RESEARCH PROPOSAL

INDEPENDENT DIRECTOR: A CRITICAL STUDY

Submitted To – Ms. Nandita Jha

Submitted By – Ms. Bhargavi Mishra

Roll no. – 1524

7th Semester, 4th Year

 CERTIFICATE OF DECLARATION

I hereby declare that the research paper titled Independent director: A Critical Study
submitted by me is based on actual and original work carried out by me. Any reference to work
done by any other person or institution or any material obtained from other sources have been
duly cited and referenced.

Bhargavi Mishra

1524
 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Ms
Nandita Jha for her exemplary guidance, monitoring and constant encouragement throughout the
course of this project. The blessing, help and guidance given by his from time to time shall carry
me a long way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to my seniors, the library staff
and my friends for their valuable information and guidance, which helped me in completing this
task through various stages.

I would also thank my Institution and my faculty members without whom this project would
have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.
 TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION.......................................................................................1

CHAPTER 2: PROVISIONS MENTIONED IN COMPANIES ACT, 2013............................3

CHAPTER 3: CLAUSE 49 OF LISITING AGREEMENT...................................................7

CHAPTER 4: KEY RECOMMENDATION OF UDAY KOTAK PANEL.............................9

CHAPTER 4: CONCLUSIONS AND SUGGESTIONS......................................................10

BIBLIOGRAPHY.........................................................................................................11
 CHAPTER 1: INTRODUCTION

Though the concept of independent director cannot be called a new concept but it has emerged in
a new form in recent years more so after scams such as Satyam.

One of the factors that that has been identified to be common across all these major corporate
failures around the world has been the “failure of the board of directors of a corporation to detect
internal crisis early on & act in a timely manner to put the organization back on track before
difficulties become irreversible.”1After witnessing various corporate failure, scandals & the
ensuing crisis, attempts at various levels have been made to make corporations strong &
effective to counter various problems which crop up in routine dealings. It is at this point that
need of independent director arises because through them, objectivity & rational perspective can
be brought on board & they can to a large extent ensure transparency& accountability of a board.
They are expected to enhance the standards of corporate governance.“Corporate governance is a
key element in improving economic efficiency & growth as well as enhancing investor
confidence. The corporate governance should promote transparent& efficient markets, be
consistent with the rule of law & clearly articulate the division of responsibilities among
different supervisory, regulatory & enforcement authorities.”2

The Board is a group of individuals appointed by the owners of the company to run the company
in the interest of the stake holders. The representatives on the Board should run the affairs in a
transparent manner to all its stakeholders. A company is a combination of various stake holders
such as investors, employees, vendors, customers, governments and society at large. The
management of the daily affairs of the company is given to the Board of Directors. It has been
observed that the Boards have taken decisions which were against the interests of the
shareholders & stakeholders and were beneficial to only a select few thus in my project various
means and suggestions from the various committees have been listed to prevent obscurity and

1
Jayati Sarkar, Board Independence & Corporate Governance in India: Trends & Challenges‟ (2009) 44 Indian
Journal of Indian Relations.
2
Preamble,OECD Principles of Corporate Governance, 2004.

1
promote balance of power so that fraud of the likes of Satyam Case are not committed or are
deducted.

AIMS AND OBJECTIVES

The objective of this research project is to –

 To do comparative analysis of the role of Independent Directors between Clause 49 of

Listing Agreement and CA, 2013.
 To learn about the recommendations of Uday Kotak Panel for the positions of
Independent Directors.
 To learn about the importance of Independent Director in ensuring good Corporate
Governance.

SCOPE AND LIMITATION

This project is limited in its scope due to paucity of time, multiplicity of areas to be covered due
to the inherent vastness of the subject matter and limited financial resources. However, the
researcher has aimed to keep a fairly broad scope in order to gain a complete picture of the topic.

RESEARCH METHODOLOGY

This study involves the use of doctrinal method of research. The information will be gleaned
from various books on the subject of International Trade Law, articles and published research
works.

HYPOTHESIS

In the wake of the corporate governance norms, the role of independent director has been
strengthened.

