independent directors

SEBI press release dated 30th September, 2022 wherein the SEBI Board decided to introduce a new optional provision in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(“LODR Regulations”) for appointment of Independent Directors and a related provision for removal of Independent Directors in listed entities.
As per the existing requirement under the LODR Regulations, appointment, reappointment or removal of Independent Directors is to be made through a special resolution.

An alternative method for the appointment and removal of Independent Directors appointed for the first term has been approved by the Board. Under the alternate mechanism, if the special resolution for appointment of an Independent Director does not get the requisite majority, then the following
thresholds would be tested:
a) Threshold for Ordinary Resolution
b) Threshold for Majority of minority shareholders
If the resolution crosses the above two thresholds, in the same voting process, then such a resolution for appointment of the Independent Director would be deemed to be approved by shareholders. The same threshold will also be applicable for removal of an Independent Director appointed under this alternate mechanism.

BLOGGERS NOTE:

MCA has also to introduce a similar mechanism in respect of unlisted public limited companies which are not under SEBI purview. Nowadays many public limited companies which are not listed has venture capital/ private equity funding, wherein, at times, the appointment or re-appointment of independent directors becomes a contentious issue.

Secondly, both MCA and SEBI should debate as to what is the need for a special resolution for appointment or re-appointment of independent directors. If it is managing director or whole time director, i can understand, but for an independent director i think its not necessary to have them appointed or re-appointed by a special resolution. An ordinary resolution should suffice.

managerial remuneration

The Ministry of Corporate Affairs, New Delhi has vide its notification dated 18th March, 2021 amended the Schedule V which pertains to conditions of appointment and remuneration payable to managerial person. This schedule V applies specifically where remuneration needs to be paid to managerial person in companies which does not have profits or has inadequate profits.

The amendment has added “other director or directors” to the category of managerial person under this Schedule. Other directors has been defined to mean non-executive directors or independent directors as an explanation.

The remuneration payable to other director(s) in the case of inadequacy of profits has been fixed on the basis of effective capital of the company. For eg. where the effective capital is negative or less than Rs.50 million then maximum Rs.1.2 million can be paid to the other directors.

Similarly the limits have been placed as under:

Where the effective capital is Rs.50 million and above but less than Rs.1 billion – max Rs.1.7 million can be paid to other directors

Where the effective capital is Rs.1 billion and above but less than Rs.2.5 billion – max Rs.2.4 million can be paid to other directors

Where the effective capital is above Rs.2.5 billion – max Rs.2.4 million + 0.01% of the effective capital in excess of Rs.2.5 billion.

Basically this has been done in order to provide some remuneration to independent directors and attract good talent in companies. Presently independent directors and non executive directors are paid a pittance plus there is onerous responsibility cast on them although they are not in the hot seat of management. This will, hopefully, give a fillip to the position of independent directors in India Inc.

Simultaneously the govt. has also amended sections 149 and 197 of the companies act, 2013 to provide for the same.

Copy of the notification can be found at the MCA site. i.e. http://www.mca.gov.in

relaxation for independent directors

MCA has vide its amendment to the Companies (Appointment and Qualification of Directors), Rules, 2014 given relaxation to the independent directors.

First, they are now required to take the proficiency test within two years of his name being included in the data bank of the Institute recognized by the Ministry.

Secondly, exemption from proficiency test is given if somebody has been a Director in certain specified companies for a period of 3 years as on the date of the inclusion of his name in the data bank. Further some more exemptions is given in respect of the categories of companies/ bodies corporate in which the said director was an independent director such as body corporate listed on a foreign stock exchange which is recognized by the FATF, foreign bodies corporate having paid up share capital of USD 2 million or more, or statutory corporations set by a special act by the Parliament or certain designated officers like Directors in certain ministries such as corporate law, finance, heavy industries and public enterprises or Chief General Managers in SEBI, RBI, IRDA, PFRDA and having experience in corporate law matters .

The passing score has also been reduced to 50% from 60% previously.

This is much needed relief for the independent directors,

The notification can be found at the MCA site. i.e. http://www.mca.gov.in

independent directors

The time limit for mandatory registration of independent directors in a special portal for that purpose has been extended again to 30th April, 2020. The registration process itself is not a cumbersome process but the fact that registrations is required is by itself something to ponder about. Why everybody on this earth has to undergo multiple registrations and multiple KYCs at various portals is something that the authorities need to ponder. We are at an age when A.I. is taking over our lives, the very need to have multiple identity nos is redundant.

Section 149 of Companies Act, 2013 – Board of Directors

Section 149 of the Companies Act, 2013 brings out the following changes regarding Board of Directors of a company. 

WOMEN DIRECTORS

1) Every listed  company and every public company having a paid up share capital of Rs.100 crores or more OR turnover of Rs.300 crores or more shall mandatorily appoint one Woman Director. 

