CHAPTER 3

INDEPENDENT DIRECTORS- EVOLUTION, APPOINTMENT AND

CONTINUANCE

“The best directors are those who think independently, regardless of their
status. In other words, independence is a state of mind, not a resume
item.”
-Ram Charan1
3.1 INTRODUCTION
The Board of Directors is the most important decision making body of a
company. Its independence is indispensable in ensuring high standards of corporate
governance. Independent Directors are seen to be the drivers of ethical corporate
governance and a force which inspires confidence, trust, and belief in a company’s
functioning.2 In recent years with the advent of various corporate misdeeds such as
Satyam Debacle, Enron Debacle, and several other scandals the concept of independent
directors came into limelight. Corporate Experts were of the view that directors should
be independent and free from the influence of the Board. Independence connotes. The
concept of Independent Directors gained a worldwide momentum in the wake of
Corporate Governance for ensuring fairness, accountability and transparency in the
manner a company functions. Director is said to be a person who is occupying the
position of director, as defined in section 2 (13) of Companies Act, 1956. A director in
essence is a person who along with his fellow directors manages the affairs of the
company. He is a member of the governing Board of a company and takes part in
planning, conducting and controlling its affairs. Under section 2 (34) of the Companies
Act, 2013, director means a director who is appointed to the Board of a company. That
means only a person appointed to the Board would be regarded as director. Thus he is an
officer3 of the company and not an employee of the company. The Supreme Court held
in Bajaj Auto Ltd v. N.K. Firodia4, that the directors have to act for the paramount
interest of the company and for the general interest of the shareholders because directors

1
Ram Charan, “Boards that Deliver: Advancing Corporate Governance From Compliance to
Competitive Advantage”, Jossey- Bass, Wiley, 2005
2
Dutta, Kaushik, “Handbook for Independent Directors Upholding the moral compass” LexisNexis,
Haryana, First Edition, 2015, p. 15
3
Section 2 (59), Companies Act, 2013 (18 of 2013)
4
(1971) 41 Comp Cas 1

75
are in a fiduciary position both towards the company and towards every shareholder. But
directors are not trustees for individual shareholders. They are trustees for the company
as a whole.
The Board of Directors of a company should have an advantageous combination
of executive and non-executive directors possessing such skills and caliber so as to
monitor affairs of the company for the best interest of all. The number of independent
directors would depend whether the chairman is executive or non executive. 5
3.2 TYPES OF DIRECTORS
Board composition plays a major role in defining the way a business is influenced
and conducted. Boards are composed of different types of director’s namely executive
and non- executive directors.

Directors

Executive Non- Executive

Whole - Time Nominee

Part- Time Independent

Managing
Directors Others

Fig. 7: Types of Directors

5
Rajagopalan.R, “Directors and Corporate Governance”, 1st ed., Company law, Institute of India Pvt.
Ltd, p.136

76
3.2.1 Executive Director
Executive director is a common post in many organizations, but neither
Companies Act, 1956 nor Companies Act, 2013 defines the phrase. An executive
director is one who is an executive of the company and also a member of the board of
directors. He is a person responsible for the administration of business. Hence directors
who are serving the company in a managerial capacity are called executive directors.
They can also be termed as insiders. Technically, they are the most competent directors
as they have inside knowledge of the complexities and the functioning of the company.
Executive directors perform operational and strategic functions such as managing
people, looking after assets, hiring and firing, entering into contracts etc. Executive
directors are usually employed by the company and paid a salary, so are protected by
employment laws.
Section 2(54) of the Companies Act, 2013, defines the term managing director to
be a director who is occupying the position of a managing director and is entrusted with
substantial powers of management of the affairs of the company, given to him by an
agreement or articles of association of a company. Thus to conclude managing director is
a director who by an agreement with the company, or by a resolution of Board of
directors or a resolution passed in a general meeting, or by virtue of memorandum or
articles of association of the company is entrusted with substantial powers of
management which would not otherwise be exercised by him. Under the 1956 Act,
managing director was to exercise his power subject to superintendence, control and
direction of its Board of directors. This requirement has now been dropped. The
institution of suit on behalf of the company by the managing director is deemed to be
within the meaning of the expression ‘substantial powers of management’. Such power is
necessary and incidental for managing the day-to-day affairs and business of the
company. Therefore, the contention that the managing director has no authority to file a
suit is untenable, and a suit filed by the managing director without any authorization
from the Board of directors cannot be said to be bad in law 6.
3.2.2 Non-Executive Director
Non-executive directors are those directors who have nothing to do with day to
day affairs of company. They have no separate employment relationship with the
company. Non-executive director may or may not be an independent director.

6
Wasva Tyres v. Printers (Mysore) Ltd , (2008) 86 CLA 455 (Kar.)

77
3.2.2.1 Independent Director
An independent director is a non-executive director who is independent and having
no business or other relationship with company so as to interfere directly or indirectly
with his independent and objective judgment. However the importance of Independent
directors were realised by legislators worldwide, after the emergence of various scams,
which materially affected the world economy. The presence of Independent Directors
would make frauds, mismanagement, inefficient use of resources, and unaccountability
of decisions to be detected and prevented at the earliest. They act as a harbinger for
maintaining the balance between individual interests and interests of the society as a
whole.
The Companies Act, 1956 provides a negative definition of an independent director, in as
much as it renders ineligible eleven categories of persons to be appointed as independent
directors in a company, for instance, if a person has held any post in a company at any
point of time is disqualified to be independent director of the company. Likewise, any
vendor, supplier or customer of goods and services of the company would stand
disqualified, notwithstanding the fact that the amounts of transaction are insignificant. 7
The concept of independent director is not as new as it seems to be under the
Companies Act, 2013 and Revised Clause 49 of the Listing Agreement. This existed as
one of the three categories i.e., ‘Independent’ (other than promoter and professional), in
Form 32 required to be filed for appointment of a director under the Companies Act,
1956.8 However, the category of independent director has assumed great significance
when law9 mandated for appointment of independent directors by all listed and certain
classified public companies within one year of coming into force of the Companies Act,
2013. Revised Clause 49 of the Listing Agreement which came into force with effect
from 1st October, 2014 also mandates appointment of independent directors in listed
companies with share capital of Rs. 10 crore and net worth of Rs. 25 crore or more as at
the end of any preceding financial year.

The Cadbury Report10 identifies two areas where non- executive directors can
make an important contribution to the governance process as consequence of their

7
Rajagopalan ,R. Directors and Corporate Governance, lbid p.99
8
Agarwal, Namo Narain, “Independent Director- Start Of Journey” Corporate Law Advisor, Vol. 127,
Part1, July 2015, First
9
Sec 149 (4) , Companies Act, 2013 (18 of 2013)
10
http://www.slideshare.net/BandriNikhil/cadbury-report-on-corporate-governance visited on 14.03.16
at 10.30 A.M

78
independence from executive responsibility. First, reviewing the performance of
executive management and second, taking the lead where potential conflicts of interest
arise, as for instance, fixing the CEO’s salary and perquisites or dealing with board room
succession. Apart from these, independent directors, being non-executives with no vested
interest, can bring objectivity to the board’s decision-making process. The Task Force11
said in its report that “the identities of members of board crucial to excellence is of
course obvious. Equally vital, however are their individual competencies, experience and
track record, which must match the business that the company is in. And a mix of
operational managers, who have the insider’s perspective and external professionals,
who bring in the outsiders cool detachment, will provide the collective capability that a
board needs.”
Independent directors are those directors who apart from receiving director’s
remuneration have no other material pecuniary relationship with the company, its
promoters, its management or its subsidiaries, which in the judgment of the Board may
affect their independence of judgment.12 Hence independent directors are those, who
neither have a direct association with the company nor are they employees of the
company. Neither are they former executives of the company nor are they on board to
protect the interests of some third party. Such directors are believed to be advocating the
shareholders interests as they have no vested interest in the company. Independent
directors on the board bring in the needed expertise and objectivity to mitigate problems
of managerial entrenchment and expropriation of shareholder wealth. They are also
likely to detect financial frauds and plug them before they blow up into full size scams.
3.2.2.2 Nominee Directors
Nominee directors are nominated by financial institutions pursuant to any law or
an agreement between such financial institutions and the company so as to represent the
interests of the financial institutions which have lent funds to the company. They are not
full-time employees of the company but share some business ties with it, be it in the form
of providing consulting services to it or representing it legally or having invested in it.
Nominee directors may also be appointed by the government or any other person. They
may be appointed by the following:

11
http://indiacorplaw.blogspot.in/2009/12/task-force-on-governance-reforms.html visited on 11.03.16 at
04.49 PM
12
Birla Committee

79
 (1) Strategic investors13
(2) Private equity investors14
(3) Venture Capitalist15
(4) Financial institutions
(5) Government
(6) Creditors and lenders
They are appointed to protect the interest of financial institutions and banks.
However the Companies Act, 2013 explicitly excludes nominee directors from the ambit
of independent directors. The rationale is simple the nominee directors represent the
interest of the institution or entities that nominate them. Therefore they are not
‘independent’ in true sense. So a nominee director in the Board of a company cannot be
considered as independent director in the company. The Revised Clause 49 too excludes
nominee director from the definition of independent director. They are thus non-
executive directors but not independent directors. Nominated directors do not have
control over day to day affairs of the company. They are thus entitled to be protected.
The court quashed the summons, orders and subsequent proceedings against such
directors16.

