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Role and responsibilities of independent directors with special reference to company bill 2011


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Role and responsibilities of independent directors with special reference to company bill 2011

  1. 1. Role and Responsibilities ofIndependent Directors withspecial reference to Companybill 2011 in India. Presented to, Presented by, Prof.Vipan Kumar Sandip Bhosale RGNUL LL.M (5011) second semester 14/03/201211105/31/12 1
  2. 2. Synopsis♦ Introduction♦ Directors- Independent & Dependent♦ How the concept came in India♦ Who is Independent Director♦ Selection of Independent Director♦ Role & Responsibility♦ Concept under Listing Agreement♦ J.J.Irani Committee on ID♦ Provisions Under Company Bill 2011♦ Conclusion05/31/12 2
  3. 3. A basic design of existing corporategovernance systems Executive Owner Independent directors directors Directors Board of Directors Supervisory & Management enforcement authorities Corporate Shareholders Stakeholders Creditors05/31/12 3
  4. 4. Directors under Corporate Governance♦ Independent Directors – Non-management Directors – Necessarily be Non-executive Director♦ Dependent Directors – Management Directors – Can either be an Executive Director or a Non- executive Director05/31/12 4
  5. 5. How the concept came to India?♦ Stranger to Companies Act, 1956♦ Kumar Mangalam Birla Report on Corporate Governance♦ Concept of Independent Directors was brought in Clause 49 of Listing Agreement♦ Recommended by Narseh Chandra Committee Report05/31/12 5
  6. 6. Who are Independent Directors As per Clause 49 of the Listing Agreements an ‘independent director’ shall mean non-executive director of the company whob. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;c. is not related to promoters or management at the board level or at one level below the board;d. has not been an executive of the company in the immediately preceding three financial years;05/31/12 6
  7. 7. Continued…a. is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity.b. is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also; andc. is not a substantial shareholder of the company, i.e.d. owning two percent or more of the block of voting shares. [Institutional directors on the boards of companies shall be considered as independent directors whether the institution is an investing institution or a lending institution.]05/31/12 7
  8. 8. Other Definitions:♦ Higgs’ definition: “that a non-executive director is considered independent when the board determines that the director is independent in character and judgement and there are no relationships or circumstances which could affect, or appear to affect, the directors judgement”. • Such “relationships” are enumerated♦ To state simply the expression ‘Independent Directors’ has been defined to mean directors who apart from receiving director’s remuneration, do not have any other material pecuniary relation or transactions with the company, its promoters, its management or its subsidiaries, which in the judgement of the board may affect independence of judgement of directors.05/31/12 8
  9. 9. Selection of Independent Director♦ The selection and appointment of independent directors should be transparent and on certain valued basis.♦ Therefore, the companies should have an entirely independent nomination committee which should determine the qualifications for Board membership and should identify and evaluate candidates for nomination to the Board.♦ It would be more appropriate that the code of Corporate Governance of a company should specifically include the qualifications and attributes that the company seeks of an independent director.♦ A critical element of a director being independent is his independence to the management both in fact and perception by the public.♦ .05/31/12 9
  10. 10. Continued…♦ In considering the independence, it is necessary to focus not only on whether a directors background and current activities qualify him as independent but also whether he can act independently of the management.♦ In other words, the independent directors must not only be independent according to the legislative and stock exchange listing standards but also independent in thought and action i.e. qualitatively independent.♦ Such qualitative independence will ensure that directors think and act independently without regard to managements influence05/31/12 10
  11. 11. Roles & Responsibilities♦ Independent directors are the cornerstone of good corporate governance, President of World Council for Corporate Governance, Dr Madhav Mehra says♦ Role of Independent Director Role in Corporate Governance Protection of the Minority shareholder Risk Management and Review Role in relation to the board Improving Internal Control Statutory Compliances05/31/12 11
