Independent directors-Kashish Jaitley..docx

INDEPENDENT ? DIRECTORS IN INDIA This is not a very uncommon debate that whether the Independent Directors in India are really independent or not. With the makeover of the entire Company law in India, as aftermath of the Satyam scam the position of Independent Directors in India gained importance. Through 2013 Act, the specific roles and responsibilities of the Independent Directors were made clear but the independence of the directors is still in question. Section 149(6) of the Companies Act prescribes numerous requisites for appointment of an Independent Directors in a company. In my opinion, the requirements as given are although aimed towards independence but are not efficient. Section 149 (6)(c) mention that Independent Directors should not have any pecuniary relationship with the company in anyway. This seems slightly cumbersome since the company is anyway paying a sitting fee (as per the statute) to the director and may also issue sweat equity to the Independent Director. According to Section 197 of the Companies Act, 2013 and Regulation 17(6)(a) of SEBI (Listing Obligation Disclosure Requirement) Regulation 2015 states that the prior approval of the shareholders of the company is required for making payment to its Independent Directors, as recommended by the Board of the Company. With the approval needed from shareholders for the remuneration to the Independent Directors, there is higher probability of a bias to prevail. In all the likelihood, a disagreement between an Independent Director and majority shareholders can reflect on the Independent Director’s remuneration. In such circumstances, it is rather difficult to say that the Independent Directors will act without any bias and judgments. The Independent Directors might also have another kind of pecuniary relationship of profit-related commission. The companies can give maximum one percent of the profit to the Independent Directors, this will also reflect in the judgment or decision of an Independent Director therefore the requisite under S.149(6) (c) is not comprehensive enough to keep an Independent Director independent. According to section 149(6) (d), the proviso mentions that the relative may hold security upto the prescribed limit. In my opinion, this defeats the entire purpose of keeping the personal biases away from the Independent Director. Even if only two percent of the paid up capital is the upper cap yet it is bound to invoke some bias in the judgment of the Independent Director. Schedule IV part V gives the provision for the re-appointment of the Independent Directors. This is dependent on the basis of report of performance evaluation. The reappointment is contingent on the decision of Board of Directors. Thus, the Independent Director might refrain from passing a judgment which may disappoint the Board and hinder in his or her re-appointment. According to Sec 2 (47) and 149(6) read with Rule 5 and 6 of the Companies (Appointment and Qualifications of Directors ) Rules 2014. After glancing through the entire appointment procedure it forces me to draw the conclusion that appointment of Independent Directors is dependable almost completely on the discretion of the majority shareholders in a company. If the position of Independent Directors are a subject of the shareholder’s discretion, it is almost impossible for the Independent Directors to work without any reservations and prejudices. After appointment, the majority shareholders might hold leverage over the Independent Director for the tenure. Such a procedure disables the Independent Directors to work and discharge their responsibilities without keeping in mind the interests of the shareholders. It can also be said that this can create an agency between the Independent Director and the shareholders which is against the principle propounded by Percival Vs. Wright 2 Ch 401. The directors are only the agent of the company and not that of shareholders but in the kind of set up mentioned by Companies Act, 2013 it seems not plausible that the Independent Directors are free from the interests of shareholders. Although unintentionally yet the Independent Directors shall always keep the interest of majority shareholders in mind in order serve their own interests. This will not only harm the effective discharge of Independent Director’s duties and responsibilities but also the interest of minority shareholders might be sacrificed. In specific to India, where the big companies are usually identified by the majority shareholders who happen to be a large family for example- Reliance group. It becomes a cumbersome task to maintain unbiased behavior for the Independent Director. These family dominated companies are usually focused on the interest of the promotor and the majority shareholders keep their interest as a family at the priority. In such a scenario the fairness of the director is bound to be jeopardized. Also, when majority shareholders belong a to a family they can curb the transfer of information according to their own convenience. This situation affects the working of Independent Directors in keeping a check on transparency and accountability. To conclude my reaction on the position of Independent Directors in India, it is safe to say that the Independent Directors are not really independent in the real world. The ambiguity is not only in law but in the market structure and corporate culture of India. Thus the law should be formulated keeping in view the family dominated company’s existence. The most prominent concern is that of the appointment process. The law makers should look into an alternative appointment process for example appointment of Independent Directors from an outside agency. This shall safeguard the interest of the minority shareholders in the company and also at the same time preserve the “independence’ of an Independent Director. Kashish Jaitley 1