Independent Director- Clause 49

Clause 49,was to introduce some basic corporate governance practices in Indian companies It brought in a number of key changes in governance and disclosures (many of which we take for granted today). It specified the minimum number of Independent Directors required on the board of a company. The setting up of an Audit committee, and A Shareholders Grievance committee, among others, were made mandatory as were the Managements Discussion and Analysis (MD&A) section and the Report on Corporate Governance in the Annual Report, and disclosures of fees paid to nonexecutive directors. A limit was placed on the number of committees that a director could serve For the purpose of this clause, the expression independent director shall mean non-executive director of the company who:

A. ID apart from receiving directors remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies. B. He is not related to promoters or management at the board level or at one level below the board; C. He has not been an executive of the company in the immediately preceding three financial years; D. He is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. [This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity.] E. He is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also; and F. He is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.

Amendments Why the need ?

The Satyam imbroglio revealed the tip of the iceberg of corporate misgovernance. Eminent boards with illustrious independent directors proved feeble and ineffective against managements' machinations as more Satyams unravelled around us.

Eminence and fame have played an overwhelming role in the selection of independent directors. There is NO SUBSTITUE FOR COMPETENCE,SUBJECT KNOWLEDGE, BOARD ATTENDANCE , TIME SPENT IN PREP & SERIOUSNESS. Unfortunately, this has been the norm with Indian companies for a long time.

A disingenuous management would be happy to have indifferent and lackadaisical board members.
A charismatic CEO supported by consultants or investment bankers can convince independent directors to follow their writ, unless the directors have followed the trajectory of the company.

A sole dissenting voice in a board where everyone else is eager to clear management's decisions is unlikely to make an impact. Reservations are best voiced in a chorus. Independent directors must work in tandem and discuss board matters with each other.

A strong group of independent directors is a check on management, and can ensure proper control over agencies like auditors and lawye

IDs scarcity is imagined as many firms do not look beyond retired bureaucrats, judges and lobbyists. The so-called diversity is represented by an over-the hill academic

While representation from retired government functionaries is relevant, modern boards should also have thinkers from other fields such as sociology, ethics, accountancy and consumer behaviour.

Amendments As per the Companies Act, one person can be an independent

director on a maximum of 10 public companies, Companie while SEBI in its draft norms had proposed the cap even lower for listed companies. s Act, 2013 an individual can serve as an independent director on a maximum of seven listed companies. The Board also decided that if an individual is a whole-time director in a listed company, he can serve as an independent 7 is the No. director in a maximum of three companies. Also, if one has completed five years or more as an independent director, he will be eligible for just one more term of five years. It also prohibited offering stock options to independent directors, and asked companies to have separate meetings of independent directors and put in place a stakeholders' relationship committee.

Prohibts Stock Options

SELECTION OF INDEPENDENT DIRECTOR (SECTION 150):

An independent director may be selected from a data bank

containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors. The responsibility of exercising due diligence before selecting a person as an independent director shall lie with the company making such appointment. The appointment of independent director shall be approved by the company in general meeting and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director. Further, no person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director.

Selection
Under existing Sebi norms, an ID who resigns or is

removed from the board needs to be replaced by a new ID within 180 days from the day of such resignation or removal. Although the introduction of the new concept of ID under the New Companies Act is a welcome step for corporate governance in India, the nature of compliances which are prescribed for their appointment and the continuous obligations to be adhered during their tenure will prove a critical aspect for their appointment and working as an ID.

Proposals by SEBI
As per a SEBI proposal, detailed disclosures for

resigning as an independent director need to be made public along with the resignation letter through the stock exchanges, are going to come into force beginning October, 2014.

Highly paid Indian IDs

In India, companies give experience more importance while appointing independent directors.

But hefty fees paid to independent directors alone cannot ensure high level of corporate governance.

Role of an Independent Director

Board is the most significant instrument of Corporate Governance, IDs

ensure an Effective and Balanced Board Minority Shareholders look to IDs for providing transperancy As per Clause 49 listing Agreement:

Scrutinize Management Performance Annual financial statements before approval by the board Quarterly financial statements Performance of statutory and internal auditors Adequacy of internal control systems Evaluating Managements decision in respect of employees, creditors, suppliers of major services etc Reasons for defaults into payments deposit holders, dividends etc Whistle blower mechanism Related party transactions and internal control weaknesses Review uses/application of funds from public issues, rights issues, preferential issues etc Compliance with Companys Code of Conduct

Role of an Independent Director

Oversight of company financial reporting process and

disclosure of its financial information Recommending to Board on the appointment, reappointment and if required replacement or removal of Statutory Auditor and fixation of audit fees Meet atleast once a year without the chairman or executive directors Vis--vis the Board, in providing inputs to all key decisions such as stratergy, performance & risk evaluation Provide an objective view in evaluating executive remunerations, succession planning, changes in

Responsibilities of Independent Director

independent directors as to other directors It is necessary for the independent directors to
To acquire proper understanding of the business of the Company

The fiduciary duties of care, diligence and acting in good faith apply equally to

Provide disclosure of General Notice of directorship, membership of body corporate

and other entities. Should not be a director of more than 15 companies Be objective in forming sound decisions relating to the company and its business Be open minded, free and frank in expressing their opinions and at the same be willing to engage in meaningful debates Be committed to decisions made as a Board Continuously seek information both from within and if required outside professional knowledge to keep abreast with the latest developments in the areas of the companys operations Be informed on laws and regulations influencing their functioning as directors Utilize the expertise they possess to the good advantage of the company

Final Point: A requirement to act in the larger genuine interest of true growth &

development of the company

Functions of an Independent Director

(1) Help in bringing an independent judgment to bear on the Boards 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) Scrutinise 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; 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 inappointing 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 shareholders interest.

