The government's concept paper on the Companies Act has proposed that the Naresh Chandra Committee-recommended attributes for independent directors be taken on board while framing the new law. | |
| The committee had said that the independent directors should not have any material pecuniary relationship or transaction with the company, its promoters, senior management and subsidiaries. |
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| In its report submitted in late 2002, the committee had noted that the director should not have been an executive of the company during the last three years. |
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| He should also not be a partner or an executive of the statutory auditing firm or the internal audit firm associated with the company for the last three years. |
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| The independent director should also not be a significant supplier or vendor of the company, nor should he hold more than 2 per cent of the block of voting shares. The committee had also prescribed that these directors should not have three terms, with each term consisting of three years. |
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| The attributes should be only for public limited companies with a paid-up capital and free reserves of at least Rs 10 crore and an annual turnover of Rs 50 crore. Further, nominee directors were proposed to be excluded from the pool of directors in shortlisting independent directors. |
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| The Committee had said, "Directors are fiduciaries of shareholders and not of the management." The committee wanted a majority of the directors on the board to be independent directors with adequate representation on the audit committee. |
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| It had proposed that the minimum board size of all listed companies and unlisted public limited companies with a paid-up capital and free reserves of Rs 10 crore and an annual turnover of Rs 50 crore be fixed at seven, with at least four of them being independent. |
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| The debt-free unlisted public companies with less than 50 shareholders and unlisted subsidiaries of listed companies had, however, been exempted. |
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| "The committee dealt that to be really effective, independent directors need to have a substantial voice by being in a majority. It was felt that rather than the management or the promoters, the committee should pit its weight behind minority shareholders and other stakeholders such as consumer or creditors," it said. |
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| The proposal had, however, run into trouble with corporates who were not willing to accommodate independent directors. They were of the opinion that it would be tough for them to find a large number of such directors once the law came into force. The government had proposed to give them time. |
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| This time, too, the concept paper has said that companies would be given time. |
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| For instance, in the case of audit committees, where at least two independent directors are proposed to be appointed, companies would be given up to one year to reconstitute the committee and bring it in line with the new norms. |
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| Who can become a director? |
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- The independent directors should not have any material pecuniary relationship or transaction with the company, its promoters, senior management and subsidiaries
- The independent director should also not be a partner or an executive of the statutory auditing firm or the internal audit firm associated with the company for the last three years
- The independent director should also not be a significant supplier or vendor of the company, nor should he hold more than 2 per cent of the block of voting shares
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