Independent, non-exec directors get immunity

Proposed law provides protection from implication in fraud cases.

The revised Companies Bill, 2011, if passed in the present shape, will give a relief to independent directors (IDs).

The Bill, which the Cabinet cleared on Thursday and is slated to be tabled in the ongoing winter session of Parliament, has provided immunity to both IDs and non-executive directors — as not being a promoter or key managerial personnel (KMP).

The immunity provisions will strongly protect the independent directors, a senior ministry of company affairs official told Business Standard.

COMPANIES BILL, 2011
PROTECTING NON-PROMOTER SHAREHOLDERS

* Immunity to independent directors, non-executive directors

* Step to remove fear of implication in fraud cases

* Code for independent directors, data bank to facilitate appointment

* At least one woman director in prescribed class of companies

* Restriction on number of directorship by a person

* Strict norms to regulate third party transactions

* Not-for-profit company to be allowed to turn into an ordinary company

The Bill seeks to ensure independence and protection of interests of non-promoter shareholders through IDs. Specific code for IDs has been provided in the Schedule to the Bill, which has outlined the attributes, numbers, tenure and liability of the independent directors.

A data bank has been proposed to be maintained by a body or an institute notified by the central government to facilitate appointment of IDs.

The immunity to IDs and non-executive directors has been proposed to remove apprehensions of legal action against the independent directors in case of malpractices by the companies.

The fear of being implicated in the cases of fraud by the companies had led to hundreds of IDs resigning from the boards of various companies in 2009.

After investment banker Nimesh Kampani faced arrest in his alleged role as director in the Hyderabad-based Nagarjuna Finance scam, IDs, including a few renowned names, quit in droves, fearing that their reputations may get tarnished if they get embroiled in a controversy.

As per Clause 49 of the listing agreement prescribed by Securities and exchange Board of India, at least 50 per cent of the board should comprise independent directors for a company with an executive chairman. In the case of a company with a non-executive chairman, at least one-third of the board should be independent directors.

The immunity provision in the Companies Bill, 2011, is slated to instil confidence among the IDs, as they don’t want to take the liability that may arise of any corporate governance issues, and any malafide role played by management or majority shareholders.

The Bill has also proposed the making of “at least one” woman director mandatory in the prescribed class or classes of companies. The board may have a director representing small shareholders, who may be elected in the manner specified.

The Bill has also put restrictions on a person from accepting unlimited number of directorship. A person would not be able to hold the directorship in more than 20 companies. Out of this, public companies would not be more than 10.

A committee of the board having independent directors has been proposed to bring more independence in the functioning of the board and for protection of interest of minority shareholders.

Also brought in are suitable provisions to regulate third-party transactions — ones by a company with directors or relatives of directors or KMPs and associate companies. The Bill allows a not-for-profit-company to be converted into an ordinary company. The companies have also been allowed to issue equity shares with differential voting rights.