Introduction
An Independent director is generally known as a director in the Board of Directors of incorporated companies who do not have a material or pecuniary relationship with the company or related persons. The need for the independent director arose due to the emerging need of a strong framework of corporate governance in the functioning of the company.
The position of independent director is one of the most counterpoise position for being dominated by managerial board of corporate governance. Their main role in the company is to protect the interest of minority shareholders vis-a-vis the promoters. They also have to handle some important roles which includes maintaining balance in a promoter dominated scenario, improving corporate credibility and government standard, play vital role in risk management functioning as a watch dog in the company. .
In India the concept of independent directors came into limelight with the introduction of concept of corporate governance. The companies act of 1956, did not made any express provision with regard to the independent directors but clause 49 of the listing agreement are required to have a combination of both the executive and non executive directors which specifically figures out that if the non executive director is the chairman of the board than there should be one third of independent directors in the board and if the executive director is the chairman of the then the independent directors should comprises of at least half of the board members. Even the ministry of corporate affairs has made various changes in the Act of 1956 but the corresponding proved to be a failure as there was absence of adequate explanation of the role, duties and liabilities of the independent directors. Thus it was felt that a need for a comprehensive legislation was necessary to update the act of 1956 and make it globally compliant and more meaningful for the purpose of investor protection and consumer interest. The Companies Act, 2013 has codified a number of corporate governance norms besides the listing companies for certain classes of companies which included the appointment of certain persons as Independent Directors which came into effect from 1st August 2014.
The Act made certain provisions relating to Independent Directors by empowering greater power and responsibilities to the Independent Directors in the governance of the company. The purpose behind such codification was the enactment of provisions in regard to appointment of independent directors and the mode of their selection procedure. The act of 2013 differs from clause 49 of the listing agreement in various matters and the requirements are made more stringent. The Companies Act , 2013 has made an explanatory definition on the term “Independent Directors” under section 149(6) of the Act.
The term independent director has also been defined under section 2(47) of the said act. Section 149 defines an independent director as a director who is not a whole time director or a managing director or a nominee director. He must be a person of integrity and should possess all experiences and must be an expert in any field. In the opinion of the board he must not a promoter of the company nor he must be related to any of the promoters or directors in the company. Even it is stated that he should not have any transactions of business or pecuniary relationship with the company. He must resist himself and even his relatives from holding a position in the managerial personnel.
During the financial years he or any of his relatives must not be an employee or a partner or proprietor in the company. The main portion of this section is that he should not be a chief executive or a director of any non profit organization. Independent Directors are generally appointed for a period of five consecutive years. He had also an opportunity of re-appointment by passing of a special resolution by the company. The independent directors should not be subjected to retirement by rotation.
This kind of stability enables them to work fearlessly and efficiently. The Act also emphasizes on the appointment of an independent director as a member and chairperson in various committees. For instance audit committee which shall comprise of minimum three directors, where independent directors should form a majority. The Nomination and Remuneration Committees shall consists of three or more non executive directors, independent directors should not be less than half of the total number of members.
Further a company which consists of a more than one thousand shareholders, debenture holders, deposit holders and any other security holders at any time during a financial year shall constitute a stakeholders relationship consisting of a chairperson who shall be a non executive director. The act of 2013, under Schedule IV requires that the independent directors must meet once in year. The meeting must be held in the absence of the non independent directors and members of management. Independent Directors also has the power to review the performance of both the Board and Non independent directors and as a whole of the company. These measures are effectively helpful in the smooth functioning the board of directors of a company. The independent directors are provided a free atmosphere to perform their functions where they are protected from liability to a greater extent.
The matters which are directly relatable to the independent directors are restricted and limited by the Act to a greater extent. Section 149(12) limits the liability ” only in respects of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes and with his consent or connivance or where he had not acted diligently. The appointment of director is not based on any selection procedure . The selection of independent directors is generally lies in the hands of the owners and promoters of the company. The decisions taken by the promoters may not be in the interest of the small shareholders, and the independent directors must look into the interest of all stakeholders. Therefore a conflict arises in the independent discharge of duities of the independent directors.
