1. Role and Responsibilities of
Independent Directors with
special reference to Company
bill 2011 in India.
Presented to, Presented by,
Prof.Vipan Kumar Sandip Bhosale
RGNUL LL.M (5011)
second semester
14/03/2012111
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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
♦ Conclusion
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3. A basic design of existing corporate
governance systems
Executive Owner Independent
directors directors Directors
Board of
Directors
Supervisory &
Management enforcement
authorities
Corporate
Shareholders Stakeholders Creditors
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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 Director
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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 Report
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6. Who are Independent Directors
As per Clause 49 of the Listing Agreements an
‘independent director’ shall mean non-executive director
of the company who
b. 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;
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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; and
c. 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.]
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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 director's 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.
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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.
♦ .
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10. Continued…
♦ In considering the independence, it is necessary to focus
not only on whether a director's 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
management's influence
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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 Compliances
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12. Responsibilities of Independent
Directors
 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.
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13. Independent Directors under Listing
Agreement 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
–
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14. Recommendations of the Irani Committee on
Independent directors
Under Chairmanship of J.J.Irani
Recommendations
 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.
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15. Recent examples of liability of
independent 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 2005
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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.
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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.”
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18. Continued…
♦One Woman In Every Five Directors
♦Companies having five or more independent
directors would have to necessarily have at least one
female independent director, Corporate Affairs
Minister Murli Deora said.
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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.
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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.
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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 Lincoln
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22. Thank
You
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