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Role of the Independent Directors in India

Narendra Kumar

| Updated: Mar 07, 2019 | Category: Compliances

Independent Director


In every Company, Board of Directors plays a crucial role in the governance of companies. Board of Directors manages the affairs of the company in such a way that the company operates in the best of interest of the shareholders and stakeholders. Companies see the board of directors’ independence as the cornerstone of accountability. The presence of Independent Directors in the Board room dissuades the ineffective use of resources, fraud, and inequality and the unaccounted ability of decisions, mismanagement. Independent Directors are often seen as the link to maintain the relations between the stakeholders of the company.

The legislature of India identified the irregularities inside the organizations and corporations, which led to the insertion of provisions of the appointment of Independent Directors in the organization. Most of the scams, failures, and fiascos of businesses and companies are caused by the lack of presence of Independent Directors.

Role of Independent Director under Companies Act, 2013

Independent directors of a company or an organization basically-

  • Keep a check on the activities of the company
  • Maintain a balance in a company
  • Independent Director’s add accountability and transparency to businesses
  • Independent Directors play a major role in setting a strong foothold of corporate governance in an organization. Even if the Independent Directors of the company are not linked with the company’s day-to-day affairs or decision making, they can question the Board’s decisions.
  • When required, Independent Directors have the authority to raise red flags, which will lead to avoidance in the occurrence of unwanted situations and their consequences considerably.

Provisions of Appointment of Independent Directors under Companies Act, 2013

In general, as per the Companies Act, 2013 there have to be a minimum one-third independent director in the public listed company and a minimum of two directors in the unlisted public company. By bringing in the independent directors companies need to make sure that-

  • The rights of minority shareholders are protected;
  • And keep an eye on a company so that it doesn’t commit any fraud;

With these purposes, independent directors of the company have the authority to take certain actions. Let’s see what are the list of actions, an ID (Independent Director) can take.

What are the powers of the Independent Director?

If there is an Independent director in a company or an organization, following are the actions that these Independent Directors can take-

  • Independent Directors have the authority to question the decisions of the board members
  • They work as an independent authority and not biased towards anybody while maintaining appropriate conduct of the company.

We need Independent Directors to avoid fiascos and failures, but there are other reasons as well for appointing these IDs. Below are the reasons, why do we need IDs in the organization in India?

There is already an IL & FS fiasco, one of the examples where failure in corporate governance led to the collapse. Thus, it is really important to craft an effective method for the implementation of the appointment of Independent Directors.

What is the role of Independent directors in a Company?

In India, most of the big companies are familial and the majority of the part is controlled by the promoters. If we look at the example, in Wipro 76% part of the company is controlled by the promoters.

  • This creates the challenges of corporate governance in relation to the Independent Directors in India.
  • Independent directors of the company make sure that there is no illegal activity happening under their guidance and control. However, there is no written law which makes these independent directors directly accountable for such matters.
  • This lack of accountability is may be caused by the fact that these independent directors are absolutely hired by the members of the already existing board members
  • The only benefit given to these Independent Directors is the remuneration under section 197(5) of the Companies Act.
  • These Independent Directors cannot hold any interest in the company, which declares them independent. But still, their remuneration is controlled by the Board.
  • The appointment of Independent Directors depends upon the board of directors which make IDs to become a display piece and their word is taken in a critical and non-serious manner. And above this, their incentives are also controlled by the board members and the office of Independent directors is often looked upon as pointless and unnecessary.

The appointment of independent Directors is not in sync with the functioning of the company. It needs a lot of efforts to improve the appointment process and structure of IDs.

We will discuss a few of the points, which can bring improvement in the appointment process of IDs.

How the Independent Directors are elected in a company?

To improve the condition of Independent Directors in relation to their appointment, an impartial solution as a confirmation of an independent director must be taken from the non-controlling shareholders.

  • The election is controlled majorly by the controlling shareholders, but it will ensure the protection of the minority shareholders.
  • The controlling shareholders won’t take the appointment of the IDs lightly and as a token purpose.
  • Given the veto powers to the Non-controlling directors will improve the effectiveness of the appointment of Independent Directors.
  • Looking at the peculiar familial ownership of the companies or business in India, such large organizations are leading to the increasing number of Independent Director’s appointment.

Appointing the number of IDs for a company will be very beneficial for every organization.

Benefits of hiring an Independent Director in family-owned businesses-

Following are the benefits of appointing the number of Independent Directors in a company-

  • In large familial groups of India, increasing the number of Independent Directors will mitigate the negligence of the will of shareholders and also reduce the mismanagement of the Company.
  • Independent directors focus and work by keeping the company’s interest in mind, rather than being a safeguard to the ABC family.

But still, there is a room for improvement in the appointment and removal of these Independent Directors.

How Independent Directors should be appointed or removed?

According to our experts, if we could follow the below points, we can improve the role of independent directors-

  • In companies, the law for the removal of Independent Directors should be more stringent. If we look at the current scenario, it takes the consent of 50% shareholders for the removal of IDs, while it takes the consent of 75% shareholders for the ID.
  • However, to improve the process of appointment and removal of IDs, the removal consent must also be 75%. In addition to this, the company must seek confirmation from Non-controlling shareholders while removing any of the IDs.
  • In overall, it will bring accountability in the process of removing IDs and the reason for removal would be compelling. The appointment and removal must not be for the sake of promoters’ interest.

Despite all of this, there have to be more things in the favor of Independent Directors for the better governance and working of a company.

The scenario of Independent Directors in India and how it can be improved

Currently, Independent Directors are not the interest holders of the company; they have nothing to lose in becoming an ID of the company.

  • It is the responsibility of the Independent Director to ask for the remuneration. Sometimes the high remuneration may cause the ID’s decisions to be in the favor of promoters, as the promoters are in charge of their remuneration.
  • The guidance of Independent Directors is needed most when the company is undergoing any financial crisis.
  • If we look, there is no statute in the Indian Law or court that describes the roles of IDs. The role of IDs is basically very close to the role played by the normal directors of the company. Even so, the fingers are pointed to these independent directors at the time of the crisis.
  • The roles of the Independent Directors must be defined in the statutory. It will bring clarity to the person holding the position.
  • Independent Directors will be taking their responsibilities more seriously and will be protected against the baseless allegations.
  • The remuneration given to the independent directors of the company should match their responsibility in the company.

Conclusion

Even after the corporate failures such as IL&FS, Satyam, and Cyrus Mistry; Indian legislature has not done enough to acknowledge the problems faced in the role of Independent Directors. There is still a lack of clarity in their roles and Independent Directors must have the precision for that position. If proper roles defined these IDs, it would result in much better corporate governance.

For more information, please contact Enterslice.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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