A.C.A.E.C.orporate.L.aw.s.Virtual.C.onclave - Independent Directors & Corporate Governance Perspectives
This content delves into the significance of independent directors in corporate governance, highlighting their role in mitigating agency problems, protecting shareholder interests, and improving governance standards. It also discusses the evolution of corporate governance practices in India, focusing on initiatives like Clause 49, the Kotak Committee, and various reports aimed at enhancing governance frameworks. The legal framework related to appointment and qualifications of directors, particularly independent directors, under the Companies Act, 2013 is also explored.
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A C A E C orporate L aw s Virtual C onclave Septem ber 16, 2020 IN D E PE N D E N T D IRE C TORS - C A N IL E SH VIK A M SE Y CA NILESH VIKAMSEY
A king can reign only w ith the help of others; one w heel alone does not m ove (a chariot). Therefore, a king should appoint advisors (as councilors and m insters) and listen to their advice. The opinions of advisers shall be sought individually as w ell as together (as a group) - C hanakya CA NILESH VIKAMSEY
3 The institution of Independent D irector w as initiated in U nited States To m itigate the agency problem betw een shareholders and professional m anagers ORIG IN N ecessitated the need of having non-m anagem ent board of directors To check m anagerial excesses Protect the shareholders interest at large. CA NILESH VIKAMSEY
4 C ORPOR A TE G O VE RN A N C E - IN D IA N L A N D SC A PE CA NILESH VIKAMSEY
IN D IA N L A N D SC A PE 5 C onfederation of Indian Industry Introduction of C lause 49 K otak C om m ittee N aresh C handra C om m ittee To im prove standards concerning corporate governance of listed com panies in India R eport on C orporate A udit and G overnance C om m ittee Suggestion on C onstitution of A udit C om m ittee Special initiative on D esirable C orporate G overnance C ode 2001 2001 2003 2003 1999 1999 1996 1996 2000 2000 2002 2002 2017 2017 M urthy C om m ittee A dvisory G roup B irla C om m ittee To im prove governance standard R eport on C orporate G overnance: Standing C om m ittee on International Financial Standards and C ode R eport of the C om m ittee) on C orporate G overnance R ole of Independent D irectors R isk M anagem ent D irector C om pensation C orporate governance of directors of banks and financial institution C odes of C onduct CA NILESH VIKAMSEY
6 C om panies A ct, 2013 Section 2(47), 149, 150, 160 C hapter XI R ules C om panies (A ppointm ent & Q ualification of D irectors) R ules, 2014 as am ended tim e to tim e L E G A L FR A M E W ORK Schedule IV of C om panies A ct, 2013 C ode for Independent D irectors SE B I (L OD R ) R egulations, 2015 CA NILESH VIKAMSEY
RE Q U IRE M E N T OF L A W 7 Classes of C om panies requiring Independent D irectors on their B oards E very L isted P ublic C om pany listed on B SE / N SE / other Stock E xchanges P ublic C om panies having paid up capital of M ore than IN R 10 C rores or m ore P ublic C om panies having turnover of M ore than IN R 100 C rores P ublic C om panies having aggregate outstanding loans, debentures, and deposits exceeding IN R 50 C rores CA NILESH VIKAMSEY
RE Q U IRE M E N T OF L A W 8 N um ber of Independent D irectors C om panies A ct, 2013 SE B I L OD R C hairm an is E xecutive D irector C hairm an is N on-E xecutive D irector L isted P ublic C om panies Specified C om panies A t least 1/3 Total D irectors 1/3 of A t least 2 2 D irectors A t least 1/2 Total D irectors 1/2 of A t least 1/3 Total D irectors 1/3 of CA NILESH VIKAMSEY
C OM M ITTE E S & M E E TIN G S 9 R ole of ID in N om ination & R em uneration C om m ittee R isk M anagem ent C om m ittee Stakeholders R elationship C om m ittee ID M eeting C SR C om m ittee B oard M eeting A udit C om m ittee C redit C om m ittee CA NILESH VIKAMSEY
H O W M A N Y D IRE C TORS C OM PL Y TH E PR O VISION S ? 10 L ISTE D E N TITY U N L ISTE D E N TITY 1298, 20% 1825, 24% 5778, 76% 5268, 80% com plied D efault Com plied D efault A pprox. 20% of D irectors not in com pliance w ith the law for L isted E ntity A pprox. 24% of D irectors not in com pliance w ith the law for U nlisted E ntity Total N o. of P articipants: 6566 Total N o. of P articipants: 7603 Source: R esearch R eport by Indian Institute of C orporate A ffairs CA NILESH VIKAMSEY
11 D E FIN IN G TH E ID CA NILESH VIKAMSEY
