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Concept of board diversity in India

Amitav Ganguly 
on 17 June 2015

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MEANING OF DIVERSITY

The term “diversity” of Board of Directors {Board} has not been defined in the Companies Act 2013 or in the listing agreement with stock exchanges. Diversity is statutorily achieved; more particularly function wise, as also residence and gender wise, whereby the Board has to have an optimum combination of executive, non executive, independent, resident/non resident director/s, woman director/s, & small shareholders director/s in terms of law and corporate governance.

As per various national / international practices, it would also mean that the individuals of the Board should be diverse in background, education, experience, knowledge, thoughts, perspective, functional expertise, independence, age and gender. Diversity would further include differences that relate to communication styles, problem solving & interpersonal skills.

OBJECTIVE

The purpose for achieving diversity on the Board of Directors of the Company is for the benefits of:-

• Enhancement of the quality of performance of the Board ;
• Usher in independence in the performance of the Board;
• Eradicate the gender bias in the Board;    
• Achievement of sustainable and balanced performance and  development in the Company;
• Support the attainment of strategic objectives of the Company; &
• Compliance of applicable law/s and good corporate practices.

BRIEF OVERVIEW OF THE LAWS STIPULATING DIVERSITY

Companies Act 2013 and its Rules

{Sections 149, 151 & 152 & Companies [Appointment and Qualification of Directors] Rules 2014 & Section 178 & Companies [Meetings of Board and its Powers] Rules 2014}

• Every company shall have a Board of Directors consisting of individuals as directors and shall have minimum three directors in case of public company and maximum fifteen directors.

• Every listed company has to appoint at least one woman director on the Board within one year from the commencement of Companies Act 2013. Any vacancy shall be filled up at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

• There should be at least one director who has stayed in India for total minimum 182 days in previous calendar year.   

• Every listed public company shall have at least one-third of the total number of directors as independent directors whose period of office is not liable to determination by retirement by rotation.

• Independent Director shall meet the criteria of Independence.

• Any vacancy in the office of independent Director shall be filled up at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later. 

• Not less than 2/3 of the total number of directors of a public company shall be persons whose period of office is liable to determination by retirement of directors by rotation {i.e., rotational/ non executive directors}. Moreover, the remaining directors, subject to any regulation in the articles of association of the company, shall be persons whose period of office is not liable to determination by retirement of directors by rotation, {i.e., non rotational director /executive directors}.

• The Board of Directors of every listed company shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors.

• The Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance.

• A listed company may have one director elected by small shareholders.

New Clause 49 of the Listing Agreement {W.E.F. 1-10-2014}

• The Board of Directors of the company shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent {50%} of the Board of Directors comprising non-executive directors.

• Where the Chairman of the Board is a non-executive director, at least one-third {1/3} of the Board should comprise independent directors and in case the company does not have a regular non-executive Chairman, at least half {50%} of the Board should comprise independent directors.

• Where the regular non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half {50%} of the Board of the company shall consist of independent directors.

• The setting up of Nomination and Remuneration Committee is in consonance with the provisions of the Companies Act 2013 and its Rules.  

• Board Diversity Policy is required to be laid down.

CONCLUSION

Although the concept of Board diversity has already been present in Indian legal system even in the Erstwhile Companies Act 1956 and the earlier clause 49 of the Listing agreement, the coining of this term as compliance has been new. The only significant change which can be considered in this context is the requirement of appointment of woman director. Hopefully the purpose of diversity can be achieved in Indian corporate more in beneficial context than in mere compliance.

AMITAV GANGULY


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