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Independent director in fresh gaze

Rupesh Khokle 
on 03 April 2013

LinkedIn


The new norms of the Companies bill have become more elaborative for appointment, re-appointment, resignation, professional conduct, roles & function etc. of independent director.  It has expanded scope, roles, responsibilities and nature of duty of Independent Director towards the Board and the committee of the Board. However, it’s not incorrect to say that it may create new opportunities for the professionals to get appointed as independent director on the board of the Company.

While drafting the provisions relating to independent director, framers of the bill had taken due care to keep away all promoter group, relative of promoter, associates, any connection with practicing firms, employees of the company etc. for the purpose of appointment as independent director. The brief provision is reproduced below for better understanding: -

“Section 149 (6) An 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 organisation 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.”

It is apparent from the above provision of the Bill that appointment of an Independent Director have to pass all prescribed conditions as above. Schedule IV of the Bill stipulated Code for Independent Director which includes guidelines of professional conduct, Role and functions, duties etc. The basic intention behind the provision is that he/she should not be anyway related with the promoter company in any manner.

The Bill proposed to have an independent director for such class or classes of public companies on their board. According to the said provision many public company will come under purview and now the question is where you will find such number of independent director. To avoid this chaos, the Central Government has proposed to form a body, institute or association who will create and maintain data bank for the independent directors and this body, institution or association shall act in accordance with the direction of the Central Government. The nomination of the independent director shall be considered in this data bank after considering willingness of the person to act as independent director and subject to satisfaction of the conditions pertaining to eligibility, qualification, professional experience, expertise etc. as may be prescribed by the Central Government periodically.

Board of Directors Meeting:

Independent director endeavor to attend every Board meeting and Board committee meetings of the company. Keep inform the Board concerns for running of the company, any remedial actions thereof, ensure implementation of suggestions, violation of code of conduct, suspected frauds etc. The responsibility also casts on the Board for dealing in urgency and important matters, if the Board meeting called at shorter notice there is strict provision about compulsory attendance of at least one independent director of the company and decision taken by the Board in absence of the independent director shall be circulated to all directors including independent director and shall be final only upon ratification thereof by at least one independent director.

Audit Committee and Nomination & Remuneration Committee Meeting:

The composition of Audit Committee consists of minimum three directors including majority forming independent directors. The committee members may elect independent director as chairperson of the committee who is able to read and understand the financial statements of the Company.

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 independent director shall ensure policy formulated for appointment of key managerial person, senior management and other employees is fair and transparent. The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully.

Corporate Social Responsibility Committee:

A company crossing certain threshold limit shall have to constitute the Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director should be an independent director. The independent director roles include assisting the committee to formulate the CSR policy, recommend certain activity where amount could be spent preferable in local area etc.

Pecuniary Benefits:

An independent director shall not be entitled for stock option but may receive remuneration by way of fee as provided in the Act. Furthermore, reimbursement of expenses for attending the Board and committee meeting as well as certain percentage on the profit of the company subject to approval of the members of the company.


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