3.2.3 Women Directors

The Constitution of India enshrines the principle of gender equality in its preamble
yet equal rights for men and women are still a distant reality. To remedy this situation
section 149 of the Companies Act, 2013, incorporated the provision of mandatory
appointment of a woman to company boards, subject to limitations. According to Rule 3
of Companies (Appointment and Qualification of Directors) Rules, 201417 every listed
company or any other public company, having paid- up share capital of one hundred crore
rupees or more; or turnover of three hundred crore rupees or more shall appoint at least
one woman director by 1 October, 201418. A new company incorporated under
Companies Act, 2013 shall comply with this provision within six months from the date of

13
Strategic investors take keen participation in the strategic issues of the company in which they invest
unlike financial investors.
14
They invest in companies whereby they gain access to those companies, assets and revenue recourses,
which can lead to very high returns to investments.
15
Venture Capital is the capital invested in business, thereby involving substantial amount of risk
relating to future profits and cash flows. Mostly investment areas are risky. Therefore it is also known
as risk capital.
16
S.K Sharma and A.K Mahajan v. Registrar of Companies, (2005)126 Comp Cas 222 (P&H)
17
Rule 3 of the Companies ( Appointment and Qualification of Directors) Rules, 2014
18
Section 149 (1) , Companies Act, 2013 (18 of 2013)

80
incorporation and a company existing on or before the date of commencement of this Act
shall within one year from such commencement comply with this requirement.
In a purported effort to achieve gender equality in the cooperate board rooms and
for upliftment of the weaker sex in general, as mandated by Constitution of the India in
the fundamental rights, and directive principals the legislature of the country has sought
to induct the much publically voiced liberal feminist principles while remodeling the law
with regards to the companies incorporated in India. Certain class of companies employs
at least one woman director in its board of directors. The Companies Act, 2013 has
rightly recognized the need for women to actively participate in promoting effective
governess and thus mandates their presence on the directorial board of companies. In the
wake of challenging disparities against women in the Indian corporate sector, this
amendment was pitched into assist in ensuring better sustainability and performance.
The hassle which arises when such a provision is mandatorily imposed is finding
the balance between the legal requirement of appointment a woman and satisfying the
characteristics expected from that member in terms of expertise, training and skill as
mentioned. The Act also elucidated on the situation wherein there arises an intermittent
vacancy in the post of the woman director; it shall be filled up by the board at the
earliest. However it is considered that the period of ‘three’ months for securing the right
woman candidate for the board is an ambitious attempt as it causes the inevitable
challenge of finding a person of the same rigor and zeal as the former member. Also, the
diversity should not materialize at the cost of hierarchy disruption. Thus, the period
should have been increased to a reasonable amount of time. 19 Non-compliance with the
provision will attract a hefty fine ranging from Rs 50,000 to Rs. 5, 00,000. The
regulatory requirement is provided under the listing agreement which is monitored by the
Securities and Exchange Board of India. However, companies may face a challenge in
respect of identifying women directors. Since SEBI has not specified that the woman
director needs to be independent, companies may resort to appointing women directors
from within the promoters’ family as directors. Researcher feels that this may not
necessarily have a desired effect on the governance standards.
To sum up, it can be gain said that the legislature of India has put forth a half-
baked measure in an ostensive demonstration of purported aggrandizement of women
participation in corporate sector, when the dismal representation of women in Indian

19
Anand Swaroop Das, “Mandatory Appointment of women to company Boards: A Titular
Ostentation?” Company Law Journal, Vol. 3, August 2015 , p. 36

81
board rooms needs more holistic and emphatic efforts to not only achieve parity in
numbers but also parity in meaningful and gainful contribution.

Board of
Directors

Non-
executive
directors

Independent
Directors

Fig. 8: Independent Directors

3.4 EVOLUTION OF INDEPENDENT DIRECTORS

Corporate governance places a fair amount of emphasis on the independence of a
Board. Corporate governance models in India are borrowed heavily from those in the
United States of America and the United Kingdom from the recommendations of
Cadbury Committee 199220 of the UK and the Sarbanes-Oxley Act of 2002 of the US.
Governance in the US aims at disciplining the management, while this aims at
disciplining the dominant shareholder and protecting interests of minority shareholders
in India. Independent directors, who are truly independent, can be an effective barricade
against corporate frauds. Active oversight and prudent judgment may suffer when large
numbers of directors are closely associated with the executive leadership.

20
The chairman of Cadbury Committee is Adrain Cadbury, it published its report in December 1992 and
was set up in May 1991 by the Financial Reporting Council of the London Stock Exchange..

82
 3.4.1 In United States of America
In 1950 Independent Directors were introduced in American Boardroom as a
voluntary movement to serve a solution to manager shareholder agency problem.
However this voluntary initiative took on a mandatory form after the various corporate
governance scandals such as Enron, WorldCom, Tyco and the like that occurred at the
turn of the century. It was believed that independent and objective thought of
independent directors will improve the decision making process and performance of the
company as a whole will enhance as such. The concept of Independent Director gained
recognition in the corporate governance in 1970’s as the kind of director capable of
fulfilling the monitoring role. 21 Well- published public failures, along with questionable
payments involving widespread bribery and illegal political contribution in 1970’s
brought about sharp focus on the Independent Directors in the US, who were to be the
vanguards of public interest. In 1978, the US Securities Exchange Commission, as part
of the corporate governance programme made it mandatory for all corporations to label
their directors as either ‘independent’ or ‘affiliated’. 22 The role of Independent Directors
in the US was consolidated in the 1980’s in the era of takeovers and mergers. Many
companies adopted fraudulent and synthetic transactions to prevent hostile takeovers,
commonly known as ‘poison pills’.23 Sarbanes Oxley Act, 2002 was enacted and
amendments to the listing rules of stock exchanges such as NYSE 24 and NASDAQ25
were made.

Corporate governance-related regulatory framework in the US concerning director

independence is based on:

 Statutory law of the State in which the company is incorporated. Most US public
companies are incorporated in the State of Delaware. The majority of other States base
their legislation on Delaware law, or on the Revised Model Business Corporations Act
(RMBCA) of 2002.
 Federal Securities laws, such as:

21
J.N. Gorden, “The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder
Value and Stock Market Prices”, Stanford Law Review, Vol.59, 2007, p. 1465-1473.
22
Exchange Act Release No. 15, 385, 43 fed. Reg.58, 522, 58,523.
23
Kaushik dutta “Handbook for Independent Directors Upholding The Moral Compass” Lexis Nexis,
first edition, 2015
24
NYSE stands for New York Stock Exchange
25
NASDAQ stands for National Association of Securities Dealers Automated Quotations.

83
 1. Rules and regulations promulgated by the Securities and
Exchange Commission (SEC).
2. Sarbanes-Oxley Act of 200226 and Dodd Frank Wall Street Reform
and Consumer Protection Act of 2010.
 Listing standards published by registered stock exchanges, such as, the New York Stock
Exchange Listed Company Manual (NYSE Listing Manual) and the National
Association of Securities Dealers Automatic Quotations Stock Market Rules (NASDAQ
Stock Market Rules).
 Company’s certificate of incorporation and byelaws.

In the US, NYSE and NASDAQ listing standards and SEC rules have
established mandates for director independence. The SEC rules do not impose any
additional independence criteria. Rather, the rules simply seek to elicit additional
disclosures.

NYSE proposes the following standards for independent directors:

a) A director is independent only if the Board affirmatively determines that he has no

material relationship with the company.

b) A director is not independent if he is or has been an employee of the company, or a

family member is, or has been an executive officer of the company etc. The director or a
family member has received more than $120,000 in direct compensation from the
company and compensation paid to a family member employed by the company. The
director of a company has made payments to the company or received payments from the
company beyond a certain limit.

As per the NASDAQ listing standards, a director is independent only if the Board
affirmatively determines that he has no relationship with the company that interfere with
the director’s independent judgment in undertaking his responsibilities. NASDAQ listing
standards have more or less similar independence criteria as the NYSE listing standards.

In two cases, Weinberger v. UOP Inc.,27 and Unocal v. Mesa Petroleum28, the Delware
Courts were very critical of the absence of an independent board exercising a monitoring
oversight, in these companies. The courts suggested in both the cases that a Board with a

26
http://www.investopedia.com/terms/s/sarbanesoxleyact.asp visited on 11.03.16 at 05.48 PM
27
493 A. 2d 946 (Del. 1985), which is regarding hostile takeover.
28
457 A.2d701, 710 (Del.1983), where controlling shareholder was involved in fraudulent related party
transaction

84
majority of Independent Directors would have greatly resolved the inherent conflict of
interest in the company’s decision-making process.

In the US, Section 30129 of the SOX Act requires that audit committee of each
listed company should be composed of independent directors. Current NYSE and
NASDAQ rules rely heavily on SEC Rule 10A-3, which requires that each member of
the audit committee of the company be independent in accordance with two criteria, one
which bars any compensation from the company or its subsidiary, and the other which
bars any control relationship with the company or its subsidiary.

3.4.2 In United Kingdom

Similar changes occurred in the UK too, the collapse of the Bank of Credit and
Commerce International (BCCI), pension fraud at the Maxwell Group, and other frauds
in 1980’s and 1990’s in the country implied serious weakness related to internal controls
and financial reporting. The corporate instability raised a hue and cry on prevailing
system of corporate governance. After the emergence of Maxwell and Polly Peck 30 scam
a demand was made to bring reforms in structure of corporate governance. Eventually
various committees were constituted under chairmanship of corporate experts to
strengthen corporate governance and bring reforms in the prevailing system. The main
focus was on reporting of financial aspects, accountability and transparency. The UK
Cadbury Report refers independent directors to be independent and having no relation
with management or business so as to materially affect their independent judgment. In
1995 Greenbury Committee was constituted which talked about the pay of the executives
in the company and to prepare a code of such determining director’s remuneration.
Further in the year 2003 although substantial improvements in corporate governance had
been stimulated in UK listed companies certain areas have been highlighted for further
improvements by the Higgs Committee31. In the same year in response to the Enron
scandal, UK government commissioned the Smith Committee which passed its report
known as the Smith Report. The views expressed in the Cadbury Report were generally
unmodified by the Hampel Report, prepared by the Committee on Corporate Governance
chaired by Sir Ronald Hampel in June 1998.

29
Sec. 301 of Sarbanes Oxley Act relates to public company audit committees.
30
https://en.wikipedia.org/wiki/Polly_Peck visited on 11.03.16 at 12:12 PM
31
Higgs Committee passed its report in the year 2003 relating to the role of non executive directors.

85
 The UK Higgs Report 200332 observed that the definition of independent director
given by Cadbury report gives little guidance as to what is the test of independence. The
Higgs Report commented that various definitions of independent director are prevailing
in UK, all with different criteria. To correct this inconsistency, the Higgs Report, which
has been adopted as part of the Combined Code 2003, elucidates definition of
independent director. It was of the view that the board in its annual report should
mention the non-executive directors which it determines to be independent. The revised
UK Corporate Governance Code33 of 2010 recommended that companies make
appointments of non-executive and Independent Directors based on merit against the
objective criteria with due regard to the benefits of diversity.