2
 CHAPTER 2: PROVISIONS MENTIONED IN COMPANIES ACT, 2013

Independent Director though not an uncommon concept was not defined under the earlier Clause
49 of listing agreement and 1956 Act. Companies, Act, 2013 for the first time has defined the
term “Independent director‟. The old Act of 1956 did not contain any provisions regarding this
so only listed companies had to follow this requirement as per Clause 49 of the Listing
Agreement but now independent directors have been made mandatory for unlisted large public
companies. The Act, 2013 differs from Clause 49 at various points but its requirements are far
more stringent than Clause 49.

Who can be an Independent Director?

By listing out detailed criteria regarding the appointment the Act has brought in a significant
change. Any promoter of the company or its holding, subsidiary or associate company or anyone
related to them or anyone who has or had pecuniary relationship with the company during the
two immediately preceding financial years or current financial year have been excluded from
being appointed as independent director3. All this has been done to maintain complete
independence .The Act also lays down a term-based appointment for a period of five years,
renewable, by special resolution for a second term, & not subject to retirement by rotation 4. This
kind of stability enables them to work can work fearlessly & efficiently.

Number of Independent Directors

There is a specific obligation on every listed public company that at least one-third of the board
of directors should comprise of independent directors & also empowers Central govt. to include
other class/classes of companies within the scope of this requirement 5. To make the process even
simpler, an independent director may be selected from a data bank containing details of persons
willing to be appointed, maintained by anybody etc as may be notified by the Central

3
Companies Act 2013, s 149(6)
4
Companies Act 2013, s 149(10) and (11)
5
Companies Act 2013, s 149(4)

3
government6. But the hard fact remains that it is really difficult to find adequate amount of
persons sufficiently qualified & also willing to take up this job.

Remuneration

Another significant step taken is that the Act also places limit on the amount of shares that can be
held in the company by a relative of such a director 7. The Act also expressly disallows them from
obtaining stock options8. Profit related commission may be paid to them, but subject to the
approval of the shareholders9. The concern which arises here is wide disparity between the
remunerations & the responsibilities given to perform.

Responsibilities

The Act has imposed manifold responsibilities on independent directors. The Act requires the
individuals to submit a self-declaration confirming that they have satisfied the criteria prescribed
for the position10. It is also stated that any board meeting held at shorter notice (to transact urgent
business) requires the presence of at least one independent director & if such is not present, the
matter discussed at the board will be considered approved only once an independent director
ratifies it11. Further, they can be removed if they fail to attend any board meeting for 12 months
period with or without permission from the Board12.

Separate meetings

The Act makes it mandatory for all the independent directors to hold at least one meeting
annually, without the presence of non independent directors & members of management 13.Here
they are expected to review the performance of the Chairperson, non independent directors & the
Board as a whole14.

6
Companies Act 2013, s 150(1)
7
Companies Act 2013, s 149(6) (e)( iii)
8
Companies Act 2013, s 149(9)
9
Companies Act 2013, s 197(7)
10
Companies Act 2013, s 149(7)
11
Companies Act 2013, s 173(3)
12
Companies Act 2013, s 167
13
Companies Act 2013, Schedule IV
14
Ibid

4
Committees

The Act has made it mandatory for independent directors to be a part of certain committees.

 Corporate Social Responsibility Committee- The Act provides that every company
having net worth of rupees five hundred crore or turnover of rupees one thousand crore or
more or a net profit of rupees five crore or more during any financial year shall constitute
a CSR Committee of the Board consisting of three or more directors, out of which at least
one director shall be an independent director15. This provision has been included so that
independent directors can keep a check on the workings of the CSR committee.

 Audit Committee- The Act requires that the Board of every listed company & such other
companies as may be prescribed shall constitute an Audit committee which shall consist
of a minimum of three directors with independent ones forming a majority16.

 Nomination & Remuneration Committee (NRC) - The Act requires that the Board of
every listed company & such other companies as may be prescribed shall constitute an
NRC consisting of three or more non executive directors out of which not less than one
half shall be independent directors17. The role of NRC is to (a) identify persons qualified
to become directors, (b) recommend to the Board their appointment & removal, (c)
evaluate directors performance, (d) recommend to the Board a policy relating to the
remunerations for the directors etc18.