  12. 12. Responsibilities of IndependentDirectors  Periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint.  To function to properly according to the spirit of corporate governance as to director on the board and as Member/Chairman across various committees viz. the Audit Committee, the Shareholders’ Grievance Committee and the Remuneration Committee of the company.  A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director.  At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of the subsidiary company.05/31/12 12
  13. 13. Independent Directors under ListingAgreement in India♦ Composition of the Board: – Not less than 50% of the board to be non-executive directors – Independent Directors: • If the chairman executive: – At least half of the board should comprise of independent directors • If Chairman non-executive: – At least one- third of the board should comprise of independent directors♦ Non-executive directors’ remuneration to be approved by shareholders♦ Board meetings – to meet at least 4 times, with gap not exceeding 3 months. Minimum information for board meetings laid down♦ Committees of Directors – – Audit Committee: requirements other than those u/s 292A • shall have minimum 3 members all of them being non-executive and majority of them being independent • Chairman of the committee shall be an independent director • To meet at least thrice a year • Company Secretary to act as secretary to the committee –05/31/12 13
  14. 14. Recommendations of the Irani Committee onIndependent directorsUnder Chairmanship of J.J.IraniRecommendations 3rd of the total number of directors of a board should be independent Role will be non-executive and will have no material or pecuniary interest in the company or its associates. Company may appoint a person of integrity, possessing relevant expertise & experience also satisfy criteria for independence.05/31/12 14
  15. 15. Recent examples of liability ofindependent directors♦ In case of Worldcom and Enron, directors settled liabilities: – $ 18 million by 10 outside directors in Worldcom – $ 13 million by 10 directors in Enron♦ In Walt Disney case, the court did not impose liability on directors: – Ruling based on Delaware law – Duty of care, fiduciary duty and gross negligence discussed at length♦ India: – The conclusion is inevitable that the liability arises on account of conduct , act or omission on the part of a person and not merely on account of holding an office or a position in a company. SC ruling in SMS Pharmaceuticals Ltd, Sept 200505/31/12 15
  16. 16. Provisions under company bill 2011♦ The Bill requires listed companies to have at least 1/3rd independent directors on their board.♦ the definition now includes positive attributes of independence (that was not the case under clause 49): the candidate must be “a person of integrity and possess the relevant expertise and experience” in the opinion of the board. The Central Government is also vested with the power to prescribe qualifications for IDs. Every ID is also required to declare that he or she meets the criteria of independence.05/31/12 16
  17. 17. Continued…♦ The committee is required to consider candidates for appointment as IDs and to recommend them to the board. This brings about greater objectivity to the ID nomination process, at least to some extent.♦ Under the Bill, IDs are entitled only to fees for attending meetings of the board, and possibly commissions within certain limits. The Bill expressly disallows IDs from obtaining stock options is companies.♦ The Bill limits the liability of an ID “only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.”05/31/12 17
  18. 18. Continued…♦One Woman In Every Five Directors♦Companies having five or more independentdirectors would have to necessarily have at least onefemale independent director, Corporate AffairsMinister Murli Deora said.05/31/12 18
  19. 19. Conclusion♦ Independent directors are very powerful part of company as they having rich experience so they play a very vital role in securing interest of shareholders as well as they are expected to give inputs for the benefit of management. For securing the independence of independent director there is need to break the nexus between the independent directors and promoters who sponsor them, for that nomination of independent director must be done by SEBI and government.05/31/12 19
  20. 20. Continued…♦ In India, the appointment of Independent Directors on the Board is a mandatory requirement for the listed Companies only. The non- listed Companies can still exercise their discretion whether to appoint them or not.♦ Therefore, it is recommended that government should make necessary amendments in the Companies Act, 1956 and include provision for appointment of Independent Directors for unlisted Companies as a mandatory requirement.05/31/12 20
  21. 21. “Character is like a Tree and Reputation like its shadow; the shadow is what we think of it, the tree is the real thing” ……Abraham Lincoln05/31/12 21
  22. 22. Thank You05/31/12 22