(1) undertake appropriate induction and regularly update and refresh Duties of Independent Director 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

Duties of Independent Director

(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 companys 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.

Satyam: How guilty were the Independent Director

Case Overview
The market capitalisation fell to Rs 1,607.04 crore on January 9, 2008,

from Rs 15,262 crore at the end of trade on December 16, 2008, the day when Satyam had announced the Rs-8,000 crore acquisition deal of two firms promoted by the kin of the IT firms former chairman Ramalinga Raju. On January 7, Ramalinga Raju tendered his resignation and confessed to a close to Rs 7,800-crore accounting fraud. The Satyam episode has brought out the failure of the corporate governance structure. The corporate governance structure hinges on the independent directors, who are supposed to bring objectivity to the oversight function of the board and improve its effectiveness.

 The independent directors on the board included

Vinod K Dham (famously known as 'father of Pentium and an ex-Intel

employee) M Rammohan Rao (Dean of Indian School of Business) U S Raju (former director of IIT Delhi) TR Prasad (former union cabinet secretary) M Srinivasan (retired professor from many US universities) Krishna Palepu (Professor at the Harvard Business School).

The company in its corporate governance report for 2007 did not name

Palepu as independent director, perhaps because he received Rs 87 lakh from the company towards consultancy fees. Each individual director received around Rs 13 lakh for the year 2007 for say 100 hours of work (a survey in US reveals that independent directors in large companies devote 50-100 hours per annum to carry out board responsibilities). It is not only in Satyam that independent directors showed lack of commitment. In the case of Enron, WorldCom and other companes in which corporate governance failed independent directors failed to perform effectively.

Subodh Kumar Agrawal, President of the Agrawal has been an independent director at Gujarat NRE Coke ICAI for 12 years and heads the board's audit committee.
He found himself in hot water when proxy advisory firm

Stakeholders Empowerment Services (SES) raised questions about the company's audit process.
SES says the company's auditor - N.C. Banerjee & Co. - certified

the consolidated accounts for 2012/13 by auditing only nine per cent of its assets and over 33 per cent of revenue. The remaining assets and revenue belong to the company's Australian units, whose auditor - Grant Thornton - had asked for more time and audit evidences to certify the accounts. The audit panel passed the accounts on May 30 without questioning the process the Indian auditor followed. Agrawal was not available for comment despite repeated attempts.

 Film distributor Eros International Media is another company with Eros International Media eminent people - Naresh Chandra, Shankar Acharya and

Dhirendra Swarup - as independent directors. Chandra is a former cabinet secretary and India's ambassador to the US. Acharya is a former chief economic adviser to the finance ministry. Swarup is a former chairman of the Pension Fund Regulatory and Development Authority. Still, the company has defaulted on its tax payments. As of August, Eros owed Rs 43.2 crore to the government in undisputed taxes, according to SES. The payments have been due for a long time value-added tax from 2006/07 to 2011/12 and service tax from 2000/01 to 2010/11. Email queries to the company did not elicit any response. Chandra refused to comment specifically on Eros, but

Sun TV Network
Chennai-based Sun TV Network is a case in point. As of June, its

promoters own 75 per cent of the media company.

Even though Sun TV's remuneration committee is headed by

independent director J. Ravindran, its wages are heavily skewed in favour of its promoter directors.
In 2012/13, the company's 1,916 employees together earned Rs

85.7 crore, or Rs 4.5 lakh on average. In comparison, the promoter directors - Kalanithi Maran and Kavery Kalanithi each got Rs 56.2 crore as salary and perks. This is a whopping 1,250 times the average staff salary.
"It clearly shows the independent directors have failed to

implement fair remuneration policies," says J.N. Gupta, Managing Director at SES.

 Kingfisher had five independent directors, including former Kingfisher SEBI chief G.N. Bajpai, who quit between September 2011 and

March 2012. Bajpai was appointed to the board of group company United Spirits a few days after he left the Kingfisher board. The airline was grounded in October because of massive debts and failing to pay salaries and taxes for many months.
company S. Kumars Nationwide, filed for bankruptcy. Its board included former SEBI chief M. Damodaran as an independent director. Damodaran and two other non-executive directors, Suresh N. Talwar and D.D. Avari, resigned soon after the bankruptcy filing.

The same month, HMX Acquisition Corp, the US unit of textile

Evaluation mechanism
(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated. (2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

Remuneration (Sub section 9 of Section 149)

An independent Director shall not receive any stock option

and may receive remuneration complying section 197 and 198, reimbursement of expenses and profit related to commission. A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose as may be decided by the Board. The amount of such fees shall not exceed the amount as may be prescribed.

Term of office (Sub section 10, 11 of Section 149)

An independent director shall hold office for a term up to five consecutive years on the Board of a company and shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Boards report. No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. The provisions of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.

Liability of Independent Directors (Sub section 12 of Section 149)

An independent director shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Suggestions to improve the Performance of Independent Directors

Regulators have to assess the performance of the board on

regular basis, albeit indirectly through scrutiny of filings. Law enforcement agencies must penalise errant independent directors. For instance, when Kingfisher Airlines missed its 180-day deadline last year to appoint new independent directors, the regulator did not take any action. A SEBI official, who does not wish to be named, says the regulator has been taking steps to improve corporate governance standards However, the solution is not simple. If independent directors are held liable for corporate fraud and severe penalties are imposed on them, it will be difficult to induct right people as independent directors in the board and companies will be deprived of the collective wisdom of people who can make a difference in the performance of companies.