Rule 3 of Companies (Appointment & Qualification of Directors) Rules, 2014 states as follows:

Provided that a company, which has been incorporated under the Act and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation:

Second proviso to sub-section (1) of section 149 covers appointment of women directors in specified class of companies. The wording of this proviso to Rule 3 is wrong as it should be “within a period of six months from the date of the commencement of the Act”, not date of incorporation. 

There is no uniformity regarding giving time limits for compliances. Sub-section (5) gives a time of one year for compliance of sub-section (4) which is regarding appointment of independent directors, whereas woman directors have to be appointed within six months of the notification. 

Any intermittent vacancy in the Woman Directors should be filled up immediately but not latter than three months from the date of such vacancy or the next Board meeting whichever is latter. 

All listed companies are required to mandatorily appoint woman directors on their Board. Whether the woman directors have to be carved out of the independent directors quota is not clear as also whether the woman director can be part of the promoters. If the latter is true then we will see a lot of wives, daughters, etc. entering into Board positions. 

There is also no provision regarding a registry of woman directors just like the case of independent directors. 

RESIDENT DIRECTOR

Section 149 (3) provides that there should be at least one Director who should have stayed in India for a period of not less than 182 days during the previous calendar year. 

This provision will hit select companies who have entirely non resident Board of Directors all of whom are stationed abroad. The provision regarding requiring at least one Director to be resident in India is salutary but time limit for compliance should have been given for this sub-section just like sub-section (2) gives one year for compliance of sub-section (1) and sub-section (5) similarly gives one year for compliance of sub-section (4).

 INDEPENDENT DIRECTORS

1) Every listed company shall have at least one third of the total number of directors as independent directors. This is at variance with the listing agreement which specifies different levels of independent directors (i.e. either one third or half) depending upon whether the Chairman is an Executive Director or Non-Executive Director and whether the Non-executive Chairman is a promoter or not. Would it not have been better to have specified that “every listed company shall have independent directors as are specified in listing agreement’ 

2) Every public company having paid up share capital of Rs.10 crores or more OR turnover of Rs.100 crores or more OR aggregate outstanding loans, debentures and deposits exceeding Rs.50 crores are required to appoint TWO independent directors on their Board. 

Existing companies hit by the aforesaid provision have a one year period within which they should comply with the requirement to appoint independent directors on their Board. (Section 149(5))

The intermittent vacancy of independent directors should be filled up within a period of three months from the date of such vacancy or immediate next Board meeting, whichever is latter.

The third proviso to Rule 4(iii) of  Companies (Appointment & Qualification of Directors) Rules, 2014 states that 

where the company ceases to fulfill any of the three conditions i.e. paid up share capital, turnover or outstanding debts, FOR THREE CONSECUTIVE YEARS, then it shall not be required to appoint the independent directors. 

This provision and Rule regarding appointment of independent directors in public companies above certain limits is Huge. 

The detailed criteria for being an independent director is given in sub-section (6), Every independent director shall at the first Board meeting after his appointment and in the first meeting of every financial year or any change in his status as an independent director give a declaration that he meets the criteria of independence as per the sub-section. 

The format of this declaration is unfortunately not given in the Rules. 

The company and the independent directors are required to comply with and abide with the Code of Conduct as enumerated in Schedule IV. 

An independent director cannot be remunerated by way of stock option, but can receive sitting fees and profit related commission, which is required to be approved by the members. 

An independent director can be appointed for a term of 5 consecutive years but can be re-appointed for another term of 5 consecutive years upon approval by members by way of special resolution. After two terms of 5 years each, he has to vacate office but can be considered for appointment as an independent director after a three year hiatus during which period, he should not be associated with the company in any manner. 

The liability of an independent director and also a Non Executive Director not being a promoter or key managerial personnel shall be restricted only to acts which had occurred with his knowledge, attributable to Board processes and with his consent or connivance or where he has not acted diligently. 

Independent directors are not liable to retire by rotation. 

 

 

 

Women Directors and Independent Directors – Companies Act, 2013

The 2nd proviso to section 149(1) of the Companies Act, 2013 states that “such class or classes of company as may be prescribed shall have at least one woman director”

Rule 11.1 in Chapter XI of the Draft Rules states that every listed company shall appoint a woman director within one year from the commencement of the 2nd proviso as above and every other public company having paid up share capital in excess of Rs.100 crores or turnover of Rs.300 crores or more shall appoint a woman director within 3 years from the commencement of the 2nd proviso as above. The words “commencement of the 2nd proviso” as opposed to “commencement of this section” has been written into the Rules probably because government still has second thoughts on the implementation of the provisions regarding mandatory appointment of women directors on the Boards of India Inc. 

Section 149(4) specifies that listed companies shall have one third of its total strength as independent directors and that certain other class or classes of companies as may be specified shall have independent directors as may be specified by the central government. 

Rule 11.2 specifies that public companies having paid up share capital of Rs.100 crores or more or turnover of Rs.300 crores or more or aggregate of loans, debentures, deposits, borrowings of Rs.200 crores should have at least one third of its total strength of the Board as independent directors. This is of course apart from the listed companies’ requirement which has been specified in the Act itself. 

