Role Of Independent Directors In Companies

Governance is the most discussed word nowadays in the corporate scenario, the reasons of which are quite obvious owing to the immense competition and regulatory framework. The concept of multi-national companies and their trans-national operation not only requires strict governance with the domestic laws of the country but also demands assurance of transparent working in the organization.

In India, the need for stronger compliance and ethically upright companies was observed after the rise in the number of scams and frauds in the early 2000s. It was clear that the management can go to any lengths to protect their personal interest. To protect the rights and interest of owners, that is the shareholders, stricter legal regime was required to be introduced and even today, there are various laws and compliances which are introduced regularly which could fit the ever-changing economic and corporate legal landscape of India. One such concept is of “Independent Directors”. The post of independent directors is mandatorily to be filled by certain companies which meet the prescribed threshold, which shall be discussed during the course of this article.

Legal Aspect

Independent Directors, as the name suggests, are not in any way associated with the company. They are appointed to present an unbiased, transparent and ethical opinion on business transactions of the entity and also oversee the activities of the company to ensure due legal compliance.

The Companies Act, 1956 did not contain the concept of the appointment of independent directors. However, the Companies Act 2013, defines independent directors under section 149(6) as “a director other than a managing director or a whole-time director or a nominee director with several other criteria”.

The definition is also given in the Regulation 16(1)(b) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulation, 2015. According to this provision, there shall be at least 50% of directors in the board as independent directors, if the chairman of the board is an executive director.

Committees like audit committee, nomination and remuneration Committee also have a mandatory requirement in relation to the appointment of independent directors. Not only this, a listed company should have at least one-third directors as independent directors

Evolution of the concept of Independent Directors

Kumar Manglam Committee formed by Securities Exchange Board of India (“SEBI”) was the first to emphasize the importance of the post of Independent Directors in the Board of Directors. Later, committees like Naresh Chandra Committee, J J Irani Committee also outlined the provisions relating to Independent Directors, which later formed the part of the legislation.

Need of Independent Directors

After the introduction of economic reforms in India during the early 1990s, our country paved the way for better opportunities which could come to indigenous corporates and industries. There was an influx of foreign investment, presence in interconnected markets and operation in mutually operating economies. Indian laws, in this scenario demanded an overhaul to keep up with the standards of the global economies. Thus, the revolution in the economic structure, at the same time demanded the need to revolutionize the structure of the corporate laws, in order to ensure ethics, transparency and accountability.

Qualification of ID

If you aspire to become the watchdog of a company – an Independent Director, then is a prescribed eligibility criteria which can be followed.

The following are certain requirements to become an independent director in India:

1. A person who is not related to the promoter or director of the company, does not hold more than 2 percent of voting power, has no pecuniary relationship and has not been the Key Managerial Personnel (“
   KMP”) or employee of the company is eligible to become an Independent Director provided that he/she is person of integrity, sound mind and not disqualified under Companies Act, 2013;
2. A person is required to pass an online proficiency exam, if not exempted, with 50 % score conducted by Indian Institute of Corporate Affairs (“IICA”) to enroll themselves in the databank managed by IICA.

Roles and Responsibilities

The role of independent directors in the Indian companies is dynamic and multi-faceted. They don't just act as guiding light but also play a more active role in being a strategic advisor to the board along-side being an overseer of legal and ethical business conducted in the entity. To ensure their independent role, the Ministry of Corporate Affairs as per a circular issued on 02.03.2020 laid that Independent Directors are exempted from any criminal liability within the purview of the term “officers in default” which is used in various penalty provisions of corporate laws. To adhere and uphold the sanctity of the concept of Independent Directors, the circular clarifies that Independent Directors are presumed to be above any criminal liability unless any act is committed with their consent or when they have not acted diligently.

Their presence in the company is not merely a legal compliance, but acts as an assurance for the third-party stakeholders of the company like shareholders, customers, vendors etc.

Foreseeing the risks and managing it, avoiding conflicts, ensuring fair financial reporting, acting neutral in the corporate matters are some of the core responsibilities of an independent director in India. They also help the Board in navigating the activities and transactions in the most ethical and fair manner without compromising with the interest of its shareholders and the company.

Therefore, the concept of independent directors in India has evolved from just being a compliance to a parameter of good governance.