W H A T D E FIN E S A N ID ? 12 E xpertise A com bination of subject m atter expertise, industry exposure and past board experiences. Integrity Threshold defined under the C om panies A ct (C A ), 2013 and additionally assessed by the board of directors and self-attested by the ID Independence A ssessed in term s of an ID s relationships w ith the com pany/ prom oters/ m anagem ent. N ot having held relationships (personal, professional, fam ilial) excluded under C A 2013. Independent D irector is defined under section 2(47) read w ith section 149 of the C om panies A ct 2013, as a director other than m anaging director, w hole-tim e director or a nom inee director. R egulation 16 (b) of SE B I (L OD R) R egulations, 2015 defines independent director as non-executive director CA NILESH VIKAMSEY
13 PRE -RE Q U ISTE FOR B E IN G TH E ID CA NILESH VIKAMSEY
Q U A L IFIC A TION 14 L aw and Finance A dm inistration and M anagem ent 01 06 02 RU L E 5 C OM P A N IE S (A PPOIN TM E N T & Q U A L IFIC A TION ) RU L E S C orporate G overnance G overnance C orporate R esearch 05 03 04 Technical Operations or discipline related to com pany business Sales and M arketing CA NILESH VIKAMSEY
PROH IB ITION S 15 SE C TION 149(6) of C om panies A ct, 2013 P rom oter or related to prom oter/director E m ployee or proprietor or a partner A ny legal or a consulting firm that has or had any transaction am ounting to 10% or m ore of the gross turnover of such firm H aving pecuniary relationship (other than rem uneration as ID or transactions exceeding 10% of his total incom e during im m ediately 2 preceding FY or current FY) H olds together w ith his relative 2% or m ore of the total voting pow er of the com pany R elative has or had pecuniary relationship or transaction am ounting to 2% of its turnover or total incom e or IN R 50 L akhs is a C hief E xecutive or director, by w hatever nam e called, of any N PO that receives 25% or m ore of its receipts or that holds 2% or m ore of the total voting pow er of the com pany Is K M P or is or has been em ployee or proposed to be appointed E m ployee or proprietor or a partner - A firm of auditors or com pany secretaries in practice or cost auditors A ll the criteria need to be seen from the standpoint of com pany, its holding, its subsidiary or its associate CA NILESH VIKAMSEY
D OE S C OM P A N IE S A C T E N A B L E S YOU TO D ISC H A RG E YOU R D U TIE S E FFE C TIVE L Y? 16 53% 28% 11% 4% 4% StronglyD isagree Strongly A gree A gree N eutral D isagree . Source: R esearch R eport by Indian Institute of C orporate A ffairs CA NILESH VIKAMSEY
17 U N D E RSTA N D IN G TH E B O A RD CA NILESH VIKAMSEY
TYPE S OF B O A RD 18 B oard M anaged M ost Involved Investor Ow ned Institutional Ow ned Fam ily Ow ned L east Involved CA NILESH VIKAMSEY
TYPE S OF B O A RD M ost Involved Operating B oard M akes K ey D ecisions Intervening B oard Intense involvem ent in K ey D ecision E ngaged B oard Serves as C E O P artner C ertifying B oard E m phasises the C redibility L east Involved P assive B oard- Traditional Type CA NILESH VIKAMSEY
W H A T IS YOU R OPIN ION ON TH E A PPL IC A B L E L A W ON ID ? 20 4 4 % % N egative 31 31% % P ositive 65 65 % % N eeds Im provem ent Source: R esearch R eport by Indian Institute of C orporate A ffairs CA NILESH VIKAMSEY
21 A PPOIN TM E N T CA NILESH VIKAMSEY
A PPOIN TM E N T PROC E D U RE S 22 N RC to form ulate criteria for determ ining qualifications & attributes for selection of director; B oard to approve policy Selection of ID based on expertise by the director and as per the approved policy P assing of Ordinary R esolution at A nnual G eneral M eeting Issuance of a Form al L etter of A ppointm ent to ID , containing term s, rem uneration, code of ethics, etc. D isclosing the P rofile of ID on the w ebsite of com pany and the stock exchange Subm ission of L etter of A ppointm ent to the Stock E xchanges ` CA NILESH VIKAMSEY
D E C L A R A TION B Y ID 23 SE C TION 149(7) of C om panies A ct, 2013 E very independent director shall give a declaration that he m eets the criteria of independence as provided in the definition Section 149 (6), (a) A t the first board m eeting (b) In every first board m eeting of every financial year (c) in case of any change w hich m ay affect his status as ID CA NILESH VIKAMSEY
24 C OD E FOR ID SC H E D U L E V CA NILESH VIKAMSEY
C OD E - G U ID E TO PROFE SSION A L C ON D U C T 25 G uidelines of professional conduct R oles & Functions D uties M anner of appointm ent R e-appointm ent R esignation or rem oval Separate M eeting E valuation M echanism CA NILESH VIKAMSEY
