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Revisiting the provisions of ‘Independent Director’ in the light of recent cases

An Independent Director, as the name suggests, is a third party individual who is supposed to be independent and not have any relations with the company, its holding, subsidiary or any associate company, either directly or through their relatives. The objective behind having the provisions of Independent Director in the Companies Act, 2013 is to ensure the independent decision making process by the #Board of Directors devoid of any undue influence of promoters or executive management in business transactions.

The Board of directors of any company is the nucleus around which the entire company operates. It is therefore quite justified to expect the Board to exhibit integrity, responsibility, accountability, diversity and promptness. The directors of the company are the agents of the shareholder and are often described as the arms of the company through which decision is made and business is conducted. The various compliance requirements of the Board are laid out in the Companies Act, 2013. In order to ensure that the Board does not misuse its decision making power, the #CompaniesAct2013 mandates the need for independent directors in certain class of companies. Independent directors are required to exercise independent judgement during the deliberations of the board. Some of the important areas where independent directors must be vigilant are the financial reporting of the company, the transactions between related parties of the company being at arm’s length and so on.

Requirement of Independent Directors (IDs)

Every listed company shall have at least 1/3 of its total number of directors as IDs The following unlisted Public companies shall have at least 2 directors as IDs

  • Paid up share capital equal to or more than INR 10 crore

  • Turnover equal to or more than INR 100 crores

  • Outstanding liabilities, debentures and deposits equal to or more than INR 50 crore;

Since both listed and unlisted companies are required to have independent directors the Ministry of Corporate Affairs as well as Securities and Exchange Board of India (SEBI) have come up with detailed regulations governing the role and compliance requirement in respect of Independent directors. The Companies Act, 2013 lays down the definition, roles and responsibilities as also the liabilities of an Independent Director. Last year #SEBI overhauled certain provisions to strengthen the position of IDs in the Board. The appointment, reappointment and removal of an independent director can only be done through a special resolution passed be the shareholders (it requires 75% votes in favour as against ordinary resolution which requires only a simple majority). In addition to strengthening the working of independent directors, this rule also protects the interests of minority stakeholder. Other provisions include 2/3 majority of IDs in the Nomination and Remuneration Committee which selects IDs. These provisions came into effect from 1st January 2022.

Definition of Independent Director:

Independent director has been defined in section 2(47) and sub section (6) of section 149 of the Companies Act, 2013. The definition lays down that an Independent director is a director other than a managing director or a whole-time director or a nominee director who satisfies the following conditions:

  • He/she is, according to the Board, a person of integrity and possesses the relevant expertise and experience;

  • He/she is or was not a promoter of the company or any of its holding, subsidiary, or associate companies;

  • He/she is not related to the promoters or directors of the company or its holding, subsidiary, or associate companies;

  • He/she does not have any pecuniary relationship with the company, its holding, subsidiary or associates, directors or promoters for two preceding financial years preceding appointment and the current year;

  • Does not have any relatives who have or have had pecuniary relationships with the company, directors or promoters for amounts exceeding rupees fifty lakhs or 2% of the paid up capital of the company;

  • Does not have any relatives who have or have had pecuniary relationships with the company, its holding, subsidiary or associate company amounting to 2% or more of its gross turnover or total income;

  • Does not have any relatives who is indebted to the company, its holding, subsidiary or associate company or has given guarantee for a third person’s indebtedness;

  • He/she himself or any relative does not hold or has not held key managerial positions or have been an employee of the company, its subsidiaries, holdings, or associate companies during 3 immediately preceding financial years;

  • He/she is not a member of the firm of auditors, company secretaries in practice, cost auditors or any legal consulting firm that has transactions with the company, and its subsidiaries, holdings and associate companies;

  • He/she does not hold more than 2% voting power of the company;

  • He/she is the CEO or director of an NGO that receives 25% or more of its receipts from the company, its directors, its holding subsidiary or associate company.

Declaration of independence

Independent directors must give a declaration of their independence in the following situations:

  • First board meeting after induction into the Board

  • First meeting of the board of directors in every financial year

  • Arising of any situation that affects the independence of their role as director

Duties of Independent directors

With the level of expertise and experience that they come with the independent directors perform the role of a guide or mentor for the board. The duties of independent directors are many including the following:

  • To act in interests of the company, shareholders and its employees.

  • To review the performance of the non independent directors and of the Board as a whole.

  • To determine the appropriate levels of remuneration of the executive directors, KMPs and the senior management.