To conclude the concept of ‘independence’ refers to independence from

management and from a position of financial gain, including employees. The Combined
Code 2003 gave a definition which does not expressly exclude substantial shareholders.
As a general rule a substantial shareholder is not considered to be the best choice as an
independent director; such a person is not always an excluded person. The board has to
explain why an excluded individual may be considered as independent, the onus lies on
them. Hence to remedy the situation of scams and instability, it was considered that
independent directors who are actually independent can bring about a change in the
system of corporate governance.
3.5.3 In India

The term “Independent Director” was first introduced in the Indian corporate
arena through the 1999 Kumar Mangalam Birla Committee34, formulated by SEBI, to
start up reforms in the area of Corporate Governance. It soon found entry into corporate
books, after Clause 49 was incorporated in listing agreement by SEBI. Three years later
the Naresh Chandra Committee35, gave governance some more thought. Committee
recommendations were though much inclined towards audit and auditors; but it did
brought some new thoughts to institution of Independent Directors. It recommended
Independent Directors should not be less than fifty percent of the board. Nominee

32
https://www.governance.co.uk/resources/item/258-the-higgs-report-review-of-the-role-and-
effectiveness -of-non-executive-directors visited on 11.03.16 at 12:20 PM
33
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-
Code-2014.pdf visited on 11.03.16 at 11:00 AM
34
1999 SEBI had set up a committee under Shri Kumar Mangalam Birla
35
Naresh Chandra Committee, June 21, 2012

86
directors of lending institutions not be considered as independents. It also provided
impetus to Independent director remuneration, training and recommended to exempt
them from criminal and civil liabilities. In 2003, SEBI constituted the Narayana Murthy
Committee36 with terms overlapping with that of Chandra Committee, whose
recommendations were incorporated in the Clause 49 by amending it in 2004. The very
purpose of appointing independent directors is to put checks and balances on each and
every activity of the company and to bring independence, impartiality and wide
experience. It also pondered view on the qualification and remuneration of independent
directors and stressed on the need evaluating performance of non-executive directors.
The committee also enhanced the view of previous Chandra Report on audit committee,
redefining its role and responsibilities, however, rejected the earlier view of treating
nominee directors of financial institutions at par with Independent Director. Sequel to
implementation of Murthy committee recommendation in Clause 49, MCA constituted
another committee in December 2004 under the Chairmanship of Shri J.J.Irani, to give
Corporate Governance a legislative stamp by revamping the Companies Act, 1956. It
has been decided in Central Government v Sterling Holiday Resort (India) Ltd &
Others37 that “the Board of Directors should be strengthened by appointing independent
directors.”
The Irani Committee38 came up with several recommendations in relation to the
Independent Directors that were in conflict with the Clause 49 and the views of the
Murthy Committee, e.g. (a) providing for several exemptions based on size and extent of
public ownership in a mandatory Corporate Governance framework so as to optimize
compliance costs while maintaining a desired level of regulatory rigour ; (b) the criteria
for “independence” of Independent Directors is proposed to be weakened significantly:
(c) the mandatory requirement of Independent Directors to constitute one-half of the
Board be weakened to one-third of the total members of the board (d) abolition of age
limits for Independent Directors. The present Corporate Governance framework
encompassing the Independent Director is through Clause 49 based on the Murthy
Report. Clause 49 gives an inclusive definition of independent director, covering under
its ambit non-executive directors who do not have a material pecuniary relationship with
the company, its promoters, management or subsidiaries, which may affect the

36
N.R.Narayana Murthy Committee, 2003 under the Chairmanship of Narayan Murthy set up by SEBI
37
2006 131 Comp Cas 6 CLB
38
Dr J.J.Irani Committee, 2004, constituted by Ministry of Corporate Affairs

87
independence of their judgment. Independent directors, as envisaged under the Listing
Agreement, cannot be substantial shareholders of the company in accordance with the
decision of the board, with the prior approval of the shareholders.
The Companies Act, 1956 did not directly talked about Independent Director's,
as no such provision existed regarding the compulsory appointment of Independent
Director's on the Board. However on careful analysis, it may be noted that Independent
Directors are included in the definition of an “officer in default” under Section 5 39. The
immunity may be available for Independent Directors on a case-to-case basis. India’s
listing standards require the boards of listed companies to include independent directors
but neither the Listing Agreement nor the Companies Act, 1956 precisely defined their
roles and liabilities. The Act of 1956 places independent directors on the same footing as
any other director for purposes of decision making and does not specify any privilege,
duty or function which they ought to perform or the liabilities they could incur for the
actions of the board. This has led to uncertainty with respect to the roles to be performed
by independent directors.

Thereafter, the Ministry of Corporate Affairs made an attempt to include

independent directors on Board of listed companies by changing the provisions of
Companies 1956, Act. However, such attempts proved to be futile as the changes failed
to explain the roles, duties or liabilities of independent directors lucidly. Board’s
independence from external influences is critical and directly proportional for effective
corporate governance. Thus, the need for comprehensive and strong legislation relating
to independent directors became vital and eventually led to the enactment of the
Companies Act 2013. It is evident that Companies Act, 1956 did not make any
provisions on independent directors and it was only clause 49 of Listing Agreement
which prescribed regulations of independent directors. Hence Companies Act, 2013 sets
the entire framework of independent directors roles, responsibilities conferring greater
power and enhance prevailing system of governance. The Companies Act, 2013 came
into force as Act no. 18 of 201340 after obtaining the assent of the President on August
29, 2013. The Ministry of Company Affairs enforced the 98 sections of the Act through
the notification dated September 12, 2013. Section 149 of Companies Act, 2013 deals
with the appointment and qualification of Independent Director's on the board and their

39
Sec 5 Companies Act, 1956 defines officer who is in default
40
Ministry of Corporate Affairs (http:/ /www.mca.gov.in/Ministry/ pdf / Commencement Notification of
CA2013.pdf) visited on 15.04.15 at 05:49 PM

88
importance in good corporate governance in the Company. The Act, 2013 has
specifically defined the roles, duties, liabilities and the manner of selection of
Independent Director's in board and various committees of the Company. The new Act
of 2013 brings clarity to the role of independent directors by laying down a non-
exhaustive list of duties to be performed by them. This has brought the Indian law in line
with the legal position in jurisdictions such as UK, where the codified duties and roles of
an independent director exist alongside their common law duties.

3.5 DEFINITION OF INDEPENDENT DIRECTOR

The concept of Independent directors gained momentum in the late 1980s and
early 1990s due to the uncovering of various corporate frauds and misfeasance.
Independent directors are directors on Board of a company who are independent
individuals, not having any other relationship or transaction with the company. An
independent director is a non-executive director who is independent and free from any
relation directly or indirectly with business which would obstruct with the exercise of his
independent judgment.41
According to the Kumar Managalam Birla Committee42, Independent directors,
are those who apart from receiving director’s remuneration have no relationship or
transactions i.e financial or material with the company, its management or its
subsidiaries which may affect their independence of judgment.
Naresh Chandra Committee43 has suggested a new precise definition according to
which an ‘Independent Director’ is a non-executive director who receives director’s
remuneration, but is not related to promoters or management. If he is an executive of the
company or partner or supplier, vendor or customer of the company in the last three
years, then he is not eligible to be appointed as independent director. Besides, he should
not be a substantial shareholder of the company. Further a ‘nominee director’ has been
excluded from the definition of independent directors. The provisions relating to
independent directors are made applicable for all listed companies, as well as large
public limited companies.

41
Fernando, A.C. ,“Corporate Governance Principles, Policies and Practices”, Pearson, p.205
42
http://www.prmetrics.in/2014/12/independent-directors-as=per=companies.html visited at 16.09.15 at
03:15 PM
see also Kumar Managalam Birla Committee under Chairmanship of Kumar Managalam Birla
Committee set up by SEBI in 1999
43
http://finmin.nic.in/reports/chandra.pdf visited on 11.03.16 at 01:25 PM

89
 The Committee has also made some useful suggestions for minimum size of
Board of directors, procedure for holding board meetings, permission to be granted for
holding board meetings through teleconferencing and video-conferencing to ensure
participation of all directors and financial and non-financial information to be provided
to the directors in the agenda papers. In order to provide incentive to independent
directors, the committee has suggested that adequate remuneration should be paid to
them. Further, such directors should be exempted from criminal and civil liabilities under
various enactments such as Companies Act, Negotiable Instruments Act, Provident Fund
Act, Employees State Insurance Act, Factories Act, Industrial Disputes Act, Electricity
Supplies Act etc. In order to ensure that independent directors can discharge their
functions properly, the committee has also suggested for organising adequate training
courses for them. In its recommendations relating to role of independent directors, the
committee has laid great emphasis on the role of Audit Committee and its independence.
It is suggested that members of the audit committees of listed and other large companies
should consist exclusively of independent directors.

The definition of independent director as per clause 4944 of the listing agreement
is similar to that of Naresh Chandra Committee. As per the definition, Independent
Director should not have any pecuniary relations or transactions with the company or its
promoters; his decisions should be independent of those who have controlling stake in a
company and in the overall interest of the company and its stakeholders. The
appointment of independent directors in case of listed companies is governed by SEBI
but in case of unlisted company there are no such requirements. Clause 49 is a part of an
agreement between the company and the stock exchange, there was nothing in the
principal Company law45 that required presence of independent directors in the Board of
directors of a company. Further the scope of Clause 49 is limited to listed companies
only. The concept of ‘independent directors’ was first sought to be introduced in the
legislation by means of the Companies Bill, 2009, which finally got enacted in the form
of the Companies Act, 2013 with several modifications. With the passage of the new
Companies Act 2013, the concept of independent directors has found place in the
Companies Act itself. The requirements prescribed under the Companies Act, 2013 seem
to be much more stringent than that of the Listing agreement.

44
http://indianboards.com/files/clause_49.pdf visited on 20.01.16 at 10:10 AM
45
Companies Act, 1956

90
 As per Section 2(47)46 of Companies Act, 2013,
“Independent director means an independent director referred to in sub-
section (5) of section 149”;
Section 149 (6) contains that –

“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 with the company, its
holding, subsidiary or
(d) 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;
(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;
(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—

46
https://www.indianindependentdirectors.org/role-of-independent director.php visited on 15.09.15 at
12:35 PM

91
 (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
percent or more of the gross turnover of such firm;
(iii) holds together with his relatives two percent or 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 percent or more of its
receipts from the company, any of its promoters, directors or its holding,
subsidiary or associate company or that holds two percent or more of the
total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed :”
An independent director shall possess appropriate balance of skills, experience and
knowledge in disciplines of finance, law, management, administration, research,
corporate governance, technical operations related to the company’s business.