Code for Independent Directors

The company & independent directors are required to “abide by the provisions specified in
Schedule IV” of the Act19, which provides a detailed Code for independent directors. However
the code appears to be mandatory which can lead to certain issues like the code states that an
independent director shall uphold ethical standards of integrity & probity, however what would

15
Companies Act, 2013, s 135(1)
16
Companies Act , 2013, s 177
17
Companies Act , 2013, s 178
18
Ibid
19
Companies Act , 2013, s 149(8)

5
constitute ethical behavior is not defined & is open to interpretation 20.Also it refers to
appointment of independent director by the board after evaluating certain attributes, the concern
that remains unaddressed is the manner in which companies need to carry out an assessment of
the attributes as specified under “manner of appointment‟ in the code from the data bank
maintained by the MCA.21

20
PwC India, Companies Act, 2013 Key highlights and analysis
(https://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-analysis.pdf) accessed 8
September, 2019
21
Avtar Singh, INTRODUCTION TO COMPANY LAW , 79 (Eastern Book Company)

6
 CHAPTER 3: CLAUSE 49 OF LISITING AGREEMENT

The clause 49 of the listing agreement by SEBI deals with corporate governance and lays down
various processes and disclosures to be followed by all the companies. It tells about the board
composition, compensations, committees and management. It lays down that each company has to
submit a quarterly corporate governance report along with a compliance certificate from the auditors
to SEBI. This report should be attached to the annual report as well as the fillings to the
stock exchanges.22

Board of Directors23

(i) The Board of directors of the company shall have an optimum combination of executive and non-
executive directors with not less than fifty percent of the board of Directors comprising of non-
executive directors.

(ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board
should comprise of independent directors and in case he is an executive director, at least half of the
Board should comprise of independent directors.

Independent Director24

The expression ‘independent director’ shall mean a non-executive director of the company who:

a) Apart from receiving director’s remuneration, does not have any material pecuniary relationships
or transactions with the company, its promoters, its directors, its senior management or its holding
company, its subsidiaries and associates which may affect independence of the director.

b) is not related to promoters or persons occupying management positions at the board level or at one
level below the board.

22
SECURITIES AND EXCHANGE BOARD OF INDIA, (https://www.sebi.gov.in/legal/circulars/oct-
2004/corporate-governance-in-listed-companies-clause-49-of-the-listing-agreement_13153.html) accessed on 8 th
September, 2019
23
Ibid
24
Ibid

7
c) has not been an executive of the company in the immediately preceding three financial years.

d) is not a partner or an executive or was not partner or an executive during the preceding three years,
of any of the following:

i) the statutory audit firm or the internal audit firm that is associated with the company, and

ii) the legal firms and consulting firms that have a material association with the company.

e) is not a material supplier, service provider or customer or a lessor or lessee of the company, which
may affect independence of the director; and

f) is not a substantial shareholder of the company i.e. owning two percent or more of the block of
voting shares. Some other requirements are:-

 Nominee directors appointed by an institution which has invested in or lent to the company
shall be deemed to be independent directors.
 Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine
years, on the Board of a company.
 All fees/compensation, if any paid to non-executive directors, including independent directors
shall be fixed by the Board of Directors and shall require previous approval of shareholders in
general meeting. The shareholders’ resolution shall specify the limits for the maximum
number of stock options that can be granted to non-executive directors, including independent
directors, in any financial year and in aggregate.
 2/3 of the members of audit committee shall be independent directors with thechairman as
independent director.
 Minimum of two independent directors should be present in each meeting of audit committee.
 The remuneration committee, which would determine the remuneration packages of the
executive directors may comprise of at least three directors, all of whom should be non-
executive directors, the Chairman of committee being an independent director.

8
 CHAPTER 4: KEY RECOMMENDATION OF UDAY KOTAK PANEL

A 21 member committee on Corporate Governance was constituted by SEBI and headed by

banker Uday Kotak. It submitted various recommendations to SEBI that included major
revamping of Corporate Governance norms for listed firms.

Recommendations under Uday Kotak Panel for the role of Independent Directors are25:

 A listed company should have at least six directors on its board.