  • To be a moderator when there is a conflict between the interest of the management and that of the shareholders.

  • To seek information or clarification and appropriate external professional advice and opinion at the expense of the company whenever situation demands so.

  • To have active and constructive participation in the Board and committee meetings.

  • To be vocal about their opinions and where they have concerns about the running of the company or a certain proposed action, to ensure that these are discussed by the Board and wherever the same is not resolved, to get their concerns are recorded in the minutes.

  • To see that the related party transactions entered into by the company are at arm’s length and in the interest of the company and to ensure that sufficient deliberations are held before approving such transactions.

  • To ensure that the company has adequate vigil mechanism to protect the interests of a person who uses such mechanism and to ensure that he/she is not prejudiced against for using it.

  • To report concerns about unethical behaviour, fraud or violation of the company's code of conduct or ethics policy.

  • Not to disclose confidential information, like technologies used, trade secrets, unpublished price sensitive information, sales promotion plans unless specifically pre approved by the Board or as required by law.

  • Not to act like a rebel and obstruct the functioning of an otherwise proper Board or committee.

In performing the above duties, the #IDs are expected to undergo appropriate induction training after joining the Board and regularly keep updating themselves and enhancing their skills and knowledge about the company and the industry in which it operates. They are also required to keep themselves well informed about the company and the legal and technological ecosystem in which it operates. They are also expected to have time for discharging their duties towards the company and strive to attend all meetings of the Board and the committees thereof of which they are a member.

Liabilities of Independent directors

The Companies Act, 2013 provides the situations in which an independent director can attract liability. It provides that an independent director can only be held liable if there is an act 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. Even though this provision is crisp and clear, the topic of the liability of independent directors has been in the news time and again.

Recent cases

In a recent matter before the Bombay High Court, the liabilities of independent directors were once again evaluated. It related to the criminal proceedings that were initiated in a cheque bouncing case under the Negotiable Instruments Act, 1881 against the executive as well as the independent directors of #Tecpro Systems Limited in the #BombayHighCourt. #Elektromag Devices Private Ltd. had filed a complaint u/s 138 of the Negotiable Instruments Act, 1881 against all the directors of Tecpro Systems for the bouncing of a cheque worth Rs. 30 lakhs issued to them by the latter. While evaluating the day-to-day role of the independent non-executive directors, the Court observed that “Non-executive director not being a promoter of or key managerial persons shall be held liable, only in respect of such 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.” The Court further observed that “Simply because a person is director of company does not make him liable under the NI Act. Only those persons who are incharge and responsible for the conduct of business of the company at the time of commission of the offence will be liable for criminal action. A director, who was not in charge of and was not responsible for the conduct of the business of the company, at the relevant time, will not be liable for offence by invoking Section 141 of NI Act”. In passing its judgement the Bombay High Court relied on the provisions of sub sections (6), (9) and (12) of section 149 of the Companies Act, 2013 and the decision of the Supreme Court of India in the case of Pooja Ravinder Devidasani v. State of Maharashtra. While quashing the criminal proceedings against the independent non-executive directors, the Bombay High Court has ordered an expedited trial against the rest of the executives of the company.

Another major recent case that throws light on the role of independent directors in the board is that of e-commerce giant Amazon which alleged that independent directors of Future Retail had failed to exercise their statutory duties and that their ‘conduct and attitude’ were question able. In a very strongly-worded letter sent to the independent directors of Future Retail Limited, Amazon wrote that "You, the Independent Directors of FRL, have failed to exercise your statutory duties and functions independently in accordance with law. Moreover, you have failed to safeguard the interest of shareholders, and have in fact facilitated commission of fraud perpetuated by FRL …. Your conduct and attitude, as the Independent Directors of FRL, raises substantial questions on accountability, transparency and fairness regime for corporate governance in India". They further wrote “It is obvious that the letter from FRL’s independent directors was issued with the sole motive to obfuscate issues that the independent directors are obliged to answer.” The above letter came ahead of the #Tribunal’s order, which is expected anytime now, in a petition filed by the Bank of India seeking to start insolvency proceedings against Future Retail Limited. It may be noted in this regard that there has been a series of communications between the US based e-commerce giant and FRL's #independentdirectors prior to this letter and in one of those the former alleges that the IDs of Future Retail even ‘admitted’ to have entered into an illegal arrangement.

The decision on this matter is awaited and once it is out this case will also probably shed some more light on the role and responsibilities of Independent directors.


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B L Sharma
B L Sharma

Very useful information

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