Independent Director: Know your Roles, Responsibilities and Duties

 Recently, the Hon’ble Supreme Court in case (Writ Petition(s)(Civil) No(s). 744/2017) related to  Jaiprakash Associates Ltd. in one of the orders (22^nd Nov., 2017) directed –

“(d) Neither the independent directors nor the promoter directors shall alienate their personal properties or assets in any manner, and if they do so, they will not only be liable for criminal prosecution but contempt of the Court.”

Sometimes, Independent Directors are treated in the same manner like Promoter Directors.  In the present day scenario, role of an Independent Director is becoming very critical and they carry a huge responsibility to protect the interest of the stakeholders of the company.  In fact, an Independent Director  is an agent of Stakeholders (Principal) as they can’t manage day to day affairs of the company.  They play a critical role in implementing good corporate governance practices in companies as the stakeholders are increasingly relying on them to deliver on their responsibilities to enhance the value of enterprise. 

The terms of appointment of Interdependent Director is based on the legal framework and they are accountable and responsible under the laws – the Companies Act, 2013 and under the Securities And Exchange Board Of India (Listing Obligations And Disclosure Requirements) Regulations, 2015 as modified from time to time. 

The Companies Act 2013 - Role and duties of independent directors:

Pursuant to section 149(8) and Schedule IV of Companies Act 2013 –

I. Guidelines of professional conduct:

An independent director shall:

1.            uphold ethical standards of integrity and probity;

2.            act objectively and constructively while exercising his duties;

3.            exercise his responsibilities in a bona fide manner in the interest of the company;

4.            devote  sufficient time and attention to his professional obligations for informed and

balanced decision making;

5.            not allow any extraneous considerations that will vitiate his exercise of objective

independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;

6.            not abuse his position to the detriment of the company or its shareholders or for the

purpose of gaining direct or indirect personal advantage or advantage for any associated person;

7.            refrain from any action that would lead to loss of his independence;

8.            where circumstances arise which make an independent director lose his independence,

the independent director must immediately inform the Board accordingly;

9.            assist the company in implementing the best corporate governance practices.

II. Role and functions:

The independent directors shall:

1.            help in bringing an independent judgment to bear on the Board’s deliberations

especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;

2.            bring an objective view in the evaluation of the performance of board and management;

3.            scrutinize the performance of management in meeting agreed goals and objectives and

monitor the reporting of performance;

4.            satisfy themselves on the integrity of financial information and that financial controls

and the systems of risk management are robust and defensible;

5.            safeguard the interests of all stakeholders, particularly the minority shareholders;

6.            balance the conflicting interest of the stakeholders;

7.            determine appropriate levels of remuneration of executive directors, key managerial

personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;

8.            moderate and arbitrate in the interest of the company as a whole, in situations of

conflict between management and shareholder’s interest.

 III. Duties :

The independent directors shall—

1.            undertake appropriate induction and regularly update and refresh their skills,

knowledge and familiarity with the company;

2.            seek appropriate clarification or amplification of information and, where necessary, take

and follow appropriate professional advice and opinion of outside experts at the expense of the company;

3.            strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;

4.            participate constructively and actively in the committees of the Board in which they are chairpersons or members;

5.            strive to attend the general meetings of the company;

6.            where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;

7.            keep themselves well informed about the company and the external environment in which it operates;

8.            not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;

9.            pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;

10.          ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;

11.          report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;

12.          acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;

13.          not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law

Securities And Exchange Board Of India (Listing Obligations And Disclosure Requirements) Regulations, 2015: Obligations with respect to Independent Directors:

1.                   A person shall not serve as an independent director in more than seven listed entities:

Provided that any person who is serving as a whole time director in any listed entity shall serve as an independent director in not more than three listed entities.

An alternate director cannot be appointed for an independent director w.e.f. October 1, 2018. If any alternate director already appointed, he shall not continue with such appointment.

2.                   The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and rules made there under, in this regard, from time to time.

Tenure of Independent Director

As per Section 149 (10) of Companies Act, 2013

An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.  He shall not hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an Independent director. However, he shall not be during the sais period of 3 years be appointed in or be associated  with the company in any other capacity, either directly or indirectly.

3.                   The independent directors of the listed entity shall hold at least one meeting in a year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting.

4.                   The independent directors in the meeting referred in sub-regulation (3) shall, inter alia-

a)      review the performance of non-independent directors and the board of directors as a whole;

b)      review the performance of the chairperson of the listed entity, taking into account the views of executive directors and non-executive directors;

c)       assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties.

5.                   An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations.

6.                   An independent director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than the immediate next meeting of the board of directors or three months from the date of such vacancy, whichever is later:

Provided that where the listed entity fulfils the requirement of independent directors in its board of directors without filling the vacancy created by such resignation or removal, the requirement of replacement by a new independent director shall not apply.

7.                   The listed entity shall familiarise the independent directors through various programmes about the listed entity, including the following:

a)      nature of the industry in which the listed entity operates;

b)      business model of the listed entity;

c)       roles, rights, responsibilities of independent directors; and

d)      any other relevant information.

SEBI LODR (Amendment) Regulations, 2018 with respect to Obligations with respect to independent directors - New Regulation added25 (8), (9) and (10)-

8.            Every independent director shall, at the first meeting of the board in which he

participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, submit a declaration that he meets the criteria of independence as provided in clause (b) of sub-regulation (1) of regulation 16 and that he is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his ability to discharge his duties with an objective independent judgment and without any external influence.

9.            The board of directors of the listed entity shall take on record the declaration and confirmation submitted by the independent director under sub-regulation (8) after undertaking due assessment of the veracity of the same.

10.          Obtaining Directors and Officers insurance (‘D and O insurance’) for all their

independent directors of such quantum and for such risks as may be determined by its board of directors. This is effective from October 1, 2018 by top 500 listed entities.

Independent Directors have to act in a very focused manner which safeguard the interest of the stakeholders – shareholders, lenders, customers, employees and vendors.   They need to work on fundamental principles keeping highest standard of functioning like -

·         integrity & probity

·         professional objectivity

·         professional competence

·         professional due diligence

·         active participation

·         confidentiality & secrecy

·         futuristic understanding