Board Independence

This article has been written by Sonali Srivastava. Sonali is currently a third-year student in National Law University Odisha.

India, see concentrated shareholdings in companies majorly.  The fact that directors are under direct influence of controlling shareholders leads to scams and prevent any foreign investments in company.  To prevent increased skepticism about independence of directors and to increase credibility and reputation of Indian Companies in International Market lead to enhancement of corporate governance norm in Clause 49 of listing agreement, SEBI LODR Regulations and in Companies Act 2013. Section 149 of Companies Act, defines the role, responsibilities and liabilities of Independent Directors. Clause 49, requirement that public listed companies board should at least consists of one third of independent director and if chairman of board is executive or promoter or any person related to him, than half of the board must consist of independent Director.

Insider model shows controlling shareholders directly influence the election of Independent Director. Recent changes lead to establishment of Nomination and remuneration committee which is going to appoint all directors now. The interesting condition put forth is that majority in nomination committee will be Independent directors. Functions of committee are to set criteria for determining qualifications required to be a director, identify and recommend deserving candidate and also to evaluate director.  This is a major step towards strengthening of board independence concept in India.

However some shortcomings in the new regime for independent director appointment is that again controlling shareholders will only appoint the members which give rise to same concern regarding board independence.  If we suppose that there is no influence of controlling shareholder, eventually the names nominated by the committee will be finalized by the majority again.  Therefore it can say that independence is peripheral and reforms failed to provide solution for the agency problems existing in Indian Companies.

Moreover, whole appointment and removal game is in hand of majority as it requires three fourth majority to take any decision in this respect.  As we seen movement from shareholder to stakeholder theory, independent director might confront conflict of interest between controlling shareholder and other stakeholders or minority shareholder. For enforcement of stakeholder’s interest, no right or remedy has been provided to them in recent reforms. This in a way again hinder the growth as it give independent director indirect discretion to his choice as to whose interest he has to protect.

Talking about the liabilities of Independent Director as provided in Companies Act, 2013, it suggest that monitoring the affairs of the company is regarded as primary function of independent director.  The shareholders has been given power to bring restraint order like injunction order and right to claim damages/ compensation from director for breaching of his duties  and for criminal breach, punishment like imprisonment and other penalties are imposed.

 Companies Act, provides for Class Action under Section 254 for all fraudulent and wrongful activities committed by directors.  It also laid to establishment of National Company law Tribunal for effective and speedy disposal of cases. Various reforms done shows greater liabilities and burden is imposed on shoulder of Independent Director by way of severe penalties. No reforms provide potential solution regarding agency problem and other difficulties which will be raised during implementation of these norms.

No doubt reforms bring higher penalty and stringent laws to regulate corporate governance in India. However such norms may in a way will take away deserving candidates capable of regulating board Independence in Companies. In order to achieve Ultimate motive of regulations, I suggest we should adopt such a voting which exclude such shareholders having interest in transaction and thereby solving agency problem to an extent. So although board independence plays a significant role in corporate governance, yet much is required to learn about the concept.

The December book bucket

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