New Rules Relaxing the Regulation of Independent Directors in India

Independent directors are meant to be third party individuals that do not have any relations with the company or its holding, subsidiary, and associate company either through themselves or their families. New rules from MCA and SEBI have been released regulating independent directors in India.

The board of directors of any company is the central decision making and governing authority. The board has several compliance requirements laid out under the Companies Act, 2013 that makes clear their corporate governing requirements. As part of the efforts of ensuring independence in the decision making of the board, the Companies Act, 2013 mandates the need for ‘independent directors’.

Essentially, independent directors are meant to be third party individuals that do not have any relations with the company or its holding, subsidiary, and associate company either through themselves or their families. They are specifically appointed to ensure independence of the Board of Directors and to prevent any undue influence by the board over the company for third party relations. 

The ministry of Coronate affairs has recently endeavored to make the appointment of Independent directors easier by reducing the necessary compliance requirements. However, the Security and Exchange Board of India has also recently proposed new regulations meant to tighten appointment of independent directors. In this article we take a look at such regulations and what they mean for companies in India.  
 
Role of Independent Directors:

The definition for independent directors has been laid down in section 149 of the Companies Act, 2013. They are defined as directors other than a managing director or a whole time director or a nominee director who satisfies the following conditions:
  • Is a person of integrity and possesses relevant experience,
  • Is or was not a promoter of the company or any of its holding, subsidiary, or associate companies,
  • Is not related to the promoters or directors of the company or its holding, subsidiary, or associate companies,
  • Does not have any pecuniary relationship with the company, directors or promoters for two years immediately preceding appointment.
  • Does not have any relatives who have or have had pecuniary relationships with the company, directors or promoters for amounts exceeding two percent of gross turnover or total income.
  • Has not and does not have any relatives, who hold key managerial positions or been an employee of the company, its subsidiaries, holdings, or associate companies.
  • Is not a member of the auditors or any legal consulting firm that has transactions with the company, and its subsidiaries, holdings and associate companies.
  • Does not hold more than 2% voting power of the company.
  • And any other conditions as prescribed.
The Companies Act mandates that at least-one third of total directors of a public company must be an independent director. Independent directors are also not liable to be given any stock option schemes, although their official expenses can be reimbursed.

Public companies with a share capital greater than INR 10 crore, or public companies with a turnover greater than INR 100 crores, or public companies with outstanding liabilities, debentures, exceeding INR 50 crore; all require a minimum of two independent director on the board of directors. 

Independent directors are required to keep a view over the financial reporting of the company, as well as specific attention to the integrity of transactions between related parties of the company. Independent directors will also be required to exercise independent judgement over the deliberations of the board of directors.

Independent directors are required to provide a declaration of their independence in the following cases:
  • The first board meeting they attend as a director,
  • The first meeting of the board of directors for every financial year,
  • Any situation that affects the independence of their role as a director of the company.
 
Centre for Independent Directors:

According to section 150 of the companies act, independent directors may also be selected off a data bank.  The Indian Institute of Corporate Affairs through the Centre maintains this data bank of the independent directors in India, along with details such as names, address, qualifications, etc. of the eligible persons. 

Every individual that is appointed as an independent director or is going to be appointed as an independent director has to apply within 13 months (from their announcement) to the Indian Institute of Corporate Affairs, for inclusion of their name in the data bank. Their names will be included for as long as they continue to hold office with the company.

Once individuals are registered, they are required to pass an online proficiency exam within one year from registration and inclusion of their name in the data bank. If the individual does not pass this test, then their names will be subsequently removed from the eligible persons list. However, certain persons have now been given an exemption from this test.
 
Relaxations by MCA:

The Ministry of Corporate Affairs has further relaxed the rules for registration with the Institute of independent directors and the passing of the online exam.  As notified in December 2020, the rules for passing the online self-assessment exam for independent directors have been further relaxed. Independent directors will now have to pass the test within two years from their inclusion on the list. Previously, the period allowed was one year.

Individuals will not be required to pass the self-assessment test, if they have played any of the following roles for at least three years before the date of their appointment as an independent director:
  • A director or key managerial personnel of a listed public company, or unlisted public company with a share capital exceeding INR 10 crores, or body corporate listed on a recognized stock exchange, bodies incorporated outside India with  a share capital exceeding $2 million, or statutory corporations set up in India.
  • Was or was in a pay scale of director or above in the Ministry of Corporate Affairs or the Ministry of Finance, etc. 
  • Was in the pay scale of Chief General manager or above in SEBI or RBI or IDAI, and has experience in handling matters related to corporate, securities or economics law.
Under these new relaxations, the individuals will have to receive 60% to pass the self-assessment test.
 
New Rules Proposed by SEBI:

SEBI has recently released proposed rules to strengthen the rules governing independent directors. The rules have been proposed to strength the working of independent directors in regard to protection of the interests of minority stakeholder rights.

The draft rules are now up for public commentary before the final rules will be introduced.

The draft rules propose the following changes:
  • Key managerial personnel or employees of promoter group companies should not be appointed as independent directors unless there has been a cooling off period of at least three years.
  • The appointment and re-appointment of independent directors will be revised to include dual approval process whereby the approval of the majority shareholders as well as the majority of the minority shareholders will be required.
  • The approval of the majority of the minority shareholders will also be taken for the removal of independent directors as well.
  • Independent directors will be appointed only with the prior approval of the shareholders of the company.
  • Audit committees going forward will have to be comprised of at least 2/3rd independent directors and 1/3rd non-executive directors who are not related to the promoters of the company.
SEBI has also invited views on whether employee stock option schemes with a long term vesting period of three years should be allowed as remuneration for independent directors.

While the MCA revisions were done with the view of relaxing rules for appointment of independent directors, the SEBI rules are looking to tighten such rules to improve protection of minority shareholders’ interests.