INTRODUCTION:

Corporate Governance, a system by which business corporations are directed and controlled. The corporate governance process focuses on the role of the directors. Directors have been considered as the brain and soul of the organization. The corporate governance also has to take into account the legal, regulatory, institutional and ethical environment of the community. Corporate success and sustainable economic growth rest with good governance.

A firm which has good governance system has better image and greater value, higher profits and higher sales growth than those with poor governance system. Further more, corporate governance will promote enterprise and ensure accountability. The companies Act, 2013 was passed by the Rajya Sabha on 8^th August 2013 paving way for a new company law and received the assert of the President on 29^th August, 2013. The Act 2013 replaces the existing Companies Act, 1956 which was enacted 62 years ago. The new Act seeks to user in more transparency and governance in the corporate bodies besides creating the necessary environment for growth in the present global structure. It has the potential to be a historic mile stone, as it aims to improve corporate governance, simplify regulations, enhances the interests of minority investors and for the first time states the role of whistle-blowers. The Act encourages good governance practices by placing the onus on Independent directors to bring oversight in the functioning of the Board and protect the interest of minority shareholders and management interest. In the year 1991, India entered the era of globalization. The reforms of 1991 opened India to the external world and forced it to adopt globalized, well-established culture. To sustain in the foreign market, Indian Company started following the well-founded and well-established best practices in the laws regarding corporate structure. Appointment of Independent Directors was one of them. In India about 40% of the companies have less than one third Independent Directors of their board. 30% of the companies are fulfilling the requirement board committee for the minimum number of the independent directors on their board while about 31% have better practice of appointment of Independent Directors on their board. Independent Directors bring in independent thinking and rich experience in their respective fields. Independent Directors help maintain an ethical climate in the organization.

OBJECTIVE OF THE STUDY:

· To study the companies Act, 2013.

· To study the importance of the Independent Director.

· To study the responsibilities and Independent Directors for a good corporate governance.

· To study the limitation of the Independent Directors.

RESEARCH METHODOLOGY:

For the present study, the data have been collected from mainly Secondary sources which cover the period from 2011 to 2018. The relevant secondary data have been collected from publication articles especially highlights the performance of Independent Directors in Corporate Governance in India, the relevant Law books, Journals, Newspapers and web-sites are used in this study.

Who is an Independent Director?

Independent director’s appointment was supposed to be the biggest corporate governance reform. However, 15 years down the live, independent directors have hardly been able to make the desired impact. The regulator on its part has, time and again, made the norms tighter introduced comprehensive definition of independent directors, defined a role of the audit committee etc. However, most Indian promoters design a tick the box way out of the regulatory requirements. The independence of such promoter appointed independent directors is questionable as it is unlikely that they will stand up for minority interests against the promoter. Despite all the governance reforms, the regulator is still found wanting. Perhaps, the focus needs to shift to limiting promoter’s powers in matters relating to in independent directors.

According to sub-section (6) of section 149 of the Companies Act, 2013 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 promote or directors in the company

(c) Who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promotes, or directors, during the two immediately preceding financial year or during the current financial year.

(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 percent, or more of its gross turnover or total income of 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 positive 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 –

(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 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 nonprofit organization that receives twenty-five percent or more of its receipts from the company, any of its promotes, 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.

The definition of Independent Director as per Companies Act, 2013 provides quantitative threshold for evaluate of significance of the relationship and considers all pecuniary relationship (both material and immaterial).

Position of “Independent Director” in Board Composition:

As per sub section 4 of section 149 of the Companies Act 2013, every listed public company is mandatory required to have at least one third of the total number of directors as independent directors.

Unlisted public companies must appoint at least two independent directors in the following circumstances:

(i) if the paid up share capital exceeds Rs. 10 crores;

(ii) if the turnover exceeds Rs. 100 crores;

(iii) if the aggregate of all the outstanding loans, debentures and deposits exceeds Rs.50 crores.

