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
Independent directors of a company or an
Keep a check
on the activities of the company
balance in a company
Director’s add accountability and transparency to businesses
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.
required, Independent Directors have the authority to raise red flags, which will
lead to avoidance in the occurrence of unwanted situations and their
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-
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-
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
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
What is the role of Independent directors in
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
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
is controlled majorly by the controlling shareholders, but it will ensure the
protection of the minority shareholders.
controlling shareholders won’t take the appointment of the IDs lightly and as a
veto powers to the Non-controlling directors will improve the effectiveness of
the appointment of Independent Directors.
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-
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.
directors focus and work by keeping the company’s interest in mind, rather than
being a safeguard to the ABC family.
there is a room for improvement in the appointment and removal of these
How Independent Directors should be
appointed or removed?
our experts, if we could follow the below
points, we can improve the role of independent directors-
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.
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.
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
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.
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.
Directors will be taking their responsibilities more seriously and will be
protected against the baseless allegations.
remuneration given to the independent directors of the company should match their
responsibility in the company.
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.