Independent directors lose freedom of indifference
Oct 20 2013 , Mumbai
A highly sought-after position among corporate stalwarts and retired honchos, the chair of an independent director now comes with an attractive sitting fee of Rs 1 lakh, but under the new Act, with an added rider making them accountable for any offence during their tenure.
If found guilty, they will also invite stricter penalties and punishments, including imprisonment.
Till recently, independent directors were not held responsible for crime and perjury taking place during their tenure, as the role was ill-defined and their participation in boardroom meetings was mere formalities.
The new Act has demarcated their role without any ambiguity, say legal experts.
They are now required to raise questions to the effect if they are aware of discrepancies instead of being silent spectators to prove their disengagement, said Nilanjana Singh, partner of Mumbai-based law firm AZB & Partners.
“Even if the independent director may have been absent during a particular meeting, but present in subsequent meetings where the pertinent issues were discussed, the director cannot claim ignorance. It would be his responsibility to summarise and document the briefs and prepare the minutes to avoid problems later,” said Shailesh Haribhakti, co-founder and managing partner of Haribhakti & Co Chartered Accountants, and an independent director on several boards.
According to a latest KPMG-Assocham report on Companies Act 2013, specific but inclusive duties of directors have been laid down and any contravention would attract punishment, including compensatory fine. “Apart from specific enunciation of good practices and concepts, this would result in an easier prosecution of delinquent directors,” the report said.
The independent director should also declare to the board that he is independent at the time of his appointment with no relation with the company, its subsidiary and the promoters. He must also inform whenever there is any change that may impact his independence.
The tenure of independent directors has also been limited to add fresh talent on the board. The tenure would now be for a maximum of two consecutive tenures of five years with a cooling-off period of three years thereafter. “During the cooling-off period, the person cannot be inducted in the company in any capacity either directly or indirectly. Limited tenure will also ensure fresh talent on the boards, and reduce the proximity of independent directors with the management,” said Sai Venkateshwaran, head of accounting advisory at KPMG India.
The new Act fixes the maximum number of directors at 15 against 12 at present. This number can be enhanced by a special resolution without the central government’s approval. Also, apart from listed companies, other class of companies as may be prescribed to have audit committees should have a minimum of three directors with independent directors in majority. The members, including the chairman of the committee, should be financially literate and understand the financial statements.