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Independence of Independent Director

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The genesis of the institution of Independent Director should be viewed from the ownership of the company vis-àvis management. Board of Directors is an integral part of the company. In layman’s language, they are a group of people who are appointed by owners of the company to look after the interests of the stakeholders which comprises of different people like employees, investors, government, society etc. BOD is credited with the work of looking after the day to day management of the company. It is assumed and expected that the BOD will carry the same functions with transparency and accountability and carry out the affairs in interests of the common good. This is exactly the triggering point for the so called independent behavior of the board. The idea of independence has been a shabby concept and what has been generally seen is that the board often works prejudicial to the interests of the stakeholders motivated by material benefits of few members. This called for the need of an institution which would be really independent and would carry out their functions with absolute accountability. 

The Indianized conception of Independent Director has been transplanted from the Anglo-Saxon jurisprudence. The independent director can be regarded as that member of the board who has disseminated himself from the internal affairs of the management of the company. He is expected to monitor the board with a sense of segregation. The Companies Act of 2013 traces the concept of independent director under Sec. 149. It has been a wide advocated concept that the institution of independent director has been major tool of corporate governance.

 The article seeks to answers one of the most burning questions of the corporate world i.e. are independent directors really independent? It has been advocated by the concerned article that the institution of independent director has been a sham in India. The concept has been well adopted in theory but lacks practicality. Three prongs have been attacked i.e. nomination, removal and a remuneration which creates hurdle in independency of independent director.

 The Definitional Issue of ‘Independence’ 

There has always an ambiguity worldwide as to what constitutes “independence” of independent director. Policymakers of India have tried continuously setting out different meanings attached to the term “independence”. This dates back to the CII Report which although recognized the importance of the institution of independent director, but abstained from defining the term. The first legit attempt to define the term was made by the Kumar Mangalam Birla Committee report. The committee defined independent directors as “directors who apart from receiving directors’ remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries which in the judgement of the board may affect their independence of judgment”. The definition ought to be a narrow approach to determine the independence of independent director. Sole reason for the definition being treated as a narrow test was its pecuniary considerations. These recommendations soon led to a regulatory framework i.e. clause 49 of the Listing Agreement. The concerned clause listed out exclusions to the institution of independent director like individuals who were related to promoter and members of senior management by familial ties. There were some other exclusions as well. However, the provision did not capture certain social relations that would affect director’s independence. These loopholes were done away with Sec. 149 of the Companies Act, 2013. It turned out be a major boost in the corporate governance goal. There were many improvisations which led to an effective independence threshold. It contains a fair list of exclusions. Moreover, it also lays down the overarching subjective requirement of expertise and experience.

 The criteria discussed above basically amounts to the fulfillment of objective factors. What the definitional issue of independence lacks is the subjective element. The issue of the subjective element or the practical aspect to the independence of Independent Director has been discussed below.

 How much “Independent” are Independent Directors? The theoretical basis for the institution has already been discussed at length. Going through the above discussions it was clear that it is quite possible to come up with satisfactory objective criteria for the attribute or independence but it is also of utmost importance to understand the fact that the business is carried on at a real-time basis and fulfillment of the objective criteria would not serve the real purpose and pacify the ground realities. These subjective element lies in the nomination, removal and the remuneration process that hasn’t been dealt by the legislation so far. This element hits the very core of the independence criteria of independent director. 

Nomination & Election Process 

The law does not provide special provision for the nomination of independent director. However, Clause 49 of the Listing agreement lays down as to who would nominate the said independent directors. Above clause lays down that Nomination and Remuneration Committee of the board will do the needful. It specifically mentions that Nomination and Remuneration Committee of the board will formulate the criteria for determining qualifications, positive attributes and independence of a director and will identify and recommend to the board their appointment. This is certainly followed by board approving or disproving such recommendations and takes them to general meeting for final approval. Section 152(2) says that “every director shall be appointed by the company in a general meeting.” Now, it is of utmost relevance to mention here that the Nomination and Remuneration Committee only nominates candidate for the post of independent director and still the decision making power rests with the board. The fact that the committee only “nominates” and it is commonly seen that the committee nominates people acquainted with the promoters or the directors. This process leads to the independent director who is appointed is left out with a sense of indebtment to the promoters or directors. This is the triggering point where the independence of the director is hit brutally. The present law does not lay down specific procedure as to the appointment or the nomination of independent director. The appointment of independent director in India takes place through the usual process where each director is to be voted on individually at a shareholders’ meeting by way of a separate resolution. It is seen that the appointment of such independent directors are at the petty of the controlling shareholders. 