Qualities of Independent Director:

An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

Broadly one who wishes to qualify as an Independent Director has to possess following unwritten qualities:

1. Impartiality

2. Loyalty

3. Decision – making (judgment)

4. Professional repute

Role and Duties of Independent Directors:

The role of Independent directors is considered to be a great significance. The guidelines, role, functions and duties are broadly set out under code of conduct under Schedule IV of the Companies Act 2013. The code of conduct lays down the guidelines of professional conduct as well as role, functions and duties of Independent Director.

Role and functions listed under Schedule-IV of the Companies Act, 2013 are as under –

The independent directors shall:

1. Help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct.

2. Bring an objective view in the evaluation of the performance of board and management.

3. Scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

4. Satisfy them on the integrity of financial information and those financial controls and the systems of risk management are robust and defensible.

5. Safeguard the interests of all stakeholders, particularly the minority shareholders.

6. Balance the conflicting interest of the stakeholders.

7. Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management.

8. Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

Position of Independent Directors in Committee:

As part of Corporate Governance, the companies meeting some threshold criteria are required to constitute / reconstitute board. The Companies Act 2013 has also emphasized on the appointment of an Independent Director as a member and as a chairperson in various committee.

In case of Stakeholders Committee, the Board of Directors of the Company which consist of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a stakeholders relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the board. As a good Corporate Governance practice the Companies Act, 2013 raised need to establish Vigil (Whistle Blower) Mechanism which aims to provide a channel to the Directors and employees to report genuine concerns about disreputable behavior, actual or suspected fraud or violation of the Codes of Conduct or Policy.

Remuneration:

The Companies Act, 2013 expressly disallows independent directors from obtaining stock options and remuneration other than sitting fees and reimbursement of travel expenses for attending the board and other meetings. Sitting fees to be paid to Independent Directors for attending the Board Meetings pursuant to section 197(5) which is maximum of Rs.1,00,000/- per meeting is to be decided by the Board. Profit related commission may be paid to independent director subject to the approval of the shareholders.

As per General Circular 14/2014, an Independent Director would not be considered to have a pecuniary relationship under section 149(6) (c) for transactions with a company. Its holding, subsidiary or associate company, of their promotes, or directors, provided such transactions are in the ordinary course of business and are on an arm’s length basis.

Term of Office of Independent Director:

An Independent director shall hold Office for a term up to 5 consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report. As per MCA clarification vide General Circular 14/2014 an Independent Director even if appointed for a lesser period than of 5 years will be held as appointed for one term.

No Independent Director shall hold office for more than 2 consecutive terms, but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director provided that he shall not, during the said period of 3 years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Retirement of directors by rotation shall not be applicable to appointment of independent directors.

Accountability to Stake Holders:

Empowerment of independent directors has to be supplemented with greater duties for and accountability of directors. In this regard, Indian company Law, revamped in 2013, mandates that directors owe duties not only towards the company and share holder but also towards the employees, community and for the protection of environment. Although these general duties have been imposed on all directors, directors including independent directors have been complacent due to lack of enforcement action. To increase accountability, it may be a good idea to require the entire board to be present at general meetings to give stake holders an opportunity to interact with the Board and pose questions.

Executive Compensation:

Executive compensation is a contentious issue especially when subject to share holder accountability. Companies have to offer competitive compensation to attract talent. However, such executive compensation needs to stand the test of stake holder’s scrutiny. Presently, under Indian Law, the nomination and remuneration committee (a committee of the Board comprising of a majority of independent directors) is required to frame a policy on remuneration of key employees. Also, the annual remuneration paid to key executive is required to be made public. Is this enough? To retain and nurture a trust worthy relationship between the share holders and the executive, companies may consider framing remuneration policies which are transparent and require share holder’s approval.