No list of positive qualification has been laid for their appointment. It is based on negative prescriptions. As regards to the selection of independent directors, section 150(1) says that independent directors are selected from a data bank maintained by anybody, institute or association containing details of persons as notified by central government . Such persons must have willingness to act as independent directors. Independent directors are allowed to act independently for the independent directors to be successful. Independence has to reviewed regularly as an instrument of good governance.
But inspite of such provisions hindrances exists in the proper and effective performance of their functions. Independent directors are not able to functional efficiently as they are part timer. They generally spends 18-20 hours in a week on board meetings. They have no right to interfere in day to proceedings of the company and are supposed to support the management in getting the delivery of what the objectives of the company are to its shareholders.
Because of such situation the independent directors find it difficult to understand the governance of the company and fail to fulfil its responsibilities and perform the functions. They are not qualified to head committees in the company as they falls short of time. They are not provided with legal protection due to which they have a fear of raising their voices against any arguments in the meetings.
Statement of Problem
Certain new regulations were being brought in force for the effective functions of the independent directors but despite of such mechanisms the present framework of law is unable to meet the objections of corporate governance in relation to independent directors as complete independence is not provided in their functioning and the reasonable eligibility criteria for the post of independent directors is not being fulfilled. So the independence of directors is more a myth than a reality. This study will examine the problems as faced by independent directors.
Firstly, the independent directors are not able to check the controlling shareholders. The promoters had to play a significant role for this purpose even in the presence of independent directors. Secondly, the shareholders of the controlling companies have the power of ownership and the access of information which is one of the main issue faced by the independent directors as they are not being able to exercise their judgement independently. Thirdly, different types of questionarie arise in the mind of the members of the company as to whether the independent director possesses sufficient knowledge, skill and access to play their role efficiently in the development of the company policies. Fourthly, the management doesnot provide sufficient information to the independent directors which leads to the ineffective working of the board. Fifthly, Objectives of the study.
The proposed research work aims the following.
To evaluate whether the appointment of independent directors has played a dominant role in profit orientation of the company. To find out whether the independent directors are independent both during the appointment process and after it To analyze and criticize the existing legal provisions of Independent Directors under the relevant Indian legislations. To recommend necessary steps for improvement in the effective working of Independent Directors Limitations The research will be done with special reference to India only. The research limited its scope to the law relating to laws as applicable in india.
The researcher will particularly focus on the working of independent directors and their adequacy within the provisions of the act The proposed research is purely analytical in nature. The research doesnot include any field data collection or sampling but does include study of various reports and case studies. It also deals with the various issues and challenges faced by the independent directors in their working mechanism. Literature Review As per the researcher knowledge, a comprehensive review of the relevant literature available on the subject domain gives a direction to research work. The review of the past research work helps in identifying the issues and concern relevant to the study.
A thorough study of existing literature in the area of independent directors has been carried out to understand the depth of research problem. The researcher has undergone some books and articles in carrying out the research problem. A complete review of various books, journals , articles and relevant literature has been provided below. Santosh pandey & valdeed ahmed ansari(2015), makes certain reviews on the effective working on independent directors on the board of Indian listed companies and the effect it had on the changes of regulatory reforms .
The study analysis further that the regulatory reforms need strong action is to be taken in the appointment area of independent directors so that the independent directors become a strong pillar of the corporate governance reforms in India as dealt in the companies act,2013 . Shinoy Koshy, Preetha S &Vandana V(2014) made a critical analysis on the concept of independent directors in relation to the listed companies as provided under clause 49 of the listing agreement and the companies act, 1956 inorder to examine the different changes that has been brought into focus by the new companies act, 2013. The article tries to make suggestion that although the new act tries to empower the independent directors with broader roles, greater independence and defined liabilities but the act has limited their functioning capacities on account of being a minority in thee board. Mittal (2011) reviewed that the independent directors has been an important measure towards fostering better corporate governance. the institution of independent directors is an emerging cornerstone in the world.