One of the main functions of independent director is protection of the interests of the minority shareholders but under the present matrix of appointment and removal leads to the fact that the sole purpose of independent director gets disbursed. Above fallacy can be remedied by the increasing the participation of minority shareholders. Effective independence of independent director could be achieved by two schemes namely by the case of cumulative voting by shareholders and secondly by election by a majority of minority. By the process of cumulative voting, minority shareholders could be given their chance to elect the independent director in proportionate to their shareholders. This would ultimately lead to reduction in dominance of controlling shareholders. In this scheme, individual shareholder is given the power to exercise to respective number of votes determined as the product of the number of shares held by the shareholder and the number of independent directors to be elected. This scheme for the nomination of independent director would ensure effective independence because it would involve participation of both the minority shareholders and controlling shareholders to elect independent directors depending on the proportion of their respective shareholding. Alternatively, the process of voting by majority of minority can also certainly boost the element of independence of independent director. This type of nomination will run on premise where only minority shareholders would be given a chance to appoint the independent director. Each independent director will remain elected as long as it enjoys the majority support of the minority shareholders. Non-participation of the controlling shareholders will certainly lead to boost in the independence of independent director. This scheme is useful because it will bring out the true representation of the minority shareholders and will instill accountability in the minds of independent director towards minority shareholders.

 Removal

 We have already discussed as to the loophole in the appointment process which diminishes the independence threshold. Now, the question arises as to whether the same is similar with the removal process. The answer is affirmative. Section 115 of the Companies Act, 2013 says shareholders can give a special notice to move a resolution. Section 100 lays down that shareholders collectively owning 10 percent of paid-up equity can call for an EGM. Moreover, Section 169 lays down that any director can be removed by passing an ordinary resolution at a general meeting. Perusal of the above provisions quite clearly reveals that there is certainly no distinction between the removal of “independent” and “nonindependent” director. Thus, the process of removal of independent director is quite lucid i.e all directors need to do is aimed to provide a special notice to commence a resolution, followed by an EGM and finally passing that resolution. It is generally seen that majority Indian promoters have substantial amount of shareholdings in their company, so the removal of independent director on their whims and fancies is not mere a possibility but reality. This is another reason what affects the independence of independent director. 

Issue of Remuneration 

The Companies Act, 2013 specifically proscribes any kind of business or pecuniary relationship between the independent director and the company. However, Sec. 149(9), 197(5) and 197(9) of the Companies Act, 2013 talks on remuneration. Combined reading of the above provisions reveals that “independent directors can be paid a sitting fee and related reimbursements for attending the board/committee meetings and profit-related commissions as approved by the members.” This is where the problem lies and this problem jeopardizes the independence of independent director. The general practice prescribes that commissions which are related to some profit, the proposal is initiated in the board and followed by a general meeting for approval by shareholders. Since the process involves the participation of dominant shareholders, it very much strikes the core of the independence value of the independent directors. 

Concluding Remarks

 Above deliberations lead to the conclusion that there still persists some problems which strikes the very core of the independence of independent director. The issues of nomination, removal and remuneration needs to be addressed probably by an amendment because it erodes the very institution of the independent director. Independent director has been a tool for corporate governance and if these problems are remedied, it will emerge a very effective institution. The present institution of independent direct is in dire need of the overhaul change to make it a robust and an effective one.

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Legally Speaking

MP HIGH COURT SEEKS DGP’S REPLY: DOES POLICE’S FAILURE TO COMMUNICATE FULL CRIMINAL ANTECEDENTS OF ACCUSED AMOUNTS TO MISCONDUCT, INTERFERENCE WITH JUSTICE?

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The Madhya Pradesh High Court in the case Kuldeep Dohare Versus the State of Madhya Pradesh observed, recently the Gwalior bench directed the Director General of Police, State of Madhya Pradesh to file an affidavit explaining as to whether non-communication of criminal antecedents of an Applicant or Accused to the Court is a minor misconduct or if it amounts to interference with the criminal justice dispensation system. Before the next date of hearing, the affidavit is to be filled.

The bench comprising of Justice G.S. Ahluwalia observed and remarked that the court was frequently finding that the police authorities were not sending the complete criminal antecedents, in spite of the circular issued by Police Headquarters.