PROFE SSION A L C ON D U C T 26 U phold ethical standards of integrity and probity; A ct objectively and constructively w hile exercising his duties; E xercise his responsibilities in a bona fide m anner in the interest of the com pany; D evote sufficient tim e and attention to his professional obligations for inform ed and balanced decision m aking; N ot allow any extraneous considerations that w ill vitiate his exercise of objective independent judgm ent in the param ount interest of the com pany, w hile concurring in or dissenting from the collective judgm ent of the B oard in its decision m aking; N ot abuse his position to the detrim ent of the com pany or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person; R efrain from any action that w ould lead to loss of his independence; W here circum stances arise w hich m ake an independent director lose his independence, the independent director m ust im m ediately inform the B oard accordingly; A ssist the com pany in im plem enting the best corporate governance practices. CA NILESH VIKAMSEY
ROL E & FU N C TION 27 B ringing an independent judgm ent to bear on the B oard s deliberations especially on issues of strategy, perform ance, risk m anagem ent, resources, key appointm ents and standards of conduct; bring an objective view in the evaluation of the perform ance of board and m anagem ent; scrutinize the perform ance of m anagem ent in m eeting agreed goals and objectives and m onitor the reporting of perform ance; satisfy them selves on the integrity of financial inform ation and that financial controls and the system s of risk m anagem ent are robust and defensible; safeguard the interests of all stakeholders, particularly the m inority shareholders; balance the conflicting interest of the stakeholders; determ ine appropriate levels of rem uneration of E D s, K M P and senior m anagem ent and have a prim e role in appointing and w here necessary recom m end rem oval of E D s, K M P and senior m anagem ent; m oderate and arbitrate in the interest of the com pany, in situations of conflict betw een m anagem ent and shareholder s interest. CA NILESH VIKAMSEY
ROL E S E XPE C TA TION FROM STA K E H OL D E RS 28 ROL E S E XPE C TE D PROM OTE RS A N D M A N A G E M E N T STR A TE G IC A D VISOR S leading to overall m axim ization of overall firm value SU PE R W A TC H -D OG of P rom oters & m anagem ent on behalf of stakeholders SH A RE H OL D E RS CA NILESH VIKAMSEY
ROL E OF IN D E PE N D E N T D IRE C TOR IN D IG ITA L A G E 29 U se of new technologies such as A rtificial intelligence (A I), blockchain, Internet of Things, and R obotic process autom ation (RP A ) pursuing digital transform ation to reim agine solutions to existing business challenges Traditional firm s, regardless of size, recognize the potential for disruption from technology giants and digital startups and the resulting threat threat of of value value m igration m igration. N ew digital start ups are rising custom er expectation and setting a new standard for w hat good looks like. P rinciples to help directors for navigate the com plexities of digital transform ation and new technologies: i. A pproach as strategic im perative ii.D evelop learning and developm ent goals iii.A lignm ent of board structure and com position to reflect grow ing significance of technology iv.D em anding frequent and progressive reporting on technology related initiative v.P eriodic assessm ent of the organization leadership, talent and culture-readiness for technological change
D U TIE S 30 R egularly update and refresh their skills, know ledge and fam iliarity w ith the com pany; Seek appropriate clarification or am plification of inform ation and, w here necessary, Strive to attend all m eetings of the B oard of D irectors and of the B oard com m ittees of w hich he is a m em ber; Participate constructively and actively in the com m ittees of the B oard in w hich they are chairpersons or m em bers; Strive to attend the general m eetings of the com pany; W here they have concerns about the running of the com pany or a proposed action, ensure that these are addressed by the B oard K eep them selves w ell inform ed about the com pany and the external environm ent in w hich it operates; N ot to unfairly obstruct the functioning of an otherw ise proper B oard or com m ittee of the B oard; Pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions R eport concerns about unethical behavior, actual or suspected fraud or violation of the com pany s code of conduct or ethics policy; A ssist in protecting the legitim ate interests of the com pany, shareholders and its em ployees; N ot disclose confidential inform ation CA NILESH VIKAMSEY
