As per s. 149(6) of Companies Act, 2013, a director who meets the
requirements for Integrity, expertise, and experience, as well as the
exclusionary relationships test, but is not the managing director, whole-time
director, or nominated director is called as an Independent director. It is
further explained below:
A person of integrity:
Integrity is not a legal term. According to Black Law Dictionary, a person's
integrity refers to their moral ideals and character. The Nomination Committee
and the BODs conduct a qualitative interpretation of the candidate's integrity
against minimal legal criteria or expanded standards.
Expertise and experience:
Independent Directors should have a good mix of skills, experience, and
expertise in at least one of the following areas: finance, legal, managerial,
sales, promotion, administration, analysis, and corporate governance.
An Independent Director must not be connected to the company's promoters and
must be separate from the company's management. During the existing and two
prior financial years, has and had no pecuniary involvement with the company,
its holding, subsidiary, or associate company, or their promoters, or directors,
save from director's salary. Restriction on who can own shares in a corporation.
There are no present or former professional contacts that are forbidden.
Legal duties of Independent Directors:
- Fiduciary duties:
The duty of independent directors, the first one would be fiduciary
responsibility. The concepts of fiduciary duty encapsulate their legal
obligations. In "CBSE and Anr. Vs. Aditya Bandopadhyay and Ors.", it was
held that the dealing with the beneficiary or objects belonging to the
beneficiary, the fiduciary is required to act in trust and for the gain and
benefit of the beneficiary, and to behave in good conscience and fairness.
Fiduciary duty is categorised into two functions i.e., duty of care and duty
of diligence. A duty of care implies a responsibility to act with reasonable
caution, which includes a responsibility to carefully consider problems that
come before them. As per s. 166 (3) of Companies Act, 2013, the duty of care
requires directors to make decisions after careful consideration, balance in
decision, and knowledge of key data and details. Section 166 (3) of the
California Code of Regulations.
In "Smith v. Van Gorkom", it was held that the directors are required
to inform all the available data or information to themselves before
taking/making a decision. In law, due diligence entails doing everything
which is reasonable, not everything that is possible. It refers to
reasonable diligence, or the kind of diligence that a competent individual
would use in his own activities.
- Duty of Loyalty:
Directors must act in the best interests of the company; as per the Duty of
Loyalty. Directors are required under their duty of loyalty not to engage in
transactions that create a conflict of interest. As construed by the courts,
the duty of loyalty requires directors to act in the best interests of the
corporation as in held in the case of Dale and Carrington invt. P. ltd vs.
PK prathapan and Ors. Duty of loyalty even includes duty towards
shareholder i.e., to make a full and honest disclosure of all material
information when soliciting shareholder action. The duty of disclosure
regarding all related affairs of a company is an application of both the
duties of care and loyalty.
- Duty of demonstrating good faith:
Scheduling, evidentiary, recording, and archiving methods must be
established. IDs must also set the standard conduct and tone for the
company. Various others are instituting oversight role that act
independently, supervision of control system, threats, data, procedures, and
so on, addressing variances and demonstrating corrective measures, expansion
of concepts of fair play and reasonable pricing, particularly with involved
entities or parties with considerable influence, expose effectively.
Accountability of Independent Directors (IDs):
As per s. 149 (12) of CA, 2013, only actions of commission or omission by a
corporation that happened with the knowledge, attributable through board
proceedings, and with permission or connivance of ID, or if he had not behaved
conscientiously, are subject to legal accountability. This is the same as the
"business judgement rule" which is used in US. The safe harbour provisions must
Liability of IDs:
IDs work together to achieve a common aim of improving corporate governance
standards. Nevertheless, in terms of identifying liability, each ID is solely
liable for the proper execution of his or her tasks. The liability of IDs is
decided only after substantive and demonstrative assessment. The liability
restrictions under the "officer of default" stated under S. 2(60), CA 2013, can
be mitigated if the ID can demonstrate to the judges that the decision has been
made with reasonable deliberation and in good faith.
Functions of IDs:
The functions of IDs are categorised into two main function i.e., advisory
functions (consulting management) and oversight functions (monitoring
management). The IDs must intervene in many areas of the company such as
strategy, performance, financial reporting, internal controls and risk, people
and so on. The independent directors also has a responsibility to safeguard the
interests of all the stakeholders of the company (especially minority). The
stakeholders of the company meant all those who have interest on the company,
its functioning, its growth and development. They may be its employees,
shareholders, protection of environment etc.
IDs in Board committees:
Existing Board members are divided into committees based on their level of
competence. Committees need independent directors because of their specific
subject-matter expertise and relevant business experience, as well as to
inculcate independent thinking. The role of IDs is not one that is broad in
scope. In their particular fields, they are experts. Finance, law, management,
sales, marketing, administration, research, corporate governance, technical
operations, and other disciplines connected to a company's business are
mentioned as areas of study for IDs under CA2013.
The level of competence required of an ID varies depending on the committee with
which they are affiliated. Members of the Audit Committee, for example, must be
able to read and comprehend financial statements. As a result, they will be
assigned to the committee in which they are expertised.