It was observed that the police authorities did not send the criminal antecedents of the applicant. Furthermore, it is clear that it is a clear attempt to facilitate the applicant to obtain bail by projecting that he has no criminal antecedents. The issue raised is weather the conduct of police officers can be said to be a minor negligence or it is an interference with the criminal justice dispensation system?

In the present case, the court was dealing with a bail application moved by the accused applicant for offences punishable under section 307, Section 149, section 148, section 147, section 506, section 294, section 201. On an earlier hearing, the court had observed that even though the case diary did not reflect any criminal antecedents on the part of the Applicant. The impugned order passed by the lower court rejecting his bail application mentioned otherwise.

It was observed that a reply was sought by the court from the Superintendent of Police, District Bhind as to why the important information with regard to the criminal antecedents of the Applicant were withheld by the respective SHO. The SP informed the Court on the subsequent hearing that the SHO concerned as well as the Investigating Officer in the case were found guilty of misconduct and were fined with Rs. 2,000 and Rs. 5,000, respectively.

The Court observed that since the problem was stemming from different police stations. However, the DGP should file his reply regarding the prevailing situation-

Since in different police station, this situation is prevailing. Therefore, an affidavit is directed to be filled by the DGP, State of Madhya Pradesh as to whether non- communication of criminal antecedents of an applicant is a minor misconduct or it amounts to interfere with the criminal antecedents of justice dispensation system.

Accordingly, the affidavit needs to be filled within a period of 1 week, the matter would be heard next on 08.07.2022.

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Legally Speaking

HIGH COURT OF MADHYA PRADESH: SECTION 5 OF THE LIMITATION ACT APPLIES TO ARBITRATION REFERENCE UNDER NATIONAL HIGHWAY ACT, 1956

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The High Court of Madhya Pradesh in the case Ghanshyam Gupta v. State of Madhya Pradesh and Ors observed and stated that Section 5 of the Limitation Act would be applicable to reference to arbitration under the National Highways Act, 1956.

The Division Bench comprising of Justice Ravi Malimath and Justice Purushiandra Kumar Kaurav observed and reiterated that since no limitation is provided under Section 3G (5) of the National Highways Act. The bench stated that the provisions of Article 137 of the Schedule to the Limitation Act, 1963 would apply to such proceedings.

Therefore, the court held that the limitation period for filing an appeal against the decision of the competent authority before the arbitrator from the date of expiry of 90 days is three years from the decision of the competent authority.

FACTS OF THE CASE:

The petitioner, Mr. Ghanshyam Gupta was the landowner of the land which was acquired by the Respondent, Madhya Pradesh Road Development Corporation. Thereafter, the competent authority determined the quantum of compensation payable to the petitioner and passed an award to that effect on 30.07.2015.

The petitioner being dissatisfied with the quantum of compensation determined by the competent authority. On 04.12.2019, an appeal was filled by the petitioner before the arbitrator. The appeal was dismissed by the arbitrator as time-barred filed after the expiry of three years limitation period.

the petitioner filed a writ petition before the High Court, Aggrieved by the decision of the arbitrator.

Contentions Raised by the Parties:

It is stated that Section 5 of the Limitation Act is applicable to arbitration reference under Section 3G (5) of the National Highways Act, 1956.

It was observed that the petitioner was unaware of the availability of the remedy of appeal against the decision of the competent authority, the petitioner only after consulting his lawyer, that the petitioner came to know that he could seek enhancement. Further, there is a valid ground to condone the delay.

The submissions of the petitioner were countered by the Respondent on the following grounds:

Though, in the absence of a period of limitation for filing an appeal under Section 3G (5) of the Act of 1956, it was construed that the provisions of Article 137 of the Limitation Act would stand applicable.

It was stated that Article 137 provides for 3 years period, and the petitioner filed the appeal after a delay of 4 years.

COURT ANALYSIS:

The court observed and stated that since no limitation is provided under Section 3G (5) of the National Highways Act, the provisions of Article 137 of the Schedule to the Limitation Act would apply to such proceedings.

Therefore, the court held that the limitation period for filing an appeal against the decision of the competent authority before the arbitrator from the date of expiry of 90 days is three years from the decision of the competent authority.

The court observed that there is nothing in the National Highways Act that excludes the applicability of Section 5 of the Limitation Act. However, Section 5 of the Limitation Act would be applicable to reference to arbitration under the National Highways Act, 1956 and the arbitrator has the power to condone the delay against the award, in filing an appeal by the competent authority.