The definition of Independent Director under the Revised Clause 49 47 is in

alignment with the definition of Independent Director under the Companies Act, 2013.
The definition has excluded nominee director from the definition of the independent
director. In the earlier Clause 49, there was no specific exclusion of the nominee director.
The same has now been aligned with the Companies Act, 2013. Promoters of the
company, its holding, subsidiary or associate company have been specifically excluded
from the definition of independent directors in respect of which the earlier Clause 49 was
silent. As per the Revised Clause, the director should not have any material pecuniary
relationship with the company, and other prescribed related parties during the two
immediately preceding financial years or during the current financial year. However
there was no such restriction in the previous Clause 49 of the Listing agreement. 48

The Companies Act restricts independent director from having any transaction
with the company whereas the Revised Clause restricts an independent director from
undertaking material transactions with the company. The word material has not been

47
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.pdf visited on 11.03.16 at 12:25 PM
48
http://www.mondaq.com/india/x/328002/executive%20remuneration/remuneration%20to
%20independent%20directors visited on 10.02.16 at 10:40 PM

92
defined in the Revised Clause. The researcher is of the view that this difference between
the Companies Act and Revised Clause may lead to interpretations and differences in
applications by various companies. The Revised clause 49 requires independent directors
to be above 21 years of age which is not mentioned in Companies Act, 2013. Additional
restrictions are also placed by making independent director himself or his relatives not to
be a material supplier, service provider or customer of company. The Companies Act,
2013 places another condition relating to the definition of independent director—such
person shall possess such other qualifications as may be prescribed. In this regard, the
Rule 5 of Companies (Appointment and Qualifications of Directors) Rules, 2014 provide
that an independent director shall possess certain positive qualities to be an independent
director. As corporate governance is a multi disciplinary approach independent director
should possess skills and knowledge about all discipline namely finance, law,
management, marketing, administration, corporate governance, or other disciplines
related to the company’s business. However, there is no provision for their selection
process, independence; besides researcher feels that there is ambiguity in law about the
qualifications of an Independent Director. Independent Director`s endowed with
expertise and an independent disposition can bring about the much needed
transformation in boardrooms and board meetings can become effective strategy
sessions.
3.6 NEED FOR INDEPENDENT DIRECTORS
Corporate governance is concerned with the ways of bringing transparency and to
balance the interests of investors and managers. It has to be ensured that it benefits all its
stakeholders and not merely its promoters49.

It is unfortunate that the need and importance of Independent Directors was

realised after the Satyam Debacle in the year 2009. The Indian legislators, regulators and
corporate experts were of the view that Boards should comprise of independent directors
for changing the prevailing system of corporate governance. Satyam Computer Services
is considered to be the biggest scandal in corporate India’s history and the travails of
Nimesh Kampani relating to his service as an independent director at Nagarjuna Finance
dominating the headlines and eroding confidence in corporate India both domestically

49
T.N.Pandey, “Board’s Evaluation by Independent Directors- New Responsibility under Companies
Act, 2015 and Clause 49” SEBI &Corporate Laws, vol. 131, Issue 3, Aug1,2015, p.72

93
and overseas.50 These events attracted significant public attention to and invited the
scrutiny of India’s independent directors, and many of these independent directors took
notice: at least 620 independent directors resigned from the boards of Indian companies
in 2009. 51 This exodus of independent directors highlighted a deep discomfort within
corporate India with the very institution of independent directors in the context of
companies controlled, directly or indirectly, by corporate founders, or promoters.52

3.6.1 The Satyam Saga

Satyam Computer Services Ltd was founded in 1987 by Ramalinga Raju and his
brother Rama Raju as a private company with just 20 employees to develop software and
provide consultancy services to large corporations. On January 7, 2009, B.Ramalinga
Raju, the founder and then Chairman of Satyam Computer Services, confessed to having
orchestrated an accounting fraud on Satyam books. Satyam Computer Services Ltd a
publically traded private company was one of the most reputed software companies in
the country. Being a listed company, Satyam’s shares were traded in Bombay Stock
Exchange, National Stock Exchange in India and also New York Stock Exchange in
United States. This means that Satyam had to comply with Clause 49, Sarbanes Oxley
Act and all such prescribed rules and regulations. Even though public, Satyam remained
a company dominated by its cofounder cum Chairman Ramalinga Raju, who was
conferred with the ‘IT Man of the Year 2000 Award’ by Dataquest. In 2008, the company
received ‘Golden Peacock Award’ for excellence in corporate governance from London
based World Council for Corporate Governance. The company had an optimum
combination of non-executive directors and executive directors, an independent audit
committee, a nomination committee and remuneration committee consisting of
independent directors.
Satyam’s spiraling downward effect was discovered in two phases. One, an
aborted related party transaction involving company’s promoter and two, fudging of

50
P. Banerji, Scandal Jolts Confidence of Global Investing Community, The Financial Express, Jan. 8,
2009, available at http://www.financialexpress.com/news/scandal-jolts-confidence-of-global-
investing-community/407876 visited on 10.11.14 at 03:15 PM
51
Tabulated based on data available at http://directorsdatabase.com. For our purposes, we only counted
cessations listed in the database for which the reason listed was “resignation”.
52
Explanation I of sub clauses (k) and(l), Clause 6.8.3.2, Securities and Exchange Board of India
(Disclosure and Investor Protection), 2000, defines the term ‘promoter’ to include: (a) the person or
persons who are in over-all control of the company; (b)the person or persons who are instrumental in
the formulation of a plan or programme pursuant to which the securities are offered to the public; (c)
the persons or persons named in the prospectus as promoter(s). Provided that a director/ officer of the
issuer company or person, if they are acting as such merely in their professional capacity, shall not be
included in the Explanation.

94
accounts in Satyam’s books of accounts. Problems in Satyam begin when on December
16th, 2008 its Chairman in a surprise move announced a $1.6 billion bid for two Maytas
companies i.e. Maytas Infrastructure Ltd and Maytas Properties Ltd. These two
companies had been promoted and controlled by Raju’s family53. Despite concerns
raised by some of the independent directors, the Board adopted a unanimous resolution
to proceed with the proposed acquisition. Satyam notified the stock exchanges of the
board approval as required under the listing agreement 54. The market reacted badly to the
news and within eight hours of the announcement, Satyam was compelled to withdraw
the Maytas proposal.
Ironically, Satyam which means “truth” in Sanskrit, but Raju’s admission along
with his resignation, depicts the image of the company that had been asatyam i.e.
untruth, regarding disclosures of its financial performance to the investors, shareholders,
clients and employees. At last on 8 January, 2009, B. Ramalinga Raju made a shameful
confession of over Rs. 7800 crore financial fraud and ultimately resigned as Chairman of
Satyam. He also admitted that ‘it was like riding a tiger without knowing how to get off
without being eaten.’ Raju and his brother hid the fraud from the company’s Board,
senior managers, and auditors. Ramalinga Raju faked figures to the extent of Rs. 5040
crore of non-existent cash and bank balances as against Rs. 5361 crore in the books,
accrued interest of Rs. 376 crore non- existent, understated liability of Rs. 1230 crore on
account of funds raised by Raju and an overstated debtor’s position of Rs. 490 crore.
Hence, no one except the family members had access to complete information. From
being India’s fourth largest IT Company with high profile customers, Satyam was
entangled in the nation’s biggest scam. The case of Satyam’s accounting fraud has been
dubbed as “Indian Enron”.

53
On 16 December, 2008, Satyam’s Board convened a meeting to consider the proposed acquisition of
Maytas Infra Limited and Maytas Properties Limited, companies focused on real estate and
infrastructure development. Two major issues in the proposed transaction surfaced. First, the Maytas
companies were focused on real estate and infrastructure development- two industries unrelated to
Satyam’s core IT business. Second, the Raju family owned approximately 30% of the Maytas
companies. At this time, Ramalinga Raju served as Chairman of the Board, and B. Rama Raju served
as the Managing Director and Chief Executive Officer. This made the proposed deal a – related party
transaction.
54
Varottil, Evolution of Independent Directors, Umakanth Varotil, Evolution and Effectiveness of
Independent Directors In Indian Corporate Governance, Hastings Business Law Journal Summer, vol.
6, no. 2, 2010, p. 281., at 335

95
3.6.2 Episode of Nimesh Kampani
Nimesh Kampani, the billionaire founder of the JM group of companies, served
as an independent director on the board of Nagarjuna Finance from 1998 to 1999.55 The
promoters and executives of Nagarjuna were charged under the Andhra Pradesh
protection of Creditors Act for failing to repay depositors nearly Rs. 100 crore during
2001-2002.56 In addition to charging and arresting the founding promoter and another
affiliated director, the Government also charged Kampani, who had left the board prior
to any of the allegations surfacing. Kampani managed to avoid arrest and jail time by
remaining in Dubai for nine months until a ruling by an Andhra Pradesh Court in
October 2009 stayed the proceedings against him. 57
The Satyam episode has brought out the failure of the present corporate governance
structure that hinges on the independent directors. The independent directors failed to
question management’s strategy and use of leverage in recasting the company; they were
also extremely slow to act when it was already clear that the company was in financial
distress. The aftermath of Satyam left many independent directors terrified by the
perception- correct or not – that they could be held liable for the bad acts of a rogue
promoter that were undertaken without their knowledge 58. In India, these corporate
events have triggered the focus on governance which was not witnessed earlier.
Therefore it was felt that directors need to be selected and appointed through transparent
process ensuring strong corporate governance and rational decision making by the
Board.

3.7 APPOINTMENT OF INDEPENDENT DIRECTOR

The process of appointment of Directors is strictly regulated by the Act.

According to Sec 149 of Companies Act, 2013, only an individual can be director of a
company. No company or firm or association can be the director of a company. The
Companies Act, 2013, sets forth a mechanism that aims at removing the influence of the

55
C.R. Sukumar and B. Kalesh, Kampani surprised at Nagarjuna Probe, LIVEMINT, Dec. 23, 2008,
available at http://www.livemint.com/2008/12/22234706/Kampani-surprised-at-Nagarjuna.html.
visited on 12.04.16 at 03:50 PM
56
See, Govt to Probe Nagarjuna Finance Fraud On ‘Top Priorty’ Basis, LIVEMINT, Jan. 5, 2009,
available at http:// www.livemint.com/2009/01/05181016/Govt-to-probe-Nagarjuna-Financ.html
visited on 12.01.16 at 04:05 PM
57
C.R. Sukumar, Kampani gets Relief from Andhra Court, LIVEMINT, Oct., 15, 2009, available at
http://www.livemint.com/2009/10/15010515/Kampani-gets-relief-from-Andhr.html visited on
10.06.15 aaaaaat 10:10 AM
58
In the context of controlled firms, directors may also be concerned that much of the information they
receive is provided by promoters and management. It is not clear that this needs to be so.

