INDEPENDENT DIRECTORS

1 INDEPENDENT DIRECTORSA HAND BOOK ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003ttel 011-4534 1000, 4150 4444fax +91-11-2462 6727email 2014 PRICE : Rs. 100/- (Excluding Postage) THE INSTITUTE OF COMPANY SECRETARIES OF INDIAAll rights reserved. No part of this publication may be translated orcopied in any form or by any means without the prior written permissionof The Institute of Company Secretaries of by :THE INSTITUTE OF COMPANY SECRETARIES OF INDIAICSI House, 22, Institutional Area, Lodi Road, New Delhi - 110 003 Phones : 41504444, 45341000 oFax : 24626727 Website : o E-mail.

2 Typesetting at AArushi GraphicsAnd Printed at, Chandu Press/200/August 2014iiiiPrefaceBoard of DIRECTORS are central to the governance of companies. Theboards play a key role in providing direction to the management interms of strategy and also ensuring that the companies operate in thebest interests of the shareholders and other stakeholders. Boardindependence is seen as a cornerstone of accountability and the presenceof INDEPENDENT DIRECTORS in the boardroom has been hailed as aneffective deterrent to fraud, mismanagement, inefficient use ofresources, inequality and unaccount ability of decisions.

3 Indeed, it hasbeen widely acknowledged in recent times that their increased presencein board rooms has been hailed as harbingers, to strike right chordbetween, individual, economic, social and other stakeholders of dramatic changes in the recent past in the regulatory environmentin India on corporate governance with the enactment of the CompaniesAct, 2013 and the impending implementation of the revised clause 49of the Listing Agreement has enhanced the role of INDEPENDENT directorsin corporate governance a few notches evolution of the concept of INDEPENDENT DIRECTORS , their role,responsibilities, rights, duties and liabilities as well as related provisionsin the Companies Act, 2013 and Clause 49 of the listing agreementhave been covered in a lucid and comprehensive manner in thishandbook.

4 International perspective with regard to independentdirectors also finds a place in this place on record my sincere thanks to Mr. K. Sethuraman, GroupCompany Secretary and Chief Compliance Officer, Reliance Industriesand Agarwal, Former Principal Director, ICSI for their valuableinputs in finalizing the hand commend the dedicated efforts put in by team ICSI led by Ms. AlkaKapoor, Joint Secretary and comprising Dandona, DeputyDirector, Khatri, Assistant Director, Kant, AssistantEducation Officer and Kumar, Senior Assistant in theDirectorate of Professional Development II in preparing thispublication under the overall guidance of Mr.

5 Sutanu Sinha, ChiefExecutive, ICSI and the guidance and leadership of Mr. Sanjay Grover,Central Council Member and Chairman, Corporate Laws and am sure the publication will prove to be of immense benefit tocompanies as well as company DIRECTORS in benchmarking the governancepractices in the any publication of this kind, there is always scope for furtherrefinement. I would be personally grateful to the users and readers ofthis handbook for their R. DIRECTORS International Practices33 Who can be an INDEPENDENT of INDEPENDENT DIRECTORS on on Number of on Membership in board of INDEPENDENT Identification Number (DIN) Bank of INDEPENDENT of INDEPENDENT by of INDEPENDENT by/or relating to INDEPENDENT in board DIRECTORS and board Committees23 CSR Committee23 Nomination and Remuneration Committee23 Audit of INDEPENDENT DIRECTORS in General Meeting24and board of functions of the board as per Listing Agreement.

6 28vv of Non-Official DIRECTORS in of INDEPENDENT DIRECTORS for the32 Prevention and Detection of under the Companies Act, of INDEPENDENT Evaluation of INDEPENDENT Meetings of INDEPENDENT required to be filled in relation to in relation to INDEPENDENT Directors36 IINTRODUCTIONThe emergence of the concept of INDEPENDENT DIRECTORS can beseen in the light of evolution of the term corporate governance over time. A corporate form of entity has stakeholders , creditors , banks and financial institutions, employees,community and environment.

7 The working of the corporate systemdepends on how well the interests of these stakeholders are the year, 1999, the Securities and Exchange board of India (SEBI)set up a Committee under the chairmanship of Kumar MangalamBirla to promote and raise standards of corporate governance inIndia. The recommendations put forward by the KM Birla Committeeled to the addition of Clause 49-Corporate Governance in the ListingAgreement in the year 2000. In the Report, the Committee definesindependent DIRECTORS as: INDEPENDENT DIRECTORS are DIRECTORS who apart from receivingdirector s remuneration do not have any other material pecuniaryrelationship or transaction with the company, its promoters, itsmanagement, or its subsidiary, which in the judgment of the Boardmay affect their independence of judgment.

8 The scams such as Enron, WorldCom, Qwest, Global Crossing and themilestone legislation SOX triggered corporate governance reforms inthe international arena. Accordingly, in the year 2002, the Governmentof India appointed Naresh Chandra Committee which among otherrecommendations in line with international best practices, recommendedthat the extant definition of INDEPENDENT director should be mademore major development took place in the year 2002, whena Committee was formed by SEBI under the chairmanship ofN R Narayanamurthy for reviewing the implementation of corporategovernance code by listed companies.

9 Accordingly, the Committeerevised clause 49 to include the revised definition of IndependentDirector as under [(Para I. (A) of Clause 49 of Listing Agreement)]: iii. For the purpose of the sub-clause (ii), the expression independentdirector shall mean a non-executive director of the company who:(a) apart from receiving director s remuneration, does not have anymaterial pecuniary relationships or transactions with the company,its promoters, its DIRECTORS , its senior management or its holdingcompany, its subsidiaries and associates which may affectindependence of the director.

10 1 INDEPENDENT DIRECTORS A HAND BOOK22(b) is not related to promoters or persons occupying managementpositions at the board level or at one level below the board ;(c) has not been an executive of the company in the immediatelypreceding three financial years;(d) is not a partner or an executive or was not partner or an executiveduring the preceding three years, of any of the following:i. the statutory audit firm or the internal audit firm that isassociated with the company, andii.