Comparing the provisions of woman director and independent directors on the Boards of companies it is not clear if the woman director is also required to be an independent director, what are the qualifications of a woman director, can she be part of the promoter group. MCA should be more clear on this aspect because it is an important provision and being introduced for the first time in Indian corporate law history. If she is to be considered as part of the promoter group, then it would be better to scrap this provision or not implement it all, because it is going to be a farce with women in the households of the promoter group being routinely given a seat on the Board of Directors and they will virtually not have a say on the affairs of the company. My suggestion would be that woman director should be counted as an independent director if it has to make an impact on the gender representation, women’s role in the Board etc. 

 

Chapter XI – Appointment and qualification of directors – section 149

Chapter XI – Appointment and qualification of directors

 

1)      2^nd Proviso to section 149(1) – certain select companies to have women directors on their Board – these are (i) every listed company, and (ii) every other public company having paid up share capital of Rs.100 crores or more OR turnover of Rs.300 crores or more. In the first case the listed company should appoint woman director within one year from the commencement of the new act and in the second case, they have been given a three years leeway to comply with this section;

2)      The Rule 11.1 gives three years to a public company (other than listed company) “from the commencement of the 2^nd proviso to section 149(1) of the Act” – i don’t understand the meaning of this phrase – “commencement of the 2^nd proviso to section 149(1)” – does each of the provisos commence separately on different dates – i thought the entire section should commence at the same date, if at all the Ministry proposes the torturous process of separately intimating commencement of each sections of the Act, as it was done in the case of Competition Act, 2002;

3)      Women directors is made compulsory for all listed companies whereas even independent directors are not compulsory for all listed companies especially the small listed companies having paid up share capital upto Rs. 3 crores, for which the clause 49 is not made applicable so far;

4)      So the provisions of appointment of women directors on the Board is of far reaching consequence as the number of qualified women directors required by India Inc. Is going to be substantial;

5)      Section 149(3) is very important – it says that every company shall mandatorily have one director who is a resident Indian i.e. who has stayed in India for a period of not less than 182 days – this means that the companies cannot have a fully foreign Board – at least one director should be an Indian. All companies who are having fully foreign Board should take steps to induct at least one director on their Board;

6)      Section 149(4) goes contradictory to the existing listing agreement which gives exemption to the small listed companies from the provisions of clause 49 of the listing agreement thereof – it very clearly and equivocally says that every listed company shall have at least one-third of its total strength as independent directors. So SEBI needs to amend clause 49 to bring it in line with the companies act;

7)      Section 149(6) lays down stringent qualifications for being appointed as an independent director – person of integrity, relevant expertise, experience, not a promoter either now or in the past not only of the company, but also of its subsidiary or associate company, or not related to any of the promoters as above, no pecuniary relationship with any of these three classes of companies or whose relatives don’t have pecuniary relationship above a certain limit, or not a Key Managerial Personnel or an employee (even a peon!!) for the last three financial years or not a partner in any audit firm of CA, CS, CWA, legal consulting firm, or holds together with his relatives 2% or more of the voting power of the company or is a Chief executive of a NGO which receives 25% or more of its receipts from the company or its promoters, directors or holds 2% or more of the voting power of the company. Phew!!

8)      Section 149(7) states that every independent director shall at the first meeting at which he is appointed give a declaration that he qualifies in all the criteria that is given in section 149(6) excepting the part regarding person of integrity, expertise and experience which is required to be under an opinion of the Board;

9)      Section 149(8) – the company and its independent directors are required to abide by Schedule IV which is the Code of Conduct for Independent Directors;

10)   Section 149(9) – independent directors cannot be remunerated by way of stock options, but can receive fee, reimbursement of expenses, profit related commission as may be approved by the members – moot point here is that if the independent directors are going to be remunerated in any form by the company in which he is appointed as an independent director in whatever form the remuneration takes, then how can be retain his independence or how can he be called as an independent director;

11)   Section 149(10) & (11) – independent directors can be appointed for a maximum tenure of two consecutive period of 5 years each, but he can be re-appointed after a three year gap during which period he should not be associated in any form either with the company or its subsidiaries or its associate companies. Therefore technically speaking a young independent director can be appointed for 10 years, then take a 3 year sabbatical, come back for another 10 years and so on unless of course the law is changed further in this respect. I thought maximum tenure of 10 years is sufficient and after that “come-back” provisions after the 3 year gap, should have been avoided;

12)   Section 149(12) is very important and dangerous section for independent directors and also non executive directors – it is regarding liability for frauds committed by the company – the independent directors and NEDs can be held liable only if the fraud occurred with his knowledge, attributable through Board processes and with his consent or connivance or where he has not acted diligently – “attributable to Board processes” is not clear – ingredients of “knowledge, board processes and consent or connivance” should be present in the first instance or sheer lack of awareness on the second instance;