DOI: 10.5176/2251-3809_LRPP15.56

Authors: Jaya Mathew and Ms. Warada Bhagwat

India, one of the most developing economies in the world owes its success to liberalization policies of 1990s and the amendments made thereafter. The post liberalization period has seen a tremendous growth in India’s corporate sector with lakhs of companies emerging and running successfully. [1]

According to Ministry of Corporate Affairs, the total number of registered companies in India stood at 13, 94,819 in March 2014[2]. There are about 11,235companies listed in RSE while the number of companies listed on BSE is 5,626[3]. The rest are unlisted companies.

These numbers prove that Indian companies have increasingly been able to access newer and larger markets around the world. The reason is that India has become one of the fastest emerging nations to have aligned itself with the international trends in Corporate Governance. [4]
Corporate Governance as per the experts at the Organization of Economic Co-Operation and Development (OECD) is “the system by which business corporations are directed and controlled”. According to them, “the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the Board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs” .By doing this, it provides the structure through which the company objectives are set, and also provides the means of attaining those objectives and monitoring performance. [5]

For a long time in India since Independence, there was hardly any corporate governance practiced as large number of industries thrived on unethical practices and showed less regard for the human and organizational values while dealing with their shareholders, employees and other shareholders. The reasons being, closed economy, sheltered market, limited access to global business, lack of competitive spirit and an inefficient regulatory framework.[6]Apart from those reasons, the issues in corporate governance in the Indian context also arise due to (a) “ownership structure in companies”, (b) “failure of boards”, (c) “accounting practices and transparency”. [7]

With a string of scams and corporate frauds emerging in the post liberalization period, there was total loss of investor confidence in the companies. In order to overcome this, the corporate governance movement began in 1997 with a voluntary code framed by the Confederation of Indian Industry (CII). The next 3 years saw the voluntary adoption of this code by 30 large listed companies that accounted for 25 per cent of India’s market capitalization. [8] This was followed by a series of committee recommendations which were set up by the Securities and Exchange Board of India (SEBI) and Government of India.
In order to study corporate governance practices in India and suggest measures for improvement based on what has globally recognized as “best practices”, three committees were constituted. These three committees- the Securities and Exchange Board of India (SEBI) -appointed Kumar Mangalam Birla Committee (1999), the government-appointed Naresh Chandra Committee (2002) and the Securities and Exchange Board of India’s Narayana Murthy committee (2003) recommended a set of practices to be embedded in Indian corporate structure. [9]

The origin of Independent Directors under current law regime can be attributed to the recommendations of these three committees. Further to these proposals, the term Independent Director was introduced for the first time when Securities and Exchange Board of India (SEBI) incorporated clause 49 of the Listing Agreement. [10]

The institution was set up in order to curb the fraudulent practices that were leading to loss of investor capital and confidence. [11] Also, Independent Directors could provide disinterested advice and an external point of view to a firm in a competitive market. Further they can bring specialist knowledge and expertise and open doors to influence networks. [12] These liabilities of Independent Director could help firm to have a competitive edge and conduct business with sound corporate governance.

In 2009, the ministry of corporate affairs, India proposed “Corporate Governance Voluntary Guidelines 2009”. The endeavor of these guidelines was to administer the activities of Corporate Sector and the Companies Act. These guidelines suggest means to improve corporate governance standards and practices as well as focus on the independence of Independent Directors. The key provisions of guidelines include establishment of nomination committee comprising majority of Independent Director and an independent chairman, posting of the certificate of independence on company’s website, issuance of formal letter of appointment specifying the roles and responsibilities of Independent Directors and Non- Executive Directors, autonomy to Independent Directors to interact with company’s management as when they deem it important, access to requisite information and additional resources by Independent Directors and, provision of reasonable and sufficient remuneration to attract, retain and motivate directors. [13]

Companies Act, 2013[14], Companies (Appointment and Qualification of Directors) Rules, 2014[15], SEBI Listing Agreement [16] set out provisions regarding Independent Directors, their qualifications, tenure, office and liabilities .
As per Companies Act, 2013[17] Independent Director is a director other than managing director, whole time director or nominee director. In the opinion of the Board, he is a person of integrity and possesses relevant expertise and experience [18]. A person who is a promoter of the company, is related to promoter or director of the company or its holding company or subsidiary company or associate company, has pecuniary relationship with the company or its holding company or subsidiary company or associate company or their promoters or directors during the current financial year and two preceding financial year cannot be an Independent Director [19]. An Independent Director shall not be entitled to any stock option [20]. However he may receive remuneration by way of fee, reimbursement of expenses for participation in the board and profit related commission as may be approved by the members [21].An Independent Director holds office for a term of five years and also eligible for a second term by passing a special resolution[22]
Clause 49 of Listing agreement [23] requires the Independent Director to periodically review legal compliance reports prepared by the company and no defence shall be permitted that the independent Director was unaware of this responsibility in case of any proceedings against him in connection with the affairs of the company[24].
The Act prescribes a Code of Conduct for Independent Directors [25] which is a guide to professional conduct for Independent Directors. The code urges the Independent Directors to refrain from actions that would make an Independent Director loose his independence [26].The duties include constructive attendance in all board meetings, reporting unethical practices, fraud and violation of law [27].
In short, the present legal framework in India empowers the Independent Directors such that they can assist in safeguarding the legitimate interest of the company and its stakeholders.

Keywords: Independent Directors, Corporate Governance, Corporate Law

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