The court noted that the petitioner was not aware that an appeal could be filed against the decision of the Competent Authority and it is only after consulting his lawyer that the petitioner came aware of any such right, therefore, there is sufficient reason to condone the delay.

Accordingly, the application was allowed by the court and the court directed the arbitrator to decide the case of the petitioner on merit.

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KERALA HIGH COURT APPOINTS AMICUS CURIAE IN SARITHA NAIR’S PLEA; IS A STATEMENT RECORDED U/S 164 CRPC A PUBLIC DOCUMENT?

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The Kerala High Court in the case Saritha S. Nair v. Union of India & Anr observed and appointed an amicus curia to assist the court to decide the legal question of whether a statement recorded under Section 164 of the CrPC is a public document.

The bench comprising of Justice Kauser Edappagath appointed the amicus curiae, in the petition filled by Saritha S. Nair, the prime accused in the infamous solar panel scam seeking a direction to provide her with copies of the Section 164 statement given by Swapna Suresh, the accused in the gold smuggling case.

The court appointed Advocate K.K. Dheerendrakrishnan, as the amicus curiae in the case.

In the present case, it was observed that Saritha Nair is accused of having duped several influential people to the tune of 70 lakhs, by offering to install solar power units for them or by making them business partners and by receiving advance payments for the same.

Moreover, Swapna Suresh is accused of smuggling 30 kilograms of gold through diplomatic cargo dispatched to UAE Consulate at Thiruvananthapuram.

It was observed that when the petition came up for hearing, the counsel appearing for the petitioner, Advocate B.A Aloor appearing that the statement given by Swapna was a public document and therefore the petitioner was entitled to get a copy.

Further, Nair approached the Court apprehending that certain allegation may have been brought on record against her in the statement given by Suresh. It was prayed by Nair, that the c court allow her plea, directing the production of certified copies of the said document to her, failing which she would sustain an irreparable injury, the hardship and as well as physical and mental agony.

It was observed that the Nair had had initially moved the Principal District and Sessions Court of Ernakulam, with the same request, but this was denied. The court noted and adjourned the matter to July 11, while on a petition filed by the accuse, Saritha S. Nair in the solar scam cases, for seeking a directive to provide a copy of the statement given by Swapna Suresh, accused in the diplomatic gold smuggling case before a subordinate court.

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Legally Speaking

Supreme Court issues notice in an SLP; can section 156 (3) CRPC be invoked after failing to get desired relief in a civil suit?

It was observed that before the Calcutta High Court, it was contended by the accused that the allegations made in the application under Section 156(3) CrPC fails to make out any offence against them. Further, it was submitted that a frustrated unsuccessful litigant before the Civil Court has approached the Criminal Court and the Criminal Investigation.

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The Supreme Court in the case Usha Chakraborty vs State of West Bengal observed and issued a notice in a Special Leave Petition filled, raising an issue whether in a dispute essentially in a dispute of civil nature that can a person, after having failed to get the desired relief from a civil suit, invoke Section 156(3) of the Code of Criminal Procedure?

In the present case, an FIR was registered against the accused under Sections 323, Section 384, Section 406, Section 423, Section 467, Section 468, Section 420 and Section 120B of the Indian Penal Code, 1860 following an order passed by the Magistrate under Section 156(3) CrPC.

It was observed that before the Calcutta High Court, it was contended by the accused that the allegations made in the application under Section 156(3) CrPC fails to make out any offence against them. Further, it was submitted that a frustrated unsuccessful litigant before the Civil Court has approached the Criminal Court and the Criminal Investigation, which has commenced, is for the purposes of throttling them. The petition was dismissed by the High Court observing that the materials which have already been collected by the Investigating Agency, prima facie, make out a case for investigation. The issue raised before the court was weather the same would make out an offence after the investigation is concluded is absolutely at the end of the investigation to be analysed.

Therefore, challenging this order, one of the accused approached the Apex Court. However, It was submitted that the dispute is essentially of civil nature, for which the applicant in Section 156(3) CrPC petition filed a civil suit but having failed to get the desired relief, he invoked Section 156(3) CrPC.

The bench comprising of Justice Surya Kant and the Justice JB Pardiwala, while issuing notice also stayed further proceedings in FIR lodged against the accused.

