Standing Committee of Parliament Recommends Making the Appointment Process of Independent Directors Independent of the Company Management
The Standing Committee of Parliament, which thoroughly examined The Companies Bill, 2009, has observed that as the institution of Independent Directors is a critical instrument for ensuring good corporate governance, it is necessary that the functioning of this institution is critically analyzed and proper safeguards are made to ensure its efficacy. The Standing Committee on Finance (SCF) in its Twenty-First Report, presented to the Parliament recently, has said that the appointment of Independent Directors should not be a case of mere technical compliance reduced to the letter of the law. It is important that Independent directors play their designated role to nurture the financial health of the company and to protect the interests of various stakeholders, particularly the minority shareholders. The SCF, therefore, believes provisions pertaining to the Independent Directors should be distinguished from other directors in the Bill. It further says the Government should prescribe precisely their mode of appointment, their qualifications, extent of independence from promoters/management, their role and responsibilities as well as their liabilities.
In this context the SCF has pointed that there is a need to circumscribe and limit the liabilities of Independent Directors, so that they are able to act freely and objectively and are able to share their expertise with the rest of the Board. The SCF has suggested that a provision may also be made for the rotation of Independent Directors by restricting their tenure in a company to say, five years. The Ministry of Corporate Affairs thus needs to revisit the Institution of Independent Directors and make amendments in the Bill accordingly, the SCF has said in its Report. It further says that a code for Independent Directors may be considered for this purpose. The appointment process of Independent Directors may also be made independent of the company management by constituting a panel or a date bank to be maintained by the Ministry of Corporate Affairs, out of which companies may choose their requirement of Independent Directors, the SCF has recommended. The SCF has also desired that the Ministry may also explore the feasibility of Advisory Boards for bigger companies comprising of qualified persons/professional experts.