96
management including the company’s promoters on the selection process, even though
the names of Independent Directors may have been proposed by them. As the Higgs
Review had pointed out, weakness over independence may be due to the informality and
opacity in the appointment process which, in turn, has long- term consequences 59.

The law provides for creation and maintenance of a databank of independent

directors. The company may select an independent director from the databank. However
the selection of independent director need not be mandatorily made from the databank.
The databank merely acts as a facilitator. The company may also take recourse to other
options for choosing an independent director. The selection shall be made by the Board
of Directors; which shall be approved at the meeting of the shareholders. The databank
can be created by anybody, institute or association, as may be notified by the Central
Government. The agency should have expertise in creation and maintenance of such
databank. The rules60 require that the databank should contain necessary information i.e.
name, director identification number, full address with PIN code, Income-tax PAN,
educational and professional qualification, experience etc. in respect of each person to be
included in the databank.

The databank will be placed on the website of the body, institute or association
creating and maintaining the databank; on the website of the Ministry of Corporate
Affairs. Presently some databanks are already functioning. 61 Whosoever wants to get his
name included in the databank, will have to make an application in Form No.DIR-162 to
the agency notified by the Central Government which will charge reasonable fee from
the applicant. However the responsibility of selecting a person from the databank shall
lie with the company making such appointment. The rules require that the website
displaying the databank should also conspicuously display that the company must carry
out its own due diligence before appointing a person selected from the databank.

The appointment of independent directors shall be approved in the Annual

General Meeting of a company by serving a notice that the proposed person to be
appointed fulfills the eligibility conditions mentioned in the Act. For this, the Board

59
Derek Higgs, ‘Review of the role and effectiveness of non-executive directors’, (Higgs Report),
January 2003. Available at http://www..ecgi.org/codes/documents/higgsreport.pdf visited on 10.06.15
at 10:05 AM
60
Rule 6 of Companies (Appointment and Qualification of Directors ) Rules, 2014
61
http://www.primedirectors.com visited on 22.7.15 at 05:10 PM
62
Pursuant to section 150 and rule 6(4) of the Companies (Appointment and Qualification of Directors )
Rules, 2014

97
needs to attach an explanatory statement to the notice of such a meeting justifying the
choice of a person as an Independent Director.63 The individual to be selected at the
meeting needs to give a declaration that he has a Director Identification Number (DIN),
and is not disqualified from being appointed as a director.64 A letter of appointment shall
be issued specifying the terms and conditions65 of appointment of Independent Directors,
which shall be open for inspection at the registered office of the company by any
member during normal business hours. The same shall also be posted on the company’s
website and its registered office.

Revised Clause 49 also prescribes the same manner of appointment of

independent director as prescribed in the Companies Act, 2013. However clause 49
requires the letter of appointment along with the detailed profile of independent director
to be disclosed on the websites of the company and the stock exchanges within one day
from the date of such appointment. Researcher is of the view that the process of
nomination and appointment of independent directors should be based on an open, fair
and rigorous process by identifying individuals of suitable quality and background to
some laid down guidelines. The independent directors should be selected on there being
no conflict of interest with the company. Most of the non-executive independent
directors are being appointed through the CEO’s personal referral and only very few
through the remaining executive search firms. These directors are more likely to
beholden to the senior management; rather than safeguarding the interest of the
shareholders they are supposed to. Under the Indian corporate law, appointment of each
director is voted upon individually at a shareholders meeting where such appointment
needs to be approved by the majority of the shareholders present and voting. Hence,
controlling shareholders, by virtue of being able to muster a majority of shareholders
present and voting on such resolution can control the appointment of every single
director and thereby, determine the constitution of the entire board. Thus, while there
might be formal independence from the management, there is no independence in the
substantive sense of the term. Although Companies Act, 2013 provides that the
independent directors may be appointed from data bank but it is not obligatory.

63
Section 150 (2), Companies Act, 2013 (18 of 2013)
64
Section 164 (1), Companies Act, 2013 (18 of 2013)
65
Schedule IV, Companies Act, 2013 (18 of 2013)

98
3.8 COMPOSITION OF THE BOARD
Corporate governance scandals has occurred due to Boards being dominated by a
single senior executive or small ‘cabinet of kitchen’ with other member of board who are
not actually working but just acting as robots. Such board decisions are mostly
influenced by selfish interests. It has occurred that recruitments and appointments were
influenced by personal recommendations. Thus it was seen that composition of board of
directors was not independent and hence imbalanced and biased. As a result of all this,
board seems to be devoid of talented, intelligent, trustworthy and skillful people which
result in complicated decisions and incompetency which leads to corporate scandals and
crimes. It should be ensured that the board must compose of talent, skills and
competency which make them capable to act as the custodians of public interest.
There was no stipulation under the Companies Act, 1956 for appointment of
independent directors. For the first time it was prescribed by Clause 49 of Listing
Agreement to make it compulsory to appoint independent directors in board of directors
of a listed company. Thereafter, years later, the Companies Act, 2013 seeks mandatory
inclusion of independent directors in the Board of directors of a listed public company.
The object to enact Companies Act, 2013 is to ensure transparency and improve
standards of corporate governance. The Act has prescribed provisions for listed as well
as public companies and provided special features of independent directors. Therefore
apparently the concept of independent directors is relevant to public companies only, and
does not cover private companies. Private companies are mostly closely-held companies
whereby public funds are not involved. In these companies, the owners are in well
control of the affairs of the company. Therefore, there would be no relevance of
appointing independent directors in private companies. However, there might be legal
compulsion for appointment of independent directors even for private companies if they
are listed.

3.8.1 Independent directors under Companies Act, 2013

3.8.1.1 Listed Companies

 Listed Public Companies

For a public company66 the minimum paid up share capital of five lakh rupees
has been omitted by the Companies (Amendment) Act, 2015 and it is also made
mandatory to have independent director’s upto one third of total number of directors in a

66
Section 2(71) , Companies Act, 2013 (18 of 2013)

99
listed public company. Therefore it is compulsory for every public company which has
any of its securities listed on a recognized stock exchange to appoint requisite number of
independent directors on its Board. At least one third of the Board of Directors of such
company shall comprise of independent directors. The required number of independent
directors should be:
(a) One third of the total Board’s strength if the Chairman of the Board is a
non-executive director but the ratio of independent director must be half if
the Chairman is a promoter or person occupying management position in
the Board.
(b) One half of the total Board’s strength if Board’s Chairman is an executive
director.

The Companies (Appointment and Qualification of Directors) Rules, 2014 state

that a company for which a higher number of independent directors has been prescribed
under the regulations governing such class of companies, shall comply with the
requirements specified in such regulation. Therefore in case of a listed public company,
ultimately the provisions of the listing agreement will apply.

 Listed Private Companies

Section 2(68), Companies Act, 2013 gives definition of a private company.
Companies (Amendment) Act, 2015 has omitted requirement of minimum paid up
capital which was earlier required for private companies. Private companies are
mandated under law to restrict the right to transfer its shares. As such, shares of a private
company may not be listed on a stock exchange. When a private company lists its debt
on the recognized stock exchange, it becomes a listed company under the law. Hence any
provision of the law pertaining to listed company will apply to such private company as
well.
Now the law requires formation of audit committee by every listed company. In
case a private company becomes a listed company, it will have to form an audit
committee with minimum of three directors maximum among who should be
independent directors. As such, there are two contradictions, firstly, minimum number of
directors required in a private company is two however if the private company is listed, it
will have to get at least three directors on its Board and secondly there is no direct
requirement under the law for private companies to appoint independent directors;
however in case the private company gets listed, it will need majority of independent

100
directors on its Board. All these are necessary merely because the company has got its
debt listed on a recognized stock exchange. The researcher is of the view that this
situation seems to be a paradox. Such private listed companies will have to comply with
the requirements of law pertaining to listed companies and appoint independent directors
which they were not otherwise required.

3.8.1.2 Unlisted Companies

 Unlisted Public Company

Until now unlisted companies were not required to appoint independent directors
on the Board, since the listing agreement is applicable to listed companies only.
However, the Companies Act, 2013 provides that the number of independent directors is
to be prescribed by the Central Government. Public companies to have at least two
independent directors whose paid up share capital is of rupees ten crore or more; or
turnover of rupees hundred crore or more or whose borrowings or deposits, exceeds
rupees fifty crores.

However, if any company covered under the above mentioned categories, is

required under law to constitute an audit committee and if the composition of audit
committee is such that it requires more than two independent directors, then the company
will have to appoint such higher number of independent directors.

 Unlisted private companies

There is no requirement under the law for the unlisted private companies to
appoint independent directors.

The image of corporate governance shall be improved by the appointment of

independent directors on the Board. In public company, public interest is at stake and it
is essential to maintain transparency. It is believed that independent directors would
bring efficiency in Board of directors. Finally researcher is of the view that the inclusion
of independent director often brings a more focused and professional opinion in the
thought process of a corporation.