D U TIE S TO W A RD S STA K E H OL D E RS Shareholders E m ployee 01 E nvironm ent 08 02 Suppliers 07 03 G overnm ent 06 04 C ustom ers Society 05 L enders CA NILESH VIKAMSEY
H O W D O YOU G E T TH E PROPOS A L TO JOIN TH E C OM P A N Y A S ID ? 32 H ow do you get proposal to join the C om pany as ID Referral 51 D irectly by C om pany 52 From Prom oter 31 From D irectors/Senior O fficer 37 Recom m ended by friend/colleague 11 A dvertisem ents 5 N om inations Source: R esearch R eport by Indian Institute of C orporate A ffairs CA NILESH VIKAMSEY
33 FIN A N C IA L M A N A G E M E N T CA NILESH VIKAMSEY
FIN A N C IA L M A N A G E M E N T 34 Tracking financial perform ance and position. A nnual financial report and dividend. A nnual business plan, operating budgets, budgetary control. Investm ent decisions. Financing decisions. Financial and G overnance strategies. CA NILESH VIKAMSEY
35 D Os & D ON Ts CA NILESH VIKAMSEY
D OS & D ON TS B e Silent, calm and patient D o no interrupt unless specifically asked. B e aw are of contem porary issues (IL &FS , D H FL , PN B , N irav M odi, Satyam etc.) D o not use cellphones and do not have side conversations R ead agenda for effective participation and outcom e of the m eeting D o not discuss B oard proceedings in public U nderstand background of other directors before the first m eeting Ignoring W histle-blow er C om pliant B e alw ays Vigilant H iding from debate CA NILESH VIKAMSEY
A N IM PORTA N T ON E - SE P A R A TE M E E TIN G OF ID s 37 R egulation 25 of SE B I (L OD R ) R egulations, 2015 (A pplicable in case of listed com panies) ID s shall hold m eeting once in a year w ithout the presence of non-independent directors and m em bers and all the ID s shall strive to be present A genda for the aforesaid m eeting shall be :- R eview of P erform ance of N on-Independent D irectors R eview of P erform ance of the C hairm an A ssess the quality, quantity & tim eliness of flow of inform ation betw een the m anagem ent & board of directors CA NILESH VIKAMSEY
38 L IA B IL ITIE S FOR ID s CA NILESH VIKAMSEY
W H E N IS ID L IA B L E FOR N ON -C OM PL IA N C E ? 39 In accordance w ith Section 149(12) of C om panies A ct, 2013 Independent D irector shall be held liable only in respect of such acts of om ission or com m ission by com pany Occurred w ith his know ledge A ttributable through board process W ith his consent or connivance CA NILESH VIKAMSEY
W H E TH E R ID IS L IA B L E FOR L IA B IL ITIE S OF TH E C OM P A N Y ? 40 N A TU RE OF L IA B IL ITY RE M A RK S B orrow ed Funds Yes (if P ersonal G uarantee is given) C om m ercial L iabilities N o C ontingent L iabilities N o L egal/C om pliance L iabilities N o C rim inal L iabilities Yes (if involved directly/indirectly) CA NILESH VIKAMSEY
W H E TH E R ID IS L IA B L E FOR L IA B IL ITIE S OF TH E C OM P A N Y ? 41 In determ ining liability, every independent director is personally accountable tow ards due discharge of her/his responsibilities. The liability for violation of law s is contingent upon tw o tests Substantive A ssessm ent: W hether an Independent D irector is at default, by active association? D em onstrative A ssessm ent: If an Independent D irector has effectively discharged her/his duties essentially a test of diligence and good faith The substantive liability w ould w eigh upon an ID if w as party to the default or w as in know ledge of its occurrence (gained in accordance w ith board process) or had consented/ connived in its decision-m aking process. CA NILESH VIKAMSEY
