Independent Directors - Recent changes and trends

Since long, the position of the Independent Directors in Indian companies has been baffling.  Over the years, various changes in the Companies Act and Rules have only increased the confusion as on one hand the legislations have aimed at increasing the importance of Independent Directors in the Company; at the same time, various limitations and restrictions result in projecting Independent Directors as a fifth wheeler on the Board of Directors. 

 Apart from the already existing guidelines under Section 149 of the Companies Act 2013 (Act No. 18 of 2013), the Companies (Amendment) Act 2017 (Act No. 1 of 2018) introduced slight changes with respect to the Independent Directors as follows:

-                As opposed to the Companies Act 2013, wherein the Independent Director was required to reside in India for a period of not less than 182 days in India in the previous calendar year, the Amendment Act provides that this period of residence has to be followed during the financial year[1];

-                The Amendment Act relaxes provisions with respect to pecuniary interest of an Independent Director in the Company by permitting such remuneration as an independent director must receive[2];

-                The Section goes on to substitute the previous provision with more detailed guidelines with respect to the fiduciary standing of the independent directors in terms of laying down express provisions surrounding relatives of the Independent Director[3];

Similarly, the Companies (Appointment and Qualification of Directors) Rules, 2014 also provide for various rules and regulations which beyond laying down the duties and qualifications of the Independent Director under Schedule IV[4] don’t provide guidelines on oppression and harassment against Independent Directors. The next section of this Article will be dealing with recent changes on the autonomy of Independent Directors over the Past years and where will it lead to in future.

Tracking recent developments

2017 was a breath of fresh air for the Independent Directors Community. The Uday Kotak Committee composed of around 21 members came up with about 80 exhaustive recommendations on corporate governance which also included recommendations regarding Independent Directors. These recommendations were presented to the Securities Exchange Board of India (SEBI).  

With respect to the Independent Directors, eligibility rules have been made stricter so as to prevent Companies from hoarding fiduciary members on the board. Moreover the recommendations sought to make the role of Independent Directors more inclusive by making it compulsory to include independent directors in the nomination and remuneration committee. From the above discussion it is quite clear that the Committee was focused at making Independent Directors as the Black Horse in the race to corporate governance and clean transactions. 

 Following these recommendations, the Indian Government has recently by way of the Companies (Amendment) Bill, 2020 (Bill No. 88 of 2020) by way of the Companies (Amendment) Bill, 2020 (Bill No. 88 of 2020) proposed to introduce fresh changes. The Bill was presented in Lok on 17th March 2020. The Bill has few reflections with respect to Independent Directors as follows:

-                The Section 149(9) has a proviso which lays down that the Independent director may receive remuneration even if a company has no profits or inadequate profits;

-                Thus if a company fails to make profits during a financial year, an independent director shall be paid remuneration in accordance with Schedule V of the Act

Earlier before this Bill was introduced, certain changes were introduced by the means of Companies (Appointment and Qualification of Directors) Amendment Rules, 2020 by the Ministry of Corporate Affairs in a notification dated 28th February, 2020 which reflected on the concept of Data Bank of independent directors.

It is interesting to note that among all these key changes the only better part is that the role of Independent Directors will be improved but there are still many loopholes which we discuss hereafter.

 Despite several amendments to the Companies Act over the past years, it is unfortunate that there still exist various problems with respect to Independent Directors as follows:

 1.            Stock Options and Remuneration

Section 149(9) of the Companies Act 2013 provides that apart from remuneration by way of fee as given under Section 197 & 198 of the Act, the Independent Directors won’t get any stock options. This is where the problem arises. In the past it has been furiously debated whether to provide stock options to the Independent Directors or not as it might lead to fraudulent activities. However in 2009, the Naresh Chandra Committee[5] assigned a task force which came out with a report that dealt with various issues related to Non-Executive Directors and Independent Directors. The Report recommended not to link the compensation to the profits made and to provide a fixed set of stock options to the Independent Directors which is not at all dependent on the profits made by the Company. This strategy worked like a two way sword in the sense that the fixed compensation ensured that the Independent Directors did not meddle in the day to day corporate affairs of the Company and a fixed set of stock options implied that the Independent Directors would be able to represent the rights of shareholder more fairly and thus ensure corporate governance. Based on the above findings, the author is of the view that the Independent Directors must be given a fixed amount of stock options.

2.            Independent Directors as Whistle-blowers

It is pertinent to note that unlike Public Companies, Private Companies in India have an internal mechanism for dealing with whistleblowing which for obvious reasons is not exercised. Thus apart from laying down various roles and responsibilities, concerted efforts must be made to lend the role of watchdogs to the Independent Directors.

3.            Harassment and Oppression of Independent Directors

Unlike the US Stock Exchange Regulatory Body, SEC, SEBI in India does not provide any mechanism to report anonymously about harassment and oppression of Independent directors on the hands of the Company’s Top Management. To date neither the Act and nor the Rules have addressed the issue of harassment and oppression of Independent Directors. It seems as if the various rules with respect to qualifications and duties of an Independent Director is only adding up to the rule books. Many a times whenever any irregularity take place within the corporate governance of the Company Independent Directors are held responsible when in fact they are left out of decision-making in the board on something that resulted in an irregularity. Thus the Author recommends that there must exist some protection for the Independent Directors in such crisis in the form of Directors and Officers (D&O) liability policy which are mandatory as per the Companies Act 2013, but not many companies have actually gone about buying it.

Way ahead

The Companies Act, 2013 and the added amendments have surely invested Independent Directors with greater responsibility to ensure smooth and fair management of Company affairs but is lacking when it comes to the rights of an independent Director against a Company. Though the new amendments do make it possible for the Independent Directors to voice their opinion in the management affairs of a company, at the same time their compensation is not proportional. It would be interesting to see and observe the positive outcomes that can result on implementation of the given recommendations.

Research and inputs by Avni Agarwal, one of our most prolific student researchers

[1] Companies (Amendment) Act 2017, s.149 (3).

[2] Companies (Amendment) Act 2017, s.149 (6)(c).

[3] Companies (Amendment) Act 2017, s.149 (6)(d).

[4] Companies Act 2013.

[5] Report of the Task Force under Naresh Chandra Committee, https://www.mca.gov.in/Ministry/latestnews/Draft_R eport_NareshChandra_CII.pdf.