3.8.2 Independent Directors under Listing Agreement in India

SEBI has amended Clause 49 of the listing agreement to ensure that the provisions
relating to Independent Directors are aligned with that of Companies Act, 2013. Revised
Clause has added the requirement of at least one woman director to be included on the
Board as mentioned under the requirements of Companies Act. However, the

101
implementation of the said clause has been deferred till 1st April 2015. Further, it has
modified the reference to the chairmanship in case of non executive director. As per the
Revised Clause, if the chairman of the Board is not a ‘regular non-executive director’,
then half of the Board should comprise of independent directors. It is a welcome step to
ensure diversity on the Board. Under Clause 49 of the Listing Agreement, the strength of
the number of independent directors is determined on the status of the chairman of the
board.
3.9 LIMIT ON NUMBER OF INDEPENDENT DIRECTORSHIPS
It is often seen that external independent directors of large corporations are in
most cases people in full time occupation as CEOs or senior directors or in professional
practice with heavy demands on their time, concern has often been expressed that such
directors may not always be able to devote the time and effort required to do justice to
their independent directorships on Boards. But there will always be a limited few who
are in much greater demand. In India, in 2010 for example, highly boarded directors
(defined as sitting on five or more NSE 100 company boards) were 71 (6%) of the total
1104 director positions and controlled 66% of market capitalisation of all NSE listed
companies. Although the Initiatives have set a generous upper limit of twenty companies
and of which no more than ten may be public companies (including private companies
which are holding or subsidiary companies of public companies) on whose board a
director may sit,67 it is arguably an improvement over the extant situation of virtually
unlimited number of directorships overall including exempt directorships as alternates,
and in private limited companies that are not holding or subsidiary companies of public
companies, unlimited companies, and not-for-profit companies 68.
Section 165 (1) of the Companies Act, 2013 limits the number of directors which
can be held in a company. One director cannot hold the directorship of more than 20
companies at the same time in a public company including a sub limit of 10 public
companies. While computing the limit of directors, directorship in private companies
shall also be included. However the number of directors may be reduced by the members
of the company by passing special resolution. The rule of rotation for retirement is not
applicable for independent directors. Hence shareholders have been empowered to lower
the limits of directorships an individual can hold in a company. 69 A director who holds

67
Section 165(1) of the Companies Act, 2013 (18 of 2013)
68
Section 278 (1) of the Companies Act, 1956
69
Section 165 (2) of Companies Act, 2013 (18 of 2013)

102
office in more than one company shall be given an option to choose the directorship of
companies within a fixed time period of one year. Such choice has to be intimated to the
Registrar of companies having jurisdiction in respect of each such company 70. The limits
set by the Act, still do not cover directorships or equivalents in other entities like Trusts,
Cooperative Societies, Partnerships and other organisational formats where a person may
choose to get involved. Hence there are limits to which legislative or regulatory
provisions can (or even should) mandate; it should be up to the company and the
individual concerned to evaluate whether the required time and attention would be
possible in the circumstances and take an informed call on offering or accepting an
additional directorship.
The Listing Agreement requirements in this regard are more rigorous: the
maximum number of listed company directorships has been pared down to seven, and in
case of serving whole time directors in a listed company, this has been further scaled
down to three others.71 Under the Revised Clause 49 the provision is that an independent
director can hold directorship in not more than seven listed companies. Further, it is
regulated that a whole-time director in any listed company shall serve as an independent
director in not more than three listed companies.
Researcher makes the suggestion that the number of independent directors must
be capable of advising the board and direct it with their knowledge and skill to bring
credibility and effectiveness of the board functioning. An important issue that worries
corporate governance watchdogs is directorship overload. One single independent
director is holding position in many companies hence efficiency in work, due to overload
is not upto mark. The Companies Act, 2013 has tried to address the issue. To accept
more responsibility that one can handle is not feasible. Holding a directorship requires
considerable time and energy and at the same requires effective time management.
Therefore, it is advisable to accept directorship in suitable number of companies so that
one can contribute effectively to the Board.
3.10 QUALIFICATIONS OF AN INDEPENDENT DIRECTOR
Independent directors are directors of a company. The general qualifications and
disqualifications as applicable to any other director are applicable to independent
directors too. In addition to the qualifications prescribed under the Listing Agreement,
the new Act prescribes detailed qualification criteria for independent directors. It is

70
Section 165 (3) of Companies Act, 2013 (18 of 2013)
71
Cl.49-II-B-2 of LA

103
required that an independent director to be an expert, who should possess requisite skills,
and knowledge in various fields of finance, law, management, research and corporate
governance. 72 He should be a person of integrity, faith, honesty and having relevant
experience. Further he should not be a promoter of the company or its related companies;
or not even related to promoters or directors in the company. Besides he must neither
have nor had financial relationship with the company, its holding or subsidiary or their
promoters. He must not also have a relative having financial interests in the company’s
management. Hence to be appointed as an independent director, he must be a person
qualified to be a director and must possess an undertaking that he is not disqualified to be
a director. He should also disclose his DIN and give his consent in writing which is to be
filed with Registrar to act as a director.
While the Listing Agreement restricted the appointment of a person related to the
promoters or persons occupying management positions at the board level or one level
below, the New Act has restricted the appointee from having a relationship with the
promoter or directors of the company, its holding, subsidiary or associate company.
From this, it can be inferred that unlike the Listing Agreement, the new Act does not
require the appointee to be unrelated to a person occupying management positions at the
board level or one level below the board. Considering that the new Act does not
supersede or replace the Listing Agreement, companies will have to comply with the
requirements under both, until the rules framed in this regard provide greater clarity.
Further, while the Listing Agreement does not contain any stringent provisions with
respect to the relatives of the proposed appointee, the new Act provides that neither the
independent director nor any of his relatives:
1. Holds a key managerial position or had been an employee of the company in any of
the three financial years;
2. Is an employee or proprietor or partner, in any of the three financial years;
3. Holds 2% or more of the total voting power of the company;
4. Is a chief executive or a director, of any non-profit organization which receives 25%
or more of its receipts.
However, while the new Act requires an independent director to be a person of integrity,
relevant expertise and experience, it fails to elaborate on the requisite standards for
determining whether a person meets such criteria. It eventually results in nomination of

72
Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014

104
independent directors to be nominated by listed companies after exercising their own
judgment. It is pertinent to note that unlike the new Act, the Listing Agreement’s
description of the persons eligible to be appointed as independent directors does not
include the term “a person with integrity and possessing relevant expertise and
experience”. The Listing Agreement contains no such provision. The object behind these
restrictions is to ensure transparency by setting up the factor that independent directors
do not act against monetary or pecuniary interests of company. Many listed companies
may need to revisit the criteria used in appointing their independent directors.
3.11 DISQUALIFICATIONS OF AN INDEPENDENT DIRECTOR
An Independent Director may be disqualified if he fails to meet the standards as
expected of him. The Companies Act, 2013 lists out the conditions leading to
disqualifications73 of directors, including Independent Directors, from further
appointment, are as under:
 Is of unsound mind as declared by a competent court;
 An undischarged insolvent;
 Application for adjudication as an insolvent is pending;
 Convicted by a court of any offence leading to a sentence of not less than six
months;
 Tribunal has passed an order disqualifying appointment as a director;
 Call on shares of the company has not been paid by him;
 Convicted during the last preceding five years for an offence regarding
company’s dealing;
 Director identification number has not been allotted to him.
In Form DIR-8 every director is duty bound to inform the company regarding his
disqualification under section 164 (2), if any, before he is appointed or re-appointed.
Further Form DIR-9 is to be filed if company fails to file annual returns or to redeem its
debentures, to the registrar furnishing therein the names and addresses of all the directors
of the company during the relevant financial years. 74
Clause 49 of the Listing Agreement also prescribes a list of disqualifications for an
Independent Director. A person is disqualified to be an independent director if he has any
material or pecuniary relationship with the company which directly or indirectly affects

73
Section 164 (1) of the Companies Act, 2013 (18 of 2013)
74
Rule 14 of Companies (Appointment and Qualifications of Directors) Rules, 2014

105
his independence. Further he should not be related to the promoters or persons occupying
management positions or has been a partner an executive of the company. If he holds 2%
or more of the voting share capital or voting power of the company then also he is
disqualified.

3.12 DECLARATION BY INDEPENDENT DIRECTORS

An Independent Director is required to give a declaration that he meets the

criteria of independence. The declaration shall be made 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.75 The onus is on the Independent Director to
inform the board of a change in circumstances where he feels his independence has been
affected or his performance could be compromised. An Independent Director should
make disclosure of any interest in any companies or associations in the first Board
meeting and then at first such meeting in each financial year. If there is any change in
such concern or interest, such change should be intimated to the Board in the immediate
next Board meeting held after such change. 76

Concerns or interest in contracts or arrangements entered or proposed to be

entered with specified entities at the Board meeting at which such contract or
arrangement is discussed. The director is also prohibited to participate in such meeting. If
the concern or interest originates after the contract is entered, such concern/interest
should be disclosed at the immediate next meeting of the Board held after such
origination of interest/concern. 77 It is also mandatory for every director to keep the
company informed regarding the position he occupies in various committees in all
companies annually, and should notify changes if they take place. 78 If and when an
Independent Director feels that any circumstances - be it over the independence criteria
or with regard to the fulfillment of his duties- may adversely change, he must inform the
Board without delay.

75
Section 149(7), the Companies Act, 2013 (18 of 2013)
76
Section 184(1), the Companies Act, 2013 (18 of 2013)
77
Section 184(2), the Companies Act, 2013 (18 of 2013)
78
Clause 49 of Listing Agreement

106
 Corporate Governance Voluntary Guidelines, 200979 has also recommended that
Independent Directors should provide a detailed Certificate of Independence declaring
their status at the time of their appointment, and the same is to be provided annually. The
declaration of independence of independent directors has to be placed on company’s
website and also on stock exchanges website where securities are listed.

3.13 DISCLOSURES RELATING TO INDEPENDENT DIRECTORS

To ensure transparency and availability of information the law requires the following
disclosures to be made in relation to Independent Directors:

(a) The Board’s report attached to the statements laid before the general meeting
should include a statement from the Board on declaration of independence given
by independent directors under section 149.80
(b) The Board’s report should disclose the composition of CSR Committee, wherein
atleast one director should be an Independent director.81
(c) The terms and conditions of an independent director’s appointment should be
available on company’s website and must also be kept open
for inspection at the registered office of the company during normal business
hours.82
(d) Company’s Board report must disclose policy relating to remuneration of
company’s directors, managerial personnel and employees. 83
(e) Report on Corporate Governance, which is a part of the Annual Report, should
contain various details as to the Board composition identifying the directors,
promoters, key managerial personnel etc. their attendance at board meetings or
committees thereof in which the director is a member or chairperson, number of
Board meetings held and dates thereof.84
(f) Inter-se relationship between directors has to be disclosed in the Annual Report.85
(g) The following disclosures by the company in its Annual Report, regarding the
salary of directors must be made:

79
http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf visited
on 12.03.16 at 12.30 PM
80
Section 134(3), the Companies Act, 2013 (18 of 2013)
81
Section 135(2), the Companies Act, 2013 (18 of 2013)
82
Schedule IV
83
Section 178(3), the Companies Act, 2013 (18 of 2013)
84
Clause 49 of Listing Agreement
85
Ibid

107
 (i) All details of financial and material relationships of the non- executive
directors vis-a-vis the company.
(ii) Details of salary, bonuses, pensions, and other benefits etc.
(iii) Details of fixed component and performance linked incentives, along with
the performance criteria.
(iv) Details of contracts, notice period, fees.
(v) Shares and convertible instruments held by non-executive directors.

