply
  11. Nupur

    Ahaa, its pleasant dialogue about this piece of writing at this place at this weblog, I have read all that, so at this time me also commenting here.

    Reply
  12. K. Kalwin

    fantastic put up, very informative.
    I wonder why the opposite experts of this sector don’t understand this.
    You must continue your writing. I’m confident, you’ve a huge readers’ base already!

    Reply
  13. Nripendra

    If some one wishes to be updated with most recent technologies therefore he must be pay a quick visit this site and be up to date all the time.

    Reply
  14. O.P. Kalra

    I read this article completely about the comparison of most up-to-date and preceding technologies, it’s remarkable article.

    Reply
  15. Deepak Chawla

    After checking out a number of the blog articles on your site, I honestly like your technique of blogging.

    Reply
  16. Ram Prasad

    Very great post. I simply stumbled upon your weblog and wanted to say that I have really loved browsing your weblog posts. In any case I will be subscribing on your rss feed and I hope you write once more very soon!

    Reply
  17. Thomas

    Thank you for some other magnificent post.
    Where else could anybody get that kind of information in such a perfect manner of writing?
    I have a presentation subsequent week, and I’m on the look for such information.

    Reply
  18. AnandNarain

    You seem to be blessed with a perfect blend of good vocabulary and good writing. Thoroughly admired your work.

    Reply
  19. S.K. Kapadia

    An intriguing discussion is definitely worth comment.
    I do believe that you ought to publish more on this issue, it may not be a taboo matter but typically people don’t speak about such topics.
    To the next! Cheers!!

    Reply
  20. Monidipa

    I started to read your article and it caught me to the extent that I couldn’t put it down. Amazing piece.

    Reply
  21. Sudhanshu

    I wish to state my complements to the hard work you have done to incorporate so much of detail about every information.

    Reply
  22. Vishal

    I do accept as true with all of the ideas you have introduced for your post. They’re very convincing and will certainly work.Thank you for the post.

    Reply
  23. Pradeep Kumar

    Way cool! Some very valid points! I appreciate you penning this write-up and the rest of the site is also very good.

    Reply
  24. D.K. Saxena

    Excellent goods from you, man. I have understand your stuff previous too and you’re just too magnificent.

    Reply
  25. R.K. Arora

    Hi friends, nice piece of writing and good arguments commented at this place, I am in fact enjoying by these.

    Reply
  26. S.S. Malhotra

    I am regular visitor, how are you everybody? This post posted at this web page is really pleasant.

    Reply
  27. Anukul

    I’m very happy to find this web site. I wanted to thank you for your time due to this fantastic read!!
    I definitely liked every little bit of it and i also have you saved to fav to see new information in your site.

    Reply
  28. K.S. Panchal

    I should be leaving this one liner for your hard work “Great knowledge and good command over writing. Long way to go!”

    Reply

Leave a Reply to K.K. Bhandari Cancel reply

Your email address will not be published. Required fields are marked *