{"id":14424,"date":"2019-03-07T15:00:08","date_gmt":"2019-03-07T09:30:08","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=14424"},"modified":"2020-01-15T12:42:59","modified_gmt":"2020-01-15T07:12:59","slug":"role-of-an-independent-director","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/role-of-an-independent-director\/","title":{"rendered":"Role of the Independent Directors in India"},"content":{"rendered":"<p><br><\/p>\n\n\n\n<p>In every Company, Board of Directors plays a crucial\nrole in the governance of companies. Board of Directors manages the affairs of\nthe company in such a way that the company\noperates in the best of interest of the shareholders and stakeholders.\nCompanies see the board of directors&rsquo; independence as the cornerstone of\naccountability. The presence of Independent Directors in the Board room\ndissuades the ineffective use of resources, fraud, and inequality and the unaccounted ability of decisions,\nmismanagement. Independent Directors are often seen as the link to maintain the\nrelations between the stakeholders of the company.<\/p>\n\n\n\n<p>The legislature of India identified the irregularities inside the organizations and corporations, which led to the insertion of provisions of the <a href=\"https:\/\/enterslice.com\/learning\/know-about-the-appointment-of-independent-director\/\">appointment of Independent Directors<\/a> in the organization. Most of the scams, failures, and fiascos of businesses and companies are caused by the lack of presence of Independent Directors.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Role of Independent Director under Companies\nAct, 2013<\/h2>\n\n\n\n<p>Independent directors of a company or an\norganization basically-<\/p>\n\n\n\n<ul><li>Keep a check\non the activities of the company <\/li><li>Maintain a\nbalance in a company<\/li><li>Independent\nDirector&rsquo;s add accountability and transparency to businesses<\/li><\/ul>\n\n\n\n<ul><li>Independent\nDirectors play a major role in setting a strong foothold of corporate\ngovernance in an organization. Even if the Independent Directors of the company\nare not linked with the company&rsquo;s day-to-day affairs or decision making, they\ncan question the Board&rsquo;s decisions.<\/li><li>When\nrequired, Independent Directors have the authority to raise red flags, which will\nlead to avoidance in the occurrence of unwanted situations and their\nconsequences considerably. <\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" loading=\"lazy\" width=\"659\" height=\"176\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Capture.jpg\" alt=\"\" class=\"wp-image-14425\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Capture.jpg 659w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Capture-300x80.jpg 300w\" sizes=\"(max-width: 659px) 100vw, 659px\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Provisions of Appointment of Independent\nDirectors under Companies Act, 2013<\/h2>\n\n\n\n<p>In general, as per <a href=\"http:\/\/ebook.mca.gov.in\/default.aspx\" rel=\"nofollow noopener noreferrer\" target=\"_blank\">the Companies Act, 2013<\/a> 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-<\/p>\n\n\n\n<ul><li>The rights\nof minority shareholders are protected;<\/li><li>And keep an\neye on a company so that it doesn&rsquo;t commit any fraud;<\/li><\/ul>\n\n\n\n<p>With these purposes, independent directors of\nthe company have the authority to take certain actions. Let&rsquo;s see what are the\nlist of actions, an ID (Independent Director) can take.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What are the powers of the Independent Director?<\/h2>\n\n\n\n<p>If there is an\nIndependent director in a company or an organization, following are the actions\nthat these Independent Directors can take-<\/p>\n\n\n\n<ul><li>Independent\nDirectors have the authority to question the decisions\nof the board members <\/li><li>They work as\nan independent authority and not biased towards anybody\nwhile maintaining appropriate conduct of\nthe company.<\/li><\/ul>\n\n\n\n<p>We\nneed Independent Directors to avoid fiascos and failures, but there are other\nreasons as well for appointing these IDs. Below are the reasons, why do we need\nIDs in the organization in India?<\/p>\n\n\n\n<p>There is already an IL &amp; FS fiasco, one\nof the examples where failure in corporate governance led to the collapse.\nThus, it is really important to craft an effective method for the\nimplementation of the appointment of Independent\nDirectors.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is the role of Independent directors in\na Company?<\/h2>\n\n\n\n<p>In India, most of the big companies are\nfamilial and the majority of the part is\ncontrolled by the promoters. If we look at the example, in Wipro 76% part of\nthe company is controlled by the promoters. <\/p>\n\n\n\n<ul><li>This creates the challenges of <a href=\"https:\/\/enterslice.com\/learning\/corporate-governance-in-india\/\" target=\"_blank\" rel=\"noopener noreferrer\">corporate governance<\/a> in relation to the Independent Directors in India.<\/li><li>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.<\/li><li>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<\/li><li>The only benefit given to these Independent Directors is the remuneration under section 197(5) of the Companies Act.<\/li><li>These Independent Directors cannot hold any interest in the company, which declares them independent. But still, their remuneration is controlled by the Board.<\/li><li>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.<\/li><\/ul>\n\n\n\n<p>The appointment of independent Directors is\nnot in sync with the functioning of the company. It needs a lot of efforts to\nimprove the appointment process and structure of IDs. <\/p>\n\n\n\n<p>We will discuss a few of the points, which can bring improvement\nin the appointment process of IDs.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How the Independent Directors are elected in\na company?<\/h2>\n\n\n\n<p>To improve the condition of Independent\nDirectors in relation to their appointment, an impartial solution as a\nconfirmation of an independent director must be taken from the non-controlling\nshareholders.<\/p>\n\n\n\n<ul><li>The election\nis controlled majorly by the controlling shareholders, but it will ensure the\nprotection of the minority shareholders.<\/li><li>The\ncontrolling shareholders won&rsquo;t take the appointment of the IDs lightly and as a\ntoken purpose.<\/li><li>Given the\nveto powers to the Non-controlling directors will improve the effectiveness of\nthe appointment of Independent Directors.