3.14 PERFORMANCE EVALUATION OF THE INDEPENDENT DIRECTORS

The entire Board of Directors, excluding the director being evaluated shall make
evaluation of performance of independent directors. The report of performance
evaluation becomes the base to extend or continue the term of appointment. Under the
existing Clause 49, there was a non-mandatory requirement that the performance of the
non-executive directors can be done by the peer group consisting of the entire Board
which could in turn be a mechanism for deciding on the re-appointment of directors.
However, under the Revised Clause, there is a mandatory requirement that performance
of the independent directors shall be evaluated by the peer group basis, and the
evaluation criteria to be determined by the Nomination Committee. Further, the revised
clause requires companies to disclose the said evaluation criteria in their Annual Report.
Companies would need to develop qualitative and quantitative benchmarks in order to
ensure effective implementation of this requirement86.

3.15 Tenure of Independent Director

The tenure of an Independent Director could affect his independence. An

Independent Director with “externality” may lose its independence or may become not so
independent due to friendship established with the internal directors and the
management. It is therefore necessary to limit the tenure of an independent director. The
Board India Index of global search and recruiting firm SpencerStuart, on BSE 100,
points out that the average tenure for Independent Directors is Five-and-half years, and
around 47 percent of them have tenures greater than five years with 30 percent having
been in their roles for five to ten years, and 17 percent for more than ten years. 87

86
Advani., Vikram C.A and Handa, Manish C.A., “ Clause 49 (Revised) – Future of Corporate
Governance”, The Chartered Accountant, January 2015, p. 101
87
India Board Index 2012, Spencer Stuart, June 2013. available at https://www
.spencerstuart.com/reserach-and-insight/india-board-index-2012 visited on 15.06.15 at 02:30 PM

108
 Clause 49 of Listing Agreement (non-mandatory requirement) recommends a
maximum of 9 years in aggregate for Independent Directors. Corporate Governance
Voluntary Guidelines, 2009 recommends to limit the tenure of an independent director to
not more than six years, and independent directors cannot have more than three tenures
as independent director. Once appointed to the Board he can continue for a period of five
years88. He is not liable to retire by rotation89.
Both the Companies Act, 2013 and the Revised Clause 49 of the Listing
Agreement 2014 restricts the tenure to two terms of five years each. The second five-
year term can be offered only after a gap of three years 90 and is subject to certain re-
appointment requirements. The period of three years computed as per clause 49 includes
the period served before commencement of the Act. The period of three years is actually
the cooling off period counted from the date of expiry of the last term of the independent
director.
The tenure is limited so that an individual may not lose his independence, or may
not make independent decisions due to proximity to and familiarity with executive
directors, management or promoters of the company. There is a view that independence
of actions is likely to be comprised or absent with a longer tenure on the Board.91
Independent Directors having long affiliations with a company become ‘less vigorous
monitors’92.
3.16 Familiarisation Programme for Independent Directors
The Revised Clause mandates programmes for independent directors to know and
understand about the company in which they tend to serve, forecast their roles, visualize
their rights and responsibilities in the company, etc. This was a non-mandatory
requirement in the existing Clause 49. Further, as per the amendments to the Revised
Clause every listed company is required to disclose the details of familiarisation
programmes on the company’s website and a weblink thereto shall also be given in its
annual report. This will help in enhancing the skill sets required in Board rooms and help
in more informed decision making. SEBI has taken positive steps to enhance the level of

88
Section 149(10) the Companies Act, 2013 (18 of 2013)
89
Section 152(6), the Companies Act, 2013 (18 of 2013)
90
Section 149(11), the Companies Act, 2013 (18 of 2013)
91
Corporate Governance Policy and Voting Guidelines, National Association of Pension Funds (NAPF),
November 2012 Available at http://www.napf.co.uk./Policyand Research/DocumentsLibrary/~/media/
Policy/Documents/0277_Corporate_governance_policy_and_voting_guidelines_an_NAPF_document.
ashx visited on 11.05.15 at 11:00 AM
92
Bhagat. S and Black. B, “The Non Correlation between Board Independence and Long- term Firm
Performance”, Journal of Corporation Law, Vol. 27(2), 2002, p. 266

109
corporate governance through these measures. However, it would be incumbent on
companies to ensure that efforts in enhancing governance standards are taken in the right
spirit and the exercise does not become a tick in the box approach.

3.17 RE-APPOINTMENT OF INDEPENDENT DIRECTOR

Re-appointment of independent director is made through a special resolution of

the company;93 but this cannot happen without a performance evaluation report. The
performance evaluation has to be carried out by the whole Board of Directors except the
director to be evaluated. If the Board is satisfied with the performance of the director in
question, it may recommend re-appointment.94 The Revised Clause 49 of the Listing
Agreement 2014 is aligned towards this requirement, and additionally, requires that the
evaluation criteria for Independent Directors which are prepared by the Nomination
Committee shall be disclosed in the company’s annual report.

The Companies Act, 2013, considers a director, including an Independent Director,

as not eligible for re-appointment, or to be appointed in any other company, if the
company in which he is a director has, for a period of five years:

 Not filed financial statements or annual returns for any continuous period of three
financial years.
 Failed to repay the deposits or pay the interest thereon, or redeem any debentures
on the due date or pay interest due thereon, or pay any declared dividend and
such failure to pay or redeem continues for one year.95

The person so disqualified shall not be eligible for appointment as director of any
other public company for five years from the date of the specified types of failure. 96

3.18 RESIGNATION OF INDEPENDENT DIRECTOR

An Independent Director who feels that he is not able to justify his position, or
for any other reason, may resign from the position by sending a written notice
expressing his intension to resign, along with a reasonable justification, to the Board97.
He is also required to send within 30 days of resignation, a copy of the resignation letter
to the Registrar of Companies explaining the reasons for doing so along with fees as

93
Section 149 (10), the Companies Act, 2013 (18 of 2013)
94
Schedule IV, the Companies Act, 2013 (18 of 2013)
95
Section 164 (2), the Companies Act, 2013 (18 of 2013)
96
Snowcem India Ltd v. Union of India, (2005) 124 Comp Cas 161 (Bom)
97
Section 168(1), the Companies Act 2013 (18 of 2013)

110
provided in the Companies (Registration Office and Fees) Rules, 2014. 98 The board on
receipt of the resignation notice has to make a note of it and to inform Registrar of
Companies in case of listed companies, and the concerned stock exchange. The company
shall within thirty days from the date of receipt of notice of resignation from a director,
intimate the Registrar in Form DIR- 12 and posts the information on its website, if any. 99
Further, they need to state the facts related to such resignation in the board report placed
in the following Annual General Meeting of the company. The resignation can be
effective only on the date on which the notice is received by the company, or any later
date which may be mentioned in the resignation letter. When a director has tendered his
resignation and the Board of directors has accepted it and has acted on it, such director
cannot be held liable for the liability incurred by the company after the date of
acceptance of his resignation, except the liability incurred by him by the purchase of the
shares of that company, and nothing more.100 Relief was allowed to directors who had
resigned before the relevant period during which offences were alleged to have been
committed and then resignations were registered with ROC. 101

The instance of Satyam’s Independent Directors resignation is an example of its

own type which had never happened before. Resignations of the four eminent
Independent Directors came in at a moment of crisis- 48 hours after the company’s
Board made a decision to abort its earlier proposed investment of USD 1.6 billion in two
firms controlled by the company promoter- a move which was forced due to intense
pressure from investors.102 Researcher would like to make a suggestion that resignations
should be well reasoned and should not be merely aimed at safeguarding one’s position.
The enhanced duties and consequent liabilities, however, currently require that these
reasons be detailed in their resignation letter. An Independent Director’s letter of
resignation is a public document, and could be used as potential evidence, in a law suit or
an investigation, to prove the compelling circumstances whereby they resigned. It can act
as an effective mechanism for the director to limit his liability and explain his position
leading to resignation. From the date of resignation within a period of 180 days
independent director needs to be replaced by a new appointee.

98
Rule 16 of Companies (Appointment and Qualification of Directors) Rules, 2014
99
Rule 15 of Companies (Appointment and Qualification of Directors ) Rules, 2014
100
Saumil Dilip Mehta v. State of Maharashtra (2002) 48 CLA 21 ( Bom.)
101
G Ramesh v. Registrar of Companies, (2007) Comp Cas 655 (Mad)
102
“Scandal at Satyam: Truth, Lies and Corporate Governance”, Knowlwdge@Wharton, January 2009.
Available at http://knowlege.wharton.upenn.edu/article/scandal-at-satyam-truth-lies-and-corporate-
governance visited on 12.10.14 at 12:05 PM

111
 Withdrawal of resignation amounts to revocation and that is possible only before
the effective date of resignation i.e. later of the date of receipt of notice of resignation by
the company, or the date specified in the notice of resignation. In Union of India v. Shri
Gopal Chandra Misra and others103, the Supreme Court of India held that in the absence
of a legal, contractual; or constitutional bar, an intimation in writing sent to the
appropriate authority by an incumbent, of his intention or proposal to resign his post
from a future specified date, can be withdrawn by him at any time before it becomes
effective. Similar view was taken in Yamaha Motors (Pvt) Ltd. v. Labour Court-II and
Another,104 where it was reiterated that a prospective resignation can always be
withdrawn before it becomes effective, but it would always be subject to the service
conditions of an employee.

Researcher would like to suggest that in order to check mass resignations there
should be some guidelines simply to reign and escape from liability is no way out.
Resignations based on vague personal reasons cannot be accepted just to resign from one
company and to continue serving in others.
3.19 REMOVAL OF INDEPENDENT DIRECTOR

Independent directors can also be removed from the Board like any other director
of the company. They can be removed before completion of their tenure by passing an
ordinary resolution approved by a majority of the members. Before such removal the
Independent Director must be given sufficient opportunity of being heard 105. A director
elected by way of proportional representation, however, cannot be removed before the
completion of his term. A special notice is required to be initiated at the meeting at
which a director is to be removed. Where no special notice of resolution to remove the
directors was given, the resolution passed in the extra ordinary general meeting for
removing the directors was held to be invalid.106 The company is also required to send a
copy to the director concerned to provide him with the opportunity to present his views.
The director concerned may also seek time to send his representation. The director may
make an oral representation at the appointed meeting in case of time constraints. But
such representation may not be read out at the meeting if the company or of any other
person who makes application to the National Company Law Tribunal that it will amount

103
1978 SCR (3) 12; 1978 AIR 694
104
2012 LLR 1276 (All.H.C)
105
Section 169(1), the Companies Act, 2013 (18 of 2013)
106
Bhankerpur Simbhaoli Beverages (P) Ltd Vs. Sarabhjit Singh (1996) 86 Comp Cas 842 (P & H )

112
to secure needless publicity for defamatory matter. Shareholders can also by a sufficient
vote, remove any director with or without cause, but that is not possible in case two-
thirds of the directors are appointed through the proportional representation. The
removed director may have to be paid any compensation or damages, if so payable to
him as per the terms of his appointment as director.