How to offer candidature as Independent Director:

One who wishes to offer the candidature as Independent Director may enroll the name at the Independent Directors repository. The Independent Directors repository is a joint initiative of the three professional statutory bodies namely “The Institute of Chartered Accountant of India, the Institute of Company Secretaries of India and The Institute of Cost Accountants of India” under the active encouragement of the Ministry of Corporate affairs, Government of India. This repository has been developed to facilitate the individuals who are eligible and willing to act as Independent Directors and also to facilitate Companies to select the persons who are eligible and willing to act as Independent Directors under section 150 of the companies Act, 2013 and rules made there under.

It is discretionary for the companies to choose suitable persons for the position as an “Independent Director” from the Independent Directors repository. The responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director lies with the company making such appointment.

Procedural Requirement for Appointment, Resignation and Removal of Independent Director Appointment:

1. An Independent Director has to submit the consent to act as Director in Form DIR-2 to the Company.

2. An Independent Director has to submit a declaration that he/she is not disqualified to be appointed as a Director as the provisions of Section 164(1) and (2) of the Companies Act, 2013 in Form DIR-8 to the Company.

3. An Independent Director has to submit a declaration of Independence as per section 149(6) of the Companies Act, 2013 before his / her appointment. Such declaration has to be placed before the 1^st Board of Meeting in which he/she participates as a director and the subsequent first board meeting in each financial year.

4. As per the schedule IV (IV)(4) to the Companies Act, 2013 the Company will have to issue the appointment letter to Independent Director. Also the terms and conditions of Independent Director’s appointment have to be posted on the Company’s website.

5. Lastly the Company has to file the consent of Independent Director with Registrar of Companies within 30 days of his/her appointment in Form DIR-12;

Resignation:

1. An Independent Director may resign from his/her office by giving a notice in writing to the Company.

2. Within 30 days from the date of receipt of such notice the Board shall file same with Registrar of Companies in Form DIR-12.

3. The director shall also forward a copy of resignation along with detailed reasons for the resignation to the Registrar of Companies within 30 days of resignation.

Removal:

1. A company may by ordinate resolution, remove a director, before the expiry of his period after giving a reasonable opportunity of being heard.

2. A special notice is required for any resolution, to remove a director under this section, or to appoint somebody in place of director so removed.

3. The vacancy shall be filled within a period of not more than 180 days.

Intermittent Vacancy of an Independent Director:

Any intermittent vacancy of an Independent Director shall be filled up by the Board of Directors at the earliest but not later than immediate next board meeting or 3 months from the date of such vacancy, whichever is later.

Inadequacy of time and Board Meetings:

The expectations from Independent Directors are great. They are required to give sufficient time to the firm and Board. All Board meetings held by the firm have to be attended by the Directors in discharge of Board duties. Their position demands that they must find sufficient time to address succession issues and other matters regarding the company affairs. Board meetings will be meaningless if the directors do not give enough time to the same or do not attend them. But reality indicates that too few meetings are conducted owing to lack of time of directors. Directors hold too many directorships in different companies that restrain them from giving reasonable time to the Board. The reasons for such inadequacy may be numerous:

(a) Lack of Incentive: whatever is the compensation received by the directors in the form of remuneration are not proportionate to the work they are expected to discharge. The compensation patterns differ with the companies. It is found that most of the company do not follow any specific guideline for the purpose;

(b) Phenomenon of cross directorship, the numbers of Independent Directors are limited as compared to number of Boards. So, in most of the cases, the same person holds portfolio in different Boards;

(c) Phenomenon of group thinking/cohesion within the Boardroom: Asking unpleasant questions are, at times, treated as deviation of group thinking and are not welcome. So, in most situations, Independent Directors remain mute in the name of group thinking;

(d) Interpersonal Board dynamics create a non confrontational environment. Most of the Independent Directors are also the directors in the Board, wherein other colleagues are in more powerful position. So they mutually restrain themselves from asking difficult question to the other.

