Company Law Assignment

Name- Sikander Lamba

Roll No- 150
Div- B
Sem- VI
 INDEPENDENT DIRECTORS

A. Introduction
An independent director, as the name suggests, is someone who does not have any
material or pecuniary relationship with either the company or any of the directors. To
canvass various conceptions of an independent director, we must first seek a more
general term because not all jurisdictions place the same definition as to who might
plausibly be called ‘independent’. The concept of ‘independence’, in general, is used in
the context of independence from firstly, independence from management and secondly,
independence from a position of financial gain, including employees.

B. Legislative Intent:
The Rational: Independent Director is that such a person is expected to be independent
from the management and is expected to act as the trustees of shareholders’ interests.
Independent Directors can reasonably be perceived to not be influenced by personal
prejudice of any kind and exercise independent business judgments in view of the best
interests of the company. The position of Independent Directors is mainly supervisory
and concerned with the management of the company. For better corporate governance,
the need for an Independent Directors is recognized the world over. Those who view the
independent director as someone whose judgment should be untainted by any financial
interest in the company are suspicious of share ownership. Thus they do not draw profits
but are paid a fixed sum of money in form of salary. It is important to note from the SC
judgement of “Sahara vs. Securities Exchange Board of India” decided on 31st August,
2012 it was held that SEBI does have power to investigate and adjudicate in this matter.
It categorically iterated that the SEBI Act is a special legislation bestowing SEBI with
special powers to investigate and adjudicate to protect the interests of the investors. It has
special powers and its powers are not derogatory to any other provisions existing in any
other law and are analogous to such other law and should be read harmoniously with such
other provisions and there is no conflict of jurisdiction between the MCA and the SEBI in
 the matters where interests of the investors are at stake. To saupport this view, the
Supreme Court laid emphasis on the legislative intent and the statement of objectives for
the enactment of SEBI Act and the insertion of Section 55A in the Companies Act to
delegate special powers to SEBI in matters of issue, allotment and transfer of securities.
The Court observed that as per provisions enumerated under Section 55A of the
Companies Act, so far matters relate to issue and transfer of securities and non-payment
of dividend, SEBI has the power to administer in the case of listed public companies and
in the case of those public companies which intend to get their securities listed on a
recognized stock exchange in India.

C. Positions before and after Companies Act, 2013:

The Company Act, 1956 do not specifically give the definition of the Independent
Director. However one can find parameters mentioned in the Clause 49 of the listing
agreement which is applicable to all listed companies in order to recognize a director as
an Independent Director
The Company Act, 2013 has adopted many of the provisions of clause 49 of the listing
agreement and has defined the term 'Independent Director' under section 2(47) which
says that 'Independent Director' means an Independent Director as referred to in sub-
section (5) of section 149. The new Act along with the definition of Independent Director
also provides the criteria for appointing, qualifications, tenure, remuneration and liability
of ID's. The Companies Act, 2013 which replaces more than half century old Act is a
watershed mark and an excellent financial sector reform paving for corporate law that is
world class and carries high standard of governance, transparency, reporting and
compliance.
While on one hand it confers greater role in the governance of any Independent Director,
it create great demand of the qualified Independent Directors.
The role of independent directors as per the new provisions is unlikely to remain passive
players or mute spectators in the board room. There will be huge demand for capable,
qualified independent directors to give right direction in managing the affairs of the
company.
 It is also a key point to note that as per sub-section 6 of Section 149 of the said 2013 Act,
Independent Director means a director other than a managing director or whole time
director or a nominee director, some of the aspects can be enumerated as: a) Who, in the
opinion of the Board, is a person of integrity and possesses relevant expertise and
experience b) Who is or was not a promoter of the company or Who is not related to
promoters or directors in the company c) Who has or had no pecuniary relationship with
the company d) None of whose relative has or had pecuniary relationship or transaction
with the company. The Companies Act, 2013, most sections of which got implemented
from 1st April 2014, has mandated all listed public companies to have at least one-third
of the total Directors to be independent. Whereas in the case of unlisted public
companies, the following class of companies shall have at least two directors as
independent directors:

(i) Public Companies having paid up share capital of Ten Crore rupees or more; or (ii)
Public Companies having turnover of One Hundred Crore rupees or more; or (iii) Public
Companies which have, in aggregate, outstanding loans, debentures and deposits
exceeding 50 Crore rupees or more.

