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An Independent Director (also sometimes known as a outside director or non-executive director) is a director (member) of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees. Independent Directors do not own shares in the company. (Some sources state non-executive directors are different from independent ones in that non-executive director are allowed to hold shares in the firm while independent directors are not.
The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies like Enron, WorldCom, Parmalat in Italy, Satyam in India, the multinational newspaper group Hollinger Inc., New York Stock Exchange etc. Although there have been a number of reforms related to corporate governance, perhaps the single most important for the growth of independent directors was the promulgation of Clause 49 of the Stock Exchange Listing Agreement in 2000 by SEBI. In India as of 2004, a majority of the minimum seven directors of public companies having share capital in excess of Rs. 5 crore (Rs 50,000,000) should be independent.
INDEPENDENT DIRECTOR UNDER COMPANIES ACT, 1956
Before 2000, the Companies Act, 1956 does not talk about the Independent Director in the Board of the Indian company. The words “Independent Director” was firstly used in Clause 49 of the Listing Agreement under the heading of Corporate Governance. There after the DCA(now MCA) has made many changes under the Companies Act, 1956 like under section 292A, section 299, Section 309, Schedule Vi and Schedule XIII in which it discussed about the requirement of Independent Director.
INDEPENDENT DIRECTOR UNDER NEW COMPANIES ACT, 2013
The Corporate Affairs Minister Mr. Sachin Pilot has said on the Provision of Independent Director in his speech at the time of introduction of new Companies Act, 2013.
“We as a government can only provide the regulatory mechanism. We can only give an environment where good corporate governance takes place. Today, we have about 8.5 lakh companies and about two-third companies are family-owned. So, the role of independent directors becomes all the more important. The companies are large and public funds are invested and independent directors play a crucial role. Noting that good corporate governance has become a requirement of the day, Pilot said that minority shareholders also need to be given a say in the board decisions, as their money is as well invested in the company.”
Provisions covered under new Companies Act, 2013
There are some provisions under new Companies Act, 2013 which deal with the terms “independent director”. These are:
Section 2(47) deal with definition of independent directors
Section 134(3)(d) deal with a statement on declaration of status of independent directors which will be attached with Directors’ Report of the Company.
Section 135(1) deal with constitution of Corporate Social Responsibility Committee in which one member should be an independent director.
Section 149 deal with appointment and qualifications of independent directors.
Section 150 deal with manner of selection of Independent directors and maintenance of data bank of independent directors.
Section 152 deal with total strength of directors in which independent director will not included in that total number of directors of the company.
Section 161 which says that no person shall be appointed as an alternate director for an independent director unless he is qualified to be an independent director under the provision of this Act.
Section 173(3) talk about Board Meeting at shorter notice in which at least one Independent director should be present.
Section 177 talks about Audit Committee of the Company in which minimum number of Independent Directors will be three.
Section 197 covers the different type of fee given to Independent Directors.
Schedule IV deal with “Code for Independent Directors)
First time in new Companies Act, 2013 the number of provision inserted to regulate the company or such class of companies as may be prescribed. Hope the new act will give a clear position on the Independent directors of the company and such directors will protect the interest of Investors.
Thanks & Regards
CS Ajay Mishra