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(CHAPTER-3)

(Independent Director, Woman Director & Corporate Governance)


The Companies Act, 1956 does not provide us the specific definition of an Independent
Director, Woman Director and position of director under the Corporate Governance.
Chapter XI of Companies Act 2013 read with Companies (Appointment and Qualification of
Directors) Rules 2014 specifies regulatory prescriptions relating to appointment of
directors, directors identification number, disqualification, vacation etc.
The act has brought in many new provisions such as appointment of women director,
resident director, independent director by certain class of companies act and the
Companies Act 2013 has introduced “The Role of the Board of Directors in Corporate
Governance”.
INDEPENDENT DIRECTOR
INTRODUCTION
Independent directors are meant to serve the company's shareholders. They are not a
representative of any regulator watch dog. The Companies Act 2013 has introduced new
provisions relating to independent directors, eligibility criteria, tenure, appointment,
qualification; code etc., Clause 49 of the Listing agreement has also been amended in tune
with the Companies Act 2013.

Independent Directors are required because they perform the following important
functions :-
(i) They balance the conflicting interest of stakeholders.
(ii) They fulfill a useful role in succession planning.
(iii) They act as a coach, mentor for their full time colleagues.

(iv) They provide independent judgment and wider perspective.

An independent director(also sometimes known as an outside director) is a non-executive


director of a company and helps the company in improving corporate credibility and
governance standards. The Institution of independent directors is a critical instrument for
ensuring good corporate governance. and it is necessary that the functioning of the institution
is critically analyzed and proper safeguards are made to ensure efficacy.

BACKGROUND

The Cadbury Committee in 1992, which itself was set up following the corporate scandals
involving BCCI, Poly Peck and Maxwell, provided respectability to the concept of independent
directors, by focusing on independent directors as a part of the new practices for better
governance. Independent directors function as an oversight body in monitoring the performance
and should raise red flags whenever suspicion occurs. They are expected to be more aware and
question the company on relevant issues in their position as trustees of stakeholders.

EVOLUTION OF THE CONCEPT OF INDEPENDENT DIRECTORS IN INDIA:-

The concept of “Independent Director” was first introduced in the Indian corporate field
through the Kumar Manglam Birla Committee, formulated by SEBI, to start up reforms in
the area of Corporate Governance. The Birla Report stipulated, “Independent Directors
are directors who apart from receiving directors’ remuneration do not have any other
material pecuniary relationship or transactions with company, its promoters, its
management or its subsidiaries, which in the judgement of the board may affect their
independence of judgement”. Thereafter The Irani Committee came up with several
recommendations in relation to the independent director that were in conflict with the
Clause 49. Finally in the case of Central Government Vs. Sterling Holiday Resorts
(India) Ltd, AIR 2005, decided that “the Board of directors should be strengthened by
appointing independent directors”.

DEFINITION

Section 149(6) of Companies Act, 2013 gives the definition of 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 promoters or directors in the company, its holding, subsidiary or
associate company;

(c) Who has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors, during the two immediately preceding
financial years 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
per cent or more of its gross turnover or total income or 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 position 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 or had any transaction with the
company, its holding, subsidiary or associate company amounting to ten
per cent. or more of the gross turnover of such firm;

(iii) Holds together with his relatives two per cent. 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 per cent or more of its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that holds two per cent or more of the
total voting power of the company; or

(f) Who possesses such other qualifications as may be prescribed.