Issuance of Guidance note on Independent Directors (Revised Edition)

Following the publication of the Guidance Note on Independent Directors, the Ministry of Corporate Affairs notified the Companies (Amendment) Act 2020 of several provisions, and SEBI substantially revised the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to further strengthen the institution of independent directors.^[1] The legal framework for independent directors has dramatically changed due to these most recent modifications, prompting a revision of the Guidance Note on Independent Directors to give all stakeholders updated advice on the issue.

This updated version of the Guidance Note on Independent Directors covers the concerns and challenges, new statutory and regulatory rules, a code of conduct, and compliances relevant to independent directors. The Guidance Note also offers thoughtful opinions on many elements of the topic to make it simpler to understand and comply with the law in text and spirit. The Expert Committee on Company Law constituted under the chairmanship of Dr J J Iraniis the view that having independent directors on a company’s board will enhance corporate governance, given the board’s role to strike a balance between various interests. This is especially crucial for publicly traded corporations or businesses with significant public interests. Independent directors would be able to bring an element of objectivity to the Board process in the general interests of the company and thereby benefit minority interests and smaller shareholders.^[2] Directors representing specific interests would be constrained to the perspective dictated by such interests. Therefore, independence should be seen from the perspective of weaker stakeholders who would otherwise be unable to speak up for themselves rather than just independence from Promoter Interests.

The Companies (Amendment) Act 2017 amended the definition of independent director with the goals of defining limits concerning the financial relationships of a director for eligibility to be appointed as an Independent Director and to specify the scope of restriction on financial relationships entered into by a relative. However, depending on the size and structure of the company, different independent directors may be required. There is not a single remedy that works for all businesses. Therefore, the number of independent directors may be specified by rules for various companies. Section 149(4) of the Companies Act 2013 provides that every listed public company shall have at least one-third of the total number of directors as independent directors and that the Central Government may prescribe a minimum number of independent directors for any other classes of the public company.

In some circumstances, regulators may stipulate that companies under their regulatory jurisdiction must have independent directors. Such Regulators may identify the number of classes of businesses to whom the Companies Act’s provision for the nomination of Independent Directors has been extended. It should not be assumed that government appointees who represent government shares or nominee directors nominated by any organization or following any agreement are independent. There was a discussion over the possibility of treating bank and financial institution (FI) nominees for positions on corporate boards as “Independent.” After careful consideration, the Committee concluded that these nominees represented special interests and could not correctly be considered ‘independent’. It should not be necessary for a subsidiary company to appoint a holding company independent director as an independent director on its board.

^[1]Independent Directors: Role, Responsibilities, Effectiveness. https://www.scconline.com/blog/post/2019/07/12/independent-directors-role-responsibilities-effectiveness/

^[2] Ministry Of Corporate Affairs – Management and Board Governance – MCA. https://www.mca.gov.in/MinistryV2/management+and+board+governance.html