W H E TH E R ID IS L IA B L E FOR L IA B IL ITIE S OF TH E C OM P A N Y ? 42 Officer w ho is in default [Section 2(60), C2013] includes any person on w hose advice, directions, or instructions the B oard of D irectors of the com pany is accustom ed to acting. It also includes every director w ho is aware of a contravention by virtue of the receipt by her/him of any proceedings of the B oard or participation in such proceedings w ithout objecting to the sam e, or w here such contravention had taken place w ith her/his consent or connivance. The liability on an ID w ill be deem ed established if as a m em ber of a B oard C om m ittee (A udit, N om ination & R em uneration C om m ittee, CSR, etc.) they provide to the B oard of D irectors, advice/ recom m endation w ith respect to an action w hich is illegal. The liability can even arise w hen an ID is aw are of an illegality, in w hich case it needs to be established if the ID w as aw are of the contravention taking place. B reach of com pany law generally entails civil and crim inal liabilities under a num ber of sections including punitive action under section 447, C A 2013 (defining fraud) w hich provides for im prisonm ent from 6 m onths to 10 years and a fine up to the am ount of fraud to a m axim um of three tim es the am ount under question for fraud or false disclosure in any returns, report, financial statem ent, or prospectus. CA NILESH VIKAMSEY
W H E TH E R ID IS L IA B L E FOR L IA B IL ITIE S OF TH E C OM P A N Y ? 43 The concept of B usiness Judgm ent R ule , , as em bodied in the safe harbor provisions for independent directors under Indian law s, is yet to be tested in Indian courts. A s held by the D elaw are court in A ronson v. L ew is, 473 A .2d 805, 812 (D el. 1984) to avail im m unity under B JR: directors have a duty to inform them selves of all m aterial inform ation reasonably available to them . the decision m ust have been taken in good faith inform ed business decisions. The director m ust satisfy the stricter standard of entire fairness . CA NILESH VIKAMSEY
IN V OK IN G S A FE H A RB OU R PRO VISION S 44 W hen can an ID invoke safe harbor provisions seeking im m unity from w rongful acts of om ission or com m ission Section 149(12), C A 2013: W as not aw are of essential facts and circum stances leading to the illegal decision but had through legitim ate m eans (attributable through B oard process) tried to access inform ation regarding the sam e. D id not give consent to the decision or had not connived. This m ust be supported through dissenting view s recorded in board m inutes, in case the ID w as aw are of the decision being taken. H ad acted in due diligence. (in w hich case an ID m ust dem onstrate that he had acted w ith due diligence)
D IRE C TORS A N D OFFIC E RS L IA B IL ITY IN SU R A N C E 45 If the Independent D irector is found liable, either actively or passively, for any errors w hich have caused financial grief to any stakeholder, they w ill be held responsible. Independent D irectors m ay have to contend w ith legal im plications involving considerable financial expenses for their defense due to the sensitive nature of their w ork. D & O L IA B IL TY IN SU R A N C E POL IC Y can com e to the rescue. A D irectors and Officers L iability P olicy covers the financial liability incurred by Independent D irectors for any m istakes that they com m it in the discharge of their duties. The policy covers: L itigation costs Settlem ent paid to third parties w ho filed the law suit P ersonal liability suffered by Independent D irectors E xpenses on regulatory or adm inistrative inquiries launched on Independent D irectors E xpenses incurred on public relations activities CA NILESH VIKAMSEY
46 TIM E D E V OTE D TO TH E C OM P A N Y W H E N YOU R E Q U IRE A N Y IN FO , W H A T IS TH E RE SPON SE TIM E A s ID A s E D N o. of Respondents 70 32 62 20 12 11 11 28 10 8 3 11 1 4 2 Less than 5 Days 6 - 10 Days 11 - 15 Days 16 - 20 Days More than 20 Days L ess than 200 H ours 201 to 400 H ours 401 to 600 H ours 601 to 800 H ours M ore than 800 H ours Source: R esearch R eport by Indian Institute of C orporate A ffairs CA NILESH VIKAMSEY
47 C H A L L E N G E S F A C E D B Y ID CA NILESH VIKAMSEY
K E Y C H A L L E N G E S 48 P ersonal A uthority Inform ation A sym m etry L ack Of C ultural E nvironm ent L ack Of Transparency Fear Of L egal Scrutiny H uge R esponsibility R eputational R isk Suspected Fraud D evotion Of Tim e/E nergy CA NILESH VIKAMSEY
E M E RG IN G ISSU E S FOR ID s 49 E m erging Issues on the Credibility of ID s: Independence A ssurance the increasing debate, are Independent D irector's truly independent? A re you R eady for the Test ? P roxim ity w ith M anagem ent H ow close are you w ith the m anagem ent? C G m andates Online P roficiency Self A ssessm ent Test R equisite K now ledge are you aw are of the business and industry practices? Financial A ngle H ow do you assess the Financial Statem ents? B eing C om pliant are you com pliant of all law s and regulations, are you updated? CA NILESH VIKAMSEY
50 RE M U N E R A TION CA NILESH VIKAMSEY