<\/li><li>Looking at\nthe peculiar familial ownership of the companies or business in India, such\nlarge organizations are leading to the increasing number of Independent Director&rsquo;s appointment.<\/li><\/ul>\n\n\n\n<p>Appointing the number of IDs for a company\nwill be very beneficial for every organization. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Benefits of hiring an Independent Director\nin family-owned businesses-<\/h2>\n\n\n\n<p>Following are the benefits of appointing the\nnumber of Independent Directors in a company-<\/p>\n\n\n\n<ul><li>In large\nfamilial groups of India, increasing the number of Independent Directors will\nmitigate the negligence of the will of shareholders and also reduce the\nmismanagement of the Company.<\/li><li>Independent\ndirectors focus and work by keeping the company&rsquo;s interest in mind, rather than\nbeing a safeguard to the ABC family.<\/li><\/ul>\n\n\n\n<p>But still,\nthere is a room for improvement in the appointment and removal of these\nIndependent Directors. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How Independent Directors should be\nappointed or removed?<\/h2>\n\n\n\n<p>According to\nour experts, if we could follow the below\npoints, we can improve the role of independent directors-<\/p>\n\n\n\n<ul><li>In\ncompanies, the law for the removal of Independent Directors should be more\nstringent. If we look at the current scenario, it takes the consent of 50%\nshareholders for the removal of IDs, while it takes the consent of 75%\nshareholders for the ID.<\/li><li>However, to\nimprove the process of appointment and removal of IDs, the removal consent must\nalso be 75%. In addition to this, the company\nmust seek confirmation from\nNon-controlling shareholders while removing any of the IDs.<\/li><li>In overall,\nit will bring accountability in the\nprocess of removing IDs and the reason for removal would be compelling. The\nappointment and removal must not be for the sake of promoters&rsquo; interest.<\/li><\/ul>\n\n\n\n<p>Despite all of this, there have to be more things in the favor of\nIndependent Directors for the better governance and working of a company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The scenario of Independent\nDirectors in India and how it can be improved<\/h2>\n\n\n\n<p>Currently, Independent Directors are not the\ninterest holders of the company; they have nothing to lose in becoming an ID of\nthe company.<\/p>\n\n\n\n<ul><li>It is the\nresponsibility of the Independent Director to ask for the remuneration.\nSometimes the high remuneration may cause the ID&rsquo;s decisions to be in the favor\nof promoters, as the promoters are in charge of their remuneration.<\/li><li>The guidance\nof Independent Directors is needed most\nwhen the company is undergoing any financial crisis.<\/li><li>If we look,\nthere is no statute in the Indian Law or court that describes the roles of IDs.\nThe role of IDs is basically very close to the role played by the normal\ndirectors of the company. Even so, the fingers are pointed to these independent\ndirectors at the time of the crisis.<\/li><li>The roles of\nthe Independent Directors must be defined in the statutory. It will bring clarity to the person holding the position. <\/li><li>Independent\nDirectors will be taking their responsibilities more seriously and will be\nprotected against the baseless allegations.<\/li><li>The\nremuneration given to the independent directors of the company should match their\nresponsibility in the company.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p>Even after the corporate failures such as\nIL&amp;FS, Satyam, and Cyrus Mistry;\nIndian legislature has not done enough to acknowledge the problems faced in the\nrole of Independent Directors. There is still a lack of clarity in their roles\nand Independent Directors must have the precision for that position. If proper\nroles defined these IDs, it would result in much better corporate governance.<\/p>\n\n\n\n<p>For more information, please contact <a href=\"https:\/\/enterslice.com\" target=\"_blank\" rel=\"noopener noreferrer\">Enterslice<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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&rsquo; independence as the cornerstone of accountability. The [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":14426,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2369],"tags":[1429],"acf":{"service_id":"217"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is the Role of an Independent Director | Enterslice<\/title>\n<meta name=\"description\" content=\"Independent Director play a crucial role to save the company at the time of crisis and take care of the management and corporate governance.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/role-of-an-independent-director\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is the Role of an Independent Director | Enterslice\" \/>\n<meta property=\"og:description\" content=\"Independent Director play a crucial role to save the company at the time of crisis and take care of the management and corporate governance.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/role-of-an-independent-director\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:author\" content=\"enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2019-03-07T09:30:08+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-01-15T07:12:59+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Role-of-Independent-Directors-in-India.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"680\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Narendra Kumar","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/04\/nk-1.jpg","authorDescription":"Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.","postViews":765,"readingTime":5,"nextPost":{"id":14436,"slug":"nbfc-new-governance-code"},"prevPost":{"id":14416,"slug":"commodity-hedging"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Role-of-Independent-Directors-in-India.jpg","postTerms":"Compliances","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/14424"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=14424"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/14424\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/14426"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=14424"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=14424"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=14424"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}