The Companies Act, 2013 is drafted taking into consideration the noteworthy inputs and
contribution that an Independent Director can bring in to the business. The compensation
offered to such Independent Directors in the form of "sitting fee" has also been increased
from Rs. 20,000 (prescribed by Companies Act, 1956) to a maximum of Rs. 1,00,000/-
per meeting.

D. Role and Significance of the enacted provisions:

The independent directors shall: (i) 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; (ii) bring an objective view in the
evaluation of the performance of board and management; (iii) scrutinize the performance
of management in meeting agreed goals and objectives and monitor the reporting of
performance; (iv) satisfy themselves on the integrity of financial information and that
financial controls and the systems of risk management are robust and defensible; (v)
safeguard the interest of all stakeholders, particularly the minority shareholders; (vi)
balance the conflicting interest of the stakeholders; (vii) 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; and (viii)
moderate and arbitrate in the interest of the company as a whole, in situations of conflict
between management and shareholder’s interest. Independent directors may be seen as
watchful monitors of promoters and management on behalf of the public shareholders, or
Independent directors, given their expertise, may be viewed as reservoir of strategic
advice intended to aid promoters and managers in maximizing overall firm value.

Independent directors are thought to bring with them a number of advantages, including
independence in their views and the ability to bring an outside perspective into the board
meetings. Further, as their primary function is to comment on corporate strategy and to
direct general policy and overall supervision of the company, they can help to provide
effective leadership. Independent directors also aid in the balancing of the interests of the
shareholders, employees and creditors. This balancing role is particularly important in
situations where conflicts arise between the interests of the executive directors and the
shareholders, for example, in a management buyout scenario. The presence of
independent directors serves in bringing about impartiality in the board as a whole. Such
impartiality effectively means that considered advice would be provided and developed
for the purposes of steering the company strategy as a whole by the board of directors. It
is a fact that whilst independent impartial advice can also come from the professional
advisers appointed by the board, including financial and legal advisers, however, the
independent director’s role goes further. He is, for one, able to directly contribute and
possibly shape the deliberations of the board.

Independent directors also play a crucial supervisory function. It is thus that from a
corporate governance perspective, independent directors are required to sit on a number
of watch-dog committees, including the audit committee, the nominating committee and
the remuneration committee. Given the position they occupy, they are also well placed to
 monitor the performance of the board as a whole. Where the board’s performance is
found to be lacking, the independent directors can provide requisite reports to the
shareholders to ensure that suitable remedies are taken. On balance, independent directors
aid in the strengthening of the leadership qualities of the board.

E. Conclusion:

Their desirability seems to be taken for granted in policy-making circles. It is a practical

approach which relies on the age-old adage of separation of powers in a company.
However, is such an approach effective in ensuring that alleged independent directors are
truly independent is a director who was never a part of the management of the company,
was never employed by the company or placed in a situation of conflict and who has no
relationship with any shareholder holding 5% or more of the shares in the company truly
independent.
Also, given the responsibility of the Board to balance various interests, the presence of
independent directors on the Board of a company would improve corporate governance.
This is particularly important for public companies or companies with a significant public
interest. While directors representing specific interests would be confined to the
perspective dictated by such interests, independent directors would be able to bring an
element of objectivity to Board process in the general interests of the company and
thereby to the benefit of minority interests and shareholders. Independence therefore is
not to be viewed merely as independence from Promoter Interests but from the point of
view of vulnerable stake holders who cannot otherwise get their voice heard. Law should
therefore recognize the principle of independent directors and spell out their role,
qualifications and liability. However requirement of presence of Independent Directors
may vary depending on the size and type of the company. There cannot be a single
prescription to suit all companies. Therefore number of Independent Directors may be
prescribed through rules for different categories of companies. This recommendation was
accepted and the concept of Independent Directors was recognized and enacted in the
new Companies Act.