Limitation of Independent Director:

(a) Independent Directors are generally Lawyers, Commercial Bankers etc, for the corporation with obvious strife between his dual roles;

(b) The constituency of Independent Director is a combination of his own interest of the control group that selects him and the interest of shareholders;

(c) The Independent Director who is picked as a community representative, typically in large corporations, has the additional burden of promoting community concerns;

(d) Even if an Independent Director wants to exercise meaningful judgment, he/she is restrained by other activities and business customs as well as by the quality of information made available to him by the management.

(e) Despite more time and attention, the absence of clarity in selection process prevents the Independent Director from discharging a significant function;

(f) There are several structural constraints in the form of information flow, administration decision making and follow-up that act as barriers in performance of Independent Director;

(g) Influence of CEO over the Independent Director acts as impediment in due discharge of functions. The reason may be summed up in the following manner;

(i) CEO serves as the Chairman of the Board, the body that is supposed to monitor his action;

(ii) In the absence of independent information system, Independent Director depends on the information provided by the CEO;

(iii) No action has been suggested to ensure the overall quality and completeness of information provided to the Board.

Suggestion and Conclusion:

Corporate Governance is a valued concept in the present day corporate scenario. It is a set of rules that define the relationship between stakeholders, management and Board of Directors of a company and influence how the company is operating. At its most basic level, Corporate Governance deals with issues that result from the separation of ownership and control. But corporate governance goes much beyond that. The presence of strong governance standards provides better access to capital and aids economic growth. It also has broader social and institutional dimensions. Independent director or non-executive directors of the company monitor and control the chairman/Chief Executive; they save as a link with environment and provide an international perspective. Apart from this independent directors try to improve board processes and bring in specialist know they provide continuity, help identity alliance and acquisition. It can be concluded that, Independent Directors help maintain an ethical climate towards organization. The Independent Director should be compensated adequately for the responsibility he/she assumes in accepting a directorship. The growing trend towards stock options or restricted stock may be used as significant tools of director compensation. Selection of Independent Directors by SEBI and Government would be fairness in their decision, Legal protection must be provided to independent directors so that they can raise their voice against the management and for views in the interest of share holders. If Independent director does not fulfill their duty as a watch dog then it would amount to committing an offence. In which an Independent director can not escape from his liability.

At last but not least, “Traveling the road of good corporate Governance won’t guarantee success, but not traveling upon it will almost certainly guarantee failure.”

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Received on 05.12.2018 Modified on 27.12.2018

Asian Journal of Management. 2019; 10(1): 72-78.

DOI: 10.5958/2321-5763.2019.00013.1

Section under the Companies Act, 2013	Rules	Name of the Committee	Applicability	Composition
177	Companies (Meetings of Board and its powers) Rules, 2014	Audit Committee	(i) all public companies with a paid up capital of ten crore rupees or more. (ii) all public companies having turnover of one hundred crore rupees or more (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more	The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.
178	Companies (Meetings of Board and its Powers) Rules, 2014 (Rule 6)	Nomination Committee	(i) all public companies with a paid up capital of ten crore rupees or more. (ii) all public companies having turnover of one hundred crore rupees or more (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more	The Nomination Committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors
178	Companies (Meetings of Board and its Powers) Rules, 2014 (Rule 6)	Remuneration Committee	(i) all public companies with a paid up capital of ten crore rupees or more. (ii) all public companies having turnover of one hundred crore rupees or more (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more	Remuneration Committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors
135	Companies (Corporate Social Responsibility Policy, Rules, 2014	Corporate Social Respon-sibility Committee	(i) any company with an average profit of at least Rs.5 crore; (ii) any company with net worth exceeding Rs.500 crore or (iii) any company having turnover exceeding Rs.1,000 crore in the last three years will have to mandatory allocate 2 % of its profits on social welfare	Corporate Social Responsibility Committee shall consist of three or more non-executive directors out of which not less than one-half shall be indepen-dent directors