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Legally Speaking

GAUHATI HIGH COURT QUASHES NO-CONFIDENCE MOTION AGAINST GRAM PANCHAYAT PRESIDENT CITING PARTICIPATION OF MEMBER DISQUALIFIED FOR HAVING THREE CHILDREN

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The Gauhati High Court in the case Jugitawali Pawe v State of Assam and 15 ors observed and quashed a resolution expressing no-confidence in the petitioner – the President of a Gram Panchayat, as a result of which she as removed from office. It was stated that it is as per the citing no compliance with Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995.

It was preferred by the petitioner to the materials available on record to argue that one of the members of the Gaon Panchayat, the respondent. The respondent voted against the petitioner and had given birth to her third child the previous year. Moreover, by virtue of Section 111(2)(a) of the Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995, the petitioner stood automatically disqualified on the date of voting. Following, which her vote was taken by passing No-confidence motion.

It was prayed by the petitioner in the plea for setting aside the impugned resolution and for issuance of a direction to restore his client back in the office. Thereafter, to initiate fresh proceedings, liberty should be granted to the respondent, following the due process.

It was agreed by the Counsel representing for the respondent that the said member of the panchayat had been disqualified but retained on the ground that the disqualification would have no bearing on the petitioner’s case, as the impugned resolution was passed before the declaration of petitioner disqualification.

In the present case, It was noticed by Justice Suman Shyam the member had voted against the petitioner and without her vote. The petitioner would not have been ousted from office. Justice Shyam also found no dispute about the fact that the member had incurred disqualification under the law prior the date of adoption of the impugned resolution. Justice Shyam found it unnecessary to delve into other aspects of the matter which includes the procedural formalities for declaring the member a disqualified candidate.

It is observed that the impugned resolution was declared to be vitiated and liable to be set aside. Further, the Court restored the petitioner to the office of the President of the Bongalmara Gaon Panchayat with immediate effect and it was stated by the court that the order will not stand in the way should the authorities or any member of the Gaon Panchayat propose a fresh motion of “no-confidence” against the petitioner and the due process of law needs to be followed.

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Halt DDA’s demolition action against jhuggis in Nizamuddin’s Gyaspur area, orders Delhi High Court

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board, the residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

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plea in Delhi High Court seeking repatriation of 56 pregnant nurses

The Delhi High Court in the case Manoj Gupta & Ors. v. DDA & Ors observed and has ordered status quo on the Delhi Development Authority’s proposal to demolish jhuggi clusters in city’s Gyaspur area in Hazrat Nizamuddin. The vacation bench comprising of Justice Neena Bansal Krishna observed in the petition filled by the residents and the court granted an interim relief.

It was ordered by the court status quo till July 11, the next date of hearing.

The bench orally remarked that a ten-day delay in demolition won’t make a difference but if today it is demolished and later, we come to know that they were entitled, who’s going to… the bench will consider it on July 11, 2022 but in the Meanwhile, some protections are entitled them. Adding this, Status quo be maintained. If since 1995, they have been there, heavens won’t come down if for 10 more days they are protected.

In the plea the petitioner stated that the T-Huts settlement in the area, which was stated by the authorities to vacate. It has been in existence for almost two decades and compromise of 32 jhuggis or households.

In the plea it was alleged that the bulldozers have been parked around the camp and a DDA official has orally asked them to vacate the area and it is noted that till date no proper notice have been sent to them nor has DDA conducted any survey of the area.

Furthermore, the DDA did not provide any alternate arrangement for their rehabilitation which resulted in extreme distress among the residents.

Moreover, it was admitted by the petitioner that the land in question belongs to DDA and they may seek that status-quo to be maintained at the site. It was urged that the residents should not be physically dispose or evicted from the demolition site until the survey is conducted and rehabilitation is provided to the residents as per the DUSIB policy of 2015.

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board. The residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

It is observed that in the case Ajay Maken v. Union of India, Reliance is placed on the Supreme Court decision and the High Court decision in the case Sudama Singh & Ors. v. Government of Delhi & Anr, it was held in the case that that removal of jhuggis without ensuring relocation would amount of gross violation of Fundamental Rights under Article 21 of the Constitution. Further, it was held that the agencies conducting the demolitions ought to conduct survey before undertaking any demolition.

It is submitted that these observations would apply across the board, in the entire NCT of Delhi.

Advocates Vrinda Bhandari, Shiyaz Razaq, Kaoliangpou Kamei, Jepi Y Chisho and Paul Kumar Kalai, represented the petitioner.

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