The Companies Bill, which is soon to become law, has overhauled the framework around independent directors – making them more accountable and responsive so as to ensure effective oversight.
Thanks to the new set of provisions, independent directors are unlikely to remain passive players or mute spectators in boardrooms.
The days of independent directors attending board meeting without even reading the agenda papers, are now numbered. Nor can such directors constantly absent themselves from meetings.
The new law will also strengthen the hands of such directors in terms of their liability, especially in peculiar situations involving corporate fraud.
The new provisions include a cap on the number of directorships a person can hold in public companies, limitation of tenure to a maximum of two consecutive terms of five years, and need to give detailed reasons to the registrar of companies on resignations.
The maximum number of public companies in which a person can be appointed as a director cannot exceed 10. This will be within the overall limit of 20 companies in which a person can be a director at the same time. There is also now a detailed definition of an independent director. “The definition of independence for independent directors is stringent,” said Richard Rekhy, Chief Executive Officer, KPMG in India.
Rekhy expects the new law to improve the state of corporate governance in India. A director on being absent – with or without seeking leave of the Board – from all meetings of the Board during a period of 12 months will have to vacate his office, Rekhy pointed out.
S.N. Anantha subramanian of the Institute of Company Secretaries of India said independent directors should perform the role of “healthy rebels”. “It is not only their presence or participation, but performance that will finally count.” The new company law has limited the tenure of independent directors to maximum of two consecutive terms of five years. After a cooling period of three years, they are eligible for appointment again.
“This is a far better system than the current one. With some certainty in tenure, independent directors are likely to be more independent,” said Ashok Haldia, Director, PTC India Financial Services.
The new framework is expected to definitely usher in a new breed of good quality independent directors, according to Pawan Vijay, Managing Director, Corporate Professionals, a corporate advisory firm.