 The panel has suggested at least one independent director be a woman.
 It also proposed that directors attend at least half the total board meetings held in a
financial year. If they fail to do so, they would require shareholders’ nod for continuing.
 Companies have asked to make public the relevant skills of directors, and the age of non-
executive directors has been capped at 75 years.
 In addition, the chairperson of a listed company will be a non-executive director to ensure
that s/he is independent of the management.
 An independent director cannot be in more than eight listed companies and a managing
director can hold the post of an independent director in only three listed companies.
 The committee has proposed to increase the number of meetings to five a year.
 Every board meeting would require the presence of an independent director.
 The committee has recommended that the number of independent directors on a company
board be increased from 33% to 50%.
 Detailed reasons would need to be furnished when an independent director resigns. This
is to ensure that they remain independent of the company management.
 An audit committee is being proposed with the mandate to look into utilization of funds
infused by a listed entity into unlisted subsidiaries including foreign subsidiaries.
 The committee has also recommended that SEBI should have clear powers to act against
auditors under the securities law.

25
Corporate Governance: A critical analysis, FORUM IAS ,( https://blog.forumias.com/article/corporate-
governance-a-critical-analysis) accessed on 8th Sepetember.

9
  For government companies, the committee has recommended that the board have final
say on the appointment of independent directors and not the nodal ministry.

CHAPTER 4: CONCLUSIONS AND SUGGESTIONS

Independent directors or non-executive directors of the company monitor and control the
chairman/chief executive; they serve as a link with external environment and provide an
international perspective. Apart from this independent directors try to improve board processes
and bring in specialist knowledge, they provide continuity, help identify alliance and acquisition.
Inclusion of independent directors is a check on the management of companies as an oversight
mechanism. Their ability to contribute to the board’s deliberations is an added bonus to voice the
minority interests. It can be concluded that independent directors help maintain an ethical climate
in the organization.

However, Certain things have not been clarified in the provisions. For instance, if it is revealed at
a later date that the independent director on the Board in not in fact independent – what would
happen to the decisions of the board?

In many cases the omission and commission of an Independent Director in a fraud or scam is no
more greater than a being negligent or not being hyper vigilant and this problem is attributable to
the structure of board itself because Independent Director is not an professional investigator it
will believe whatever audits reports are being given to him by the Board of Directors, it is the job
of the auditors to verify the claims mentioned in the invoices.

Some experts have pointed out several deficiencies in the working of independent directors.
These include complaints against their inability to find sufficient time and their lack of
knowledge regarding the company affairs to fulfil the demands of their position 26. Solutions to
other problematic areas like the appointments which are handled by promoters, a comprehensive
and clearer understanding of the responsibilities of the Independent Directors is to be found and
the same time steps for the empowerment of the position should also be taken.

26
JAY LORSCH & COLIN B., BACK TO THE DRAWING BOARD: DESIGNING CORPORATE BOARDS
FOR A COMPLEX WORLD (Harvard Business Press, 2004)

10
11
 BIBLIOGRAPHY

Books

1. Dr. G.K. Kapoor & Sanjay Dhamija, Company Law, (20th ed., 2017).
2. Dr. N. V. Paranjape, Company Law, (7th ed., 2016).
3. V. Sithapathy, Corporate Governance, (1st ed., 2006).
4. A. K. Majumdar & Dr. G. K. Kapoor, Company Law, (13th ed., 2010).
5. Avtar Singh, Introduction to Company Law,(11th ed, 2014)

Websites

1. www.vccircle.com/500/news/the-legal-implications-rajus-confession - 47k -
2. www.uslaw.com/law_blogs/?item=342048 –
3. blogs.ibibo.com/danendra12012009/can-you-suggest-ways-to-reform-and-
rejuvenatesatyam –
4. www.ibtimes.co.in/articles/20090131/satyam-receives-boost-from-govt-legal-immunity-
granted-present-board_all.htm
5. www.expressindia.com/latest-news/Satyam-scam-Raju-traceless-WB-image-
suffers/408297/ -
6. Vijaya Batth, Dr. Bhagirathi Nayak, Dr. Pratima Sarangi. (2016). Role of Independent
Directors in the Changing Business Scenario in India. Retrieved from
http://www.ijsrm.in/v4-i2/2%20ijsrm.pdf
7. Ravi Thakur, Post Satyam Case: A Study of impact on role of independent
directors.http://www.internationalseminar.org/XIII_AIS/TS%201%20(B)/15.%20Mr.
%20Ravi%20Thakur.pdf

12