Handling independent directors

May 19 2014, 21:38 IST
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SummaryThe corporate affairs ministry needs to clarify the definition of independence

Independence is a state of mind, so one wonders if it, therefore, can be legislated and then enforced. However, the Companies Act 2013 has just done that. Independent directors are extensively covered under the new company law and it seeks to enforce these provisions on a wide group of companies, including several unlisted public companies. Obviously, something like this is quite likely to be plagued with problems, at least in the initial stages of implementation.

While there has been a requirement to have independent directors under the listing agreement, this is a new concept under the company law. The Act has also brought in several changes in the manner of functioning of these directors. The Act introduces a stricter definition of independence, prohibiting any direct pecuniary relationships, and limits relationships through the directors relatives or his firms or companies. The Act has also codified the duties and responsibilities of the independent directors and sets a code for professional conduct, which makes the role being discussed quite an onerous one. Further, with a view to enhance their independence, it has also introduced, albeit prospectively, mandatory rotation of independent directors, limiting their tenure to a maximum of two terms of up to 5 years each, i.e., a total of up to 10 years. The Act also now mandates unlisted public companies meeting a certain size criteria to have at least 2 independent directors. It also prohibits stock options as a means of remuneration for these directors.

Sebi, while recently amending Clause 49 of the listing agreement, has brought in some further changes, apart from aligning its requirements with the Companies Act. As per the Sebi norms, an independent director who has served for 5 years or more on October 1, 2014, will be eligible for appointment for a further term of 5 years only on completion of his existing term. Further,

Sebi limits the number of independent directorships in listed companies to seven companies and limits it to three listed companies in case the person is serving as a whole time director in any listed company. Further, Sebi also requires an independent director of a listed company to be appointed as a nominee director on material unlisted subsidiaries.

While the intent behind these changes is ensuring better governance, it is fraught with numerous challenges in implementation. For instance, prohibiting all pecuniary relationships (not just material ones) essentially means that if you

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