The paper suggest that there must be increase in the participation of the independent directors in the board room for the stoppage of the effective deterrent to fraud and mismanagement , inequality and unaccountability of decisions and inefficient use of resources. Vijaya Batth, Bhagirathi Nayak & Pratima Sarangi(2016) attempted to examine the ultimate measure if independent director not where they stand in moments of comfort, but where they actually stand should stand at the time of challenges and controversy”. The paper tries to suggest that the independent directors have been with great empowerment by the companies act 2013, in order to ensure that the management and the affairs of the company function smoothly. It is further concluded in the study that every director of the company whether independent or non independent has to play an important role in the functioning of the company and this can only be possible if the whole board functions effectively which will result in the good corporate governance and the minority and majority shareholder will be benefited thereby who has a good corporate image in the market.
Darryl Paul Barretto(2011), attempts to find out the concept of independent directors which had an influencing impact in india and seeks to suggest some major amendments to ensure that the role of independent directors is in consonance with the role envisaged at the time of their election. The article concludes that there must be various changes like preparing training modules for independent directors, prescribing upper limit age for independent directors, creating a self governing body for the independent directors etc. Research Questions Does the present manner of appointment and removal of independent directors jeopardize their independence? Whether the existing law meets the essential requirements of independent directors? Are independent directors inefficient in the working of the company in the absence of their adequate power of intervention ?Whether the minimum technical and professional qualification prescribed for appointment of Independent Directors are sufficient?
Hypothesis An director who is independent from the promoters , technically and professionally competent with a power to intervene in day to day operations will be in a better position to safeguard the interest of all stakeholders. If the independent director has a better understanding and acceptance of the complexsities and uncertainities then they will be more capable to involve in the discussion of the board meetings which will result to better decisions and development of more successful companies. Research Methodology The proposed research work is a Doctrinal i.e. Non- Empirical Research. The researcher has also adopted analytical and comparative methodology. The literature for this study is collected from primary and secondary data. Hence, research work is purely based on the primary data such as from libraries, archives, online databases and various e-learning resources.
The aforesaid research doesnot include any field data or sample collection. Format of citations Harvard’s bluebook 19th ed. has been referenced for the purpose of citations. Tentative Chapters Scheme Introduction Statement of problem Importance of the problem Hypothesis of problem Aims and objectives of research Research methodology Review of literature Introduction of the study area Evolution of the concept of independent Directors Concept of independent directors under Indian law Roles, functions and duties of independent directors Liability of an independent directors Issues and challenges faced by independent directors Conclusion
Conclusion
The new concept of having independent directors was introduced due to the emergence of corporate governance. The evolution of institutions of this concept has come a long way back. The Act of 2013, has made big contribution in the developing notion of corporate governance by appointment of independent directors which will help in leading better governance along with the helping hands for proper functioning in company’s affairs .
The provisions of the Act has assigned them with wide duties, roles, responsibilities and made an elaboration that the primary focus of independent directors should consider on being independent from the promoters. It is also hoped that independent directors will be sincerely able in running the company in a transparent as well as in an efficient manner which will ensure success in implementing high standards of corporate governance. As per Indian context the primary duty of these directors is mainly towards protecting the minority shareholders interests. There are certain accountabilities which have been placed before them. Generally the roles, responsibilities and duties performed by them are much broader and it sometimes result in overwhelming.
There is no such surety about the individual person who are interested and who is willing in taking up such broad responsibilities although when attractive remuneration are not being provided to them. There arises a main issue which is to figure out about certain capabilities of independent directors in managing the company’s affairs in an efficient manner. The necessity however is analyzing main provisions of act of 2013 to bring out whether there occurs any further defect in properly implement ting the programmes of the independent directors. As such the researcher after broad analysis concludes that the title of trustees is given to these independent directors for the purpose of good governance. So, it becomes necessary for evaluating distinct regulations along with the provisions which ensure about contribution from the independent directors in relation to affairs of corporate policies.
Its main purpose lies in seeing whether such directors are confident enough in raising their voices and crashes the old mound of acting as a rubber stamp and indeed working in bringing progress to their company rather than playing an ornamental role.