3.20 REMUNERATION OF INDEPENDENT DIRECTORS

The remuneration paid to an Independent Director is important for attracting,

retaining, and motivating quality individuals to take up their role effectively and to
discharge their responsibilities107 in a company. Independent directors may be paid
sitting fees, reimbursement of expenses incurred for participation in the meetings of
Board as well as other meetings, and profit-related commission. However such
remuneration is subject to overall maximum remuneration that may be paid by a
company to its directors and manager in respect of a financial year. 108

The overriding principle in respect of directors’ remuneration is that of openness

and shareholders are entitled to a full and clear statement of benefits available to the
directors. The Companies Act, 2013 and Revised Clause 49 mandate the formation of a
Nomination & Remuneration Committee of at least three non-executive directors and at
least half of them shall be independent. The Committee is to ensure that the remuneration
being paid is reasonable and sufficient. In the Annual report also thorough disclosure
about remuneration package including incentives and bonuses etc. has to be mentioned.
The various corporate governance codes have also stressed upon this issue.

3.20.1 Sitting fees for Board meetings

Directors are entitled to receive sitting fees which shall be determined by the
Board. It may be for attending Board meetings or various committees of the Board or for
any other purpose. However the rules may limit the sitting fees that can be paid to the
directors. Further, the rules may prescribe fees in respect of independent directors.

According to the rules, the Board may decide upon the sitting fees payable to the
directors and different fees may be fixed for independent and non-independent directors.

107
Corporate Governance Voluntary Guidelines, 2009, Ministry of Corporate Affairs Available at
http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf visited
on 11.02. 2015 at 03.40 PM
108
Section 197 read with section 198 limits the managerial remuneration that may be paid by a company
in any financial year.

113
However, in any case, the sitting fees can be maximum Rs. 100000 per meeting of the
Board or a committee of the Board.

3.20.2 Reimbursement of expenses

Independent directors are entitled to get reimbursement of expenses incurred by

them for the purpose of active participation in the meetings. The expenses may relate to
travelling, accommodation, etc in connection with companies activities.
3.20.3 Profit- related Commission
Profit related commission is the commission which is based on profits earned by
the company. Independent directors may be paid such commission if t is approved by
the members of the company.

Following things an independent director is not entitled to receive from company:

(i) Stock options

An independent director is not entitled to receive any stock options. Stock options or
other gains may put his independent status at stake. Previous clause 49 (effective till 30-
9-2014) of the Listing Agreement requires that all compensation, if any paid to
independent directors, should be determined by the Board of Directors with previous
approval of shareholders in general meeting( except where the sitting fees did not exceed
the limits laid down under the Companies Act, 2013). The resolution of shareholders
should prescribe the maximum number of stock options that can be granted to
independent directors, in any financial year. However the new law completely prohibits
granting stock options to the independent directors. Further, SEBI has also approved the
proposal to amend the Listing Agreement for prohibition on granting stock options to
independent directors. As a result, the Revised Clause 49 too, bars granting of stock
options to independent directors.
(ii) Other Gains
Independent directors should not be remunerated in any other way than that provided
under the Act. Drawing any other gain may put their independence on stake and resulting
in biased decisions.
As per the Revised Clause 49, also the provisions are same as given under the Act.

3.21 APPOINTMENT OF LEAD INDEPENDENT DIRECTOR

Internationally, it is considered a good practice to designate an independent
director as a lead independent director. He coordinates the activities of other non-

114
employee directors and advises chairman on issues ranging from the schedule of board
meetings to recommending retention of advisors and consultants to the management. The
Lead Independent Director:
 Acts as the principal liaison between the independent directors of the board and
the chairman of the board;
 Develops the agenda for and preside at executive sessions of the boards
independent directors;
 Advises the chairman of the board as to an appropriate schedule for board
meetings, seeking to ensure that the independent directors can perform their duties
responsibly while not interfering with the flow of company operations;
 Assists the board and the company officers in better ensuring compliance with and
implementation of the governance guidelines;
 Serves as chairman of the board when the chairman is not present; and
 Serves as a laision for consultation and communication with shareholders.

With these additional responsibilities, the lead independent director is expected to devote
a greater amount of time to board service than the other directors. Most regulation
requires that at least one third to as many as half the Board must comprise of
Independent Directors. Besides they are drawn from varied fields and this can easily
cause Board deliberations to go awry. Appointing lead independent directors will focus
the energies of such directors towards the common goal, contribute to focus discussions,
and assist the Board in arriving at a consensus. Global Corporate Governance guidelines
uniformly recommended that the roles of the Chair and CEO should not be exercised by
the same individual and that the Chair be an Independent director. However this
recommendation is not always possible or appropriate to follow. The role of lead
independent director is often to provide leadership to independent directors, liais with the
CEO on the behalf and advice the board on matters where there may be an actual or
perceived conflict of interests. CEO should not choose the lead independent directors
rather he should be elected by the independent directors. As with the other leadership
positions succession planning is advised for his role.
However, the benefits of the Lead Independent Director will be contingent upon
factors such as director’s competence and companies’ governance maturity. CEO and the
Lead Independent Directors need to collaborate to ensure the best possible operation of
the Board. As such, clear the division of the responsibilities with the CEO and

115
communication of this division to the Board and the management is vital. Therefore,
defining the scope of the lead independent director’s duties should be priority109 included
in the board’s charter.
SEBI, in its consultative paper had proposed appointment of the lead director as
an independent chief among all Board members who assists in coordinating the activities
and decisions of the other non-executive or independent directors and chairs the
meetings of independent directors. In case the company has an independent chairman, he
shall act as the lead independent director. However, the post may be rotated among the
independent directors every three years. The proposals, however, were not incorporated
in the Revised Clause 49. Researcher is of the view that in India also regulations for
appointment of Lead Independent Director should be made and implemented.

3.22 COMPARATIVE ANALYSIS

Aspect Previous Clauses 49 The Companies Act, Revised Clause 49

Covered (Effective Till 30-09-2014) 2013 (Effective From 01-
10-2014)
rd rd
Composition in 1/3 in case of non- 1/3 in every case 1/3rd in case of non-
the Board executive chairman; executive chairman;
½ in other cases 1/2 in other cases
Definition and Less stringent than that Very stringent Same as that under
Scope under the Act. the Act
Age Limit At least 21 years Not specified At least 21 years
Appointment of No provision Voluntary No provision
Independence appointment of
directors by director by small
minority shareholder such
shareholders director is deemed to
be independent
director
Formal letter of No such stipulation Required Required
appointment
Performance Non-mandatory Required
Evaluation requirement of performance Required
evaluation of non-executive
109
Kaushik Dutta, “Handbook Of Independent Directors Upholding The Moral Compass” LexisNexis

116
 directors.
Treatment of Nominee directors Any nominee director Alignment with the
nominee appointed by public excluded from the Companies Act, 2013.
director as financial institutions are definition of
Non- deemed independent independent director.
Independent directors
Director
Maximum Not specified. Non- 2 consecutive terms of 2 consecutive terms
tenure mandatory requirement- 9 5 years each; term of 5 years each; where
years already served till already served for 5
commencement date years or more as on
to be ignored. October 1, 2014, the
person is eligible for a
single term of 5 years
only.
Disclosure of No provision Reasons to be Reasons to be
reasons of disclosed in the disclosed by the
resignation intimation to company in its
Registrar. intimation to be stock
exchanges.
Remuneration Stock options may be Sitting fees, Stock options shall
granted- shareholders’ reimbursement of not be granted.
resolution should specify expenses for
the limits for the maximum participation in the
number of stock options Board and other
that can be granted to non- meetings and profit
executive directors, related commission as
including independent may be approved by
directors, in any financial the members. Stock
year and in aggregate. options cannot be
granted.
Replacement on
removal/ Not specified Within 180 days
resignation

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3.23 CONCLUSION
To conclude the concept of having Independent Directors is a welcome step for
corporate governance in India. Independent directors are expected to use their capacity,
knowledge and resources towards maximization of stakeholder’s value and well being.
They ensure progress of mankind through transparency, accountability and truthful
disclosure of state of affairs of company. The Companies Act, 2013 has conferred greater
empowerment upon Independent Director's to ensure that the management and affairs of
a company is being run fairly and smoothly. But, at the same time, greater accountability
has also been placed upon them. The Act empowers the Independent Director's to have a
definite 'say' in the management of a company, which would thereby immensely
strengthen the corporate governance. However it is also important to keep in mind that
good corporate governance is not just the outcome of appropriate selection and effective
functioning of Independent Director's. Every director, whether independent or non
independent, executive or non-executive has a distinct role in the functioning of the
company. It is only when the entire board functions effectively, which results to good
corporate governance and benefit minority as well as majority shareholder in its long
term which maintains a good corporate image in the market.
The Companies Act, 2013 made a considerable effort to bring the role of
independent director in line with changing needs. Transparency and independence will
be ensured when independent directors bring value to the company by providing input on
strategy, business, legal, compliance and performance of monitoring functions. While on
the one hand the new Act imposes a higher level of responsibility by clearly defining
independent directors’ role and liability in cases of failure, on the other hand it imposes
limits on their remuneration. These may prove to be disincentives for individuals to
accept appointments as independent directors. While the new Act intends to bestow
broader roles, greater independence and defined liabilities on independent directors, it
also limits their effective functioning on account of their being a minority (i.e. one-third)
of the board. Certain provisions pertaining to independent directors in the new act
conflict with the Listing Agreement, changes in the Listing Agreement is required to
ensure that it continues to apply along with the new Act. Following the notification of
the new Act, the government should prioritize the bringing in of the rules, which will
bring greater clarity, remove inconsistencies and aid in achieving the objectives of the
new Act as envisaged by the regulators. Independent Directors strives to achieve

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common goal in long term interests of stakeholders and reconciling of competing interest
of various constituents.

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