Independent Directors in the New Companies Law

Corporate transparency and accountability: that’s one mandate behind the corporate governance norms introduced by the Companies Bill, 2012.

And a major step towards achieving that mandate is the concept of ‘independent directors’.

Who is an independent director?

An independent director is a director other than a managing director or a whole-time director or a nominee director.Individuals who have vested interests in the company such as promoters and any persons related to them cannot be independent directors of the company.

What is the ‘independence’ here?

The Bill lays down certain essential and fulfilling criteria as to who can be an independent director. This mainly includes things like:

• Should not be a managing director/ nominee director/ whole time director
• Should not have any pecuniary relationship with the company
• Must possess relevant experience and expertise in the opinion of the Board

Thus, positive attributes of being an independent director have been laid down clearly under the proposed law.

Also, the Central Government is also vested with the power to prescribe qualifications for independent directors.

Finally, every independent director is also required to ‘declare’ that he or she meets the criteria of independence.

Appointment of independent directors

Under the Companies Bill, the power of appointment of independent directors, though vested in the Board of Directors, unlike in the case of other directors, has been made totally independent of the management of the company. Such an appointment has to be approved at the shareholders’ meeting.

Moreover, there shall be a data bank of independent directors maintained by the Central Government from which the company may choose suitable names.

Term of independent directors

The term of independent directors is for a period of five years. Crucially, however, the Companies Bill provides that independent directors, unlike the other directors of the company, are not required to retire by rotation. This ensures that the independent directors function without any influence or coercion from the management.

Also, an independent director can be re-elected by way of special resolution after their term of five years expires. This provision, again, gives a shot in the arm to the ‘independence’ of the independent directors.

Roles, Functions and Duties

The new provisions mandate that the independent director has the duty to scrutinize the performance of the management and ensure at all times the integrity of financial information.

Further, the independent directors have been entrusted with the all-important responsibility of safeguarding the interests all stakeholders in the company, especially the minority stakeholders.

The new concept of having independent directors is a welcome step for corporate governance in India.

It’s especially heartening to note that the Bill makes the ‘independence’ of the independent directors very real and not merely a facade.

By Preetish Sahoo, Divanshu Gupta and Tanuj Kalia