Transcript Corporate

Emerging Role of
Independent Directors in
the Board Room
N K Jain
B.Sc, LLB.,DCL,FCS,FCPS
Corporate Advisor
Cell: 09818348811
Landline: 0120 - 4263965
E-mail: [email protected]
What Boards Ought to be ?
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Knowing enough about the company
to answer for its actions yet being
able to stand back from day to day
management.
Sensitive to the pressure of short
term issues and yet being informed
about broader and long-term trends.
Focus on business’s commercial
activities while acting responsibly
towards its employees, business
partners and society.
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What Directors should do….
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Question
intelligently,
debate
constructively, challenge rigorously and
decide dispassionately.
Support executives in their leadership of
the business while monitoring their
conduct.
Gain the trust and respect of other
board members.
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Why Independent Directors ?
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The purpose of induction of
Independent Director on the board of
a company is to improve objectivity,
transparency and accountability in
the governance of the company.
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Issues & Challenges
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Qualifications
Relationships
Selection & Appointment
Numbers
Tenure
Role & Functions
Performance Evaluation
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Issues & Challenges
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Rewards
Quorum
Liability
Challenges
Way Forward
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Issue- 1: Qualifications
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ID is a director other than a MD/WTD/ ND.
ID is person of integrity, possesses relevant
expertise, experience & qualifications.
ID shall posses appropriate balance of skills,
experience and knowledge in finance, law,
management, sales, marketing, research,
administration, corporate governance,
technical operations or other disciplines
related to the company’s business.
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Issue- 2: Relationships
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Not a promoter of the Company/HC/SC/AC.
Not related to promoters or directors etc.
No pecuniary relationship with C/HC/SC/AC
or Promoters/Directors.
Relatives not to have pecuniary relationship
or transactions with the C/HC/SC/AC or
promoters/directors amounting to 2% or more
of its gross turnover or total income or ₹ 50
lac whichever is lower.
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Issue- 2: Relationships
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Not a KMP/employee of the C/HC/SC/AC.
Not an employee/proprietor/partner of:
Auditors/PCS/Cost Auditor, or
Legal or consulting firm having transactions
with the C/HC/SC/AC amounting to 10% or
more of the gross turnover of such firm.
Does not hold, with his relatives, 2% or more
of the total voting power of the company.
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Issue- 3: Manner of Selection
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An ID may be selected from a data bank
containing names, addresses & qualifications
of persons willing and eligible to act as IDs.
A body, institute or association having
expertise in creation and maintenance of
such data bank and notified by the CG shall
put such data on its website for use.
The responsibility of exercising due diligence
before selecting an ID lies with the company.
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Issue 3: Appointment of IDs
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Appointment process of IDs shall be
independent of the company management.
While selecting IDs, the Board shall ensure
that there is appropriate balance of skills,
experience, and knowledge in the Board to
discharge its functions and duties effectively.
Appointment of IDs shall be approved at the
meeting of the shareholders.
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Manner of Appointment
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The explanatory statement shall include a
statement that in the opinion of the Board, the
ID proposed to be appointed fulfils the
conditions specified in the Act and the Rules
and the proposed director is independent of
the management.
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Letter of Appointment
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The appointment of ID shall be formalised
through a letter which shall set out :The terms of appointment;
The expectation of the Board, the board level
committees in which the ID is expected to
serve and its tasks;
Fiduciary duties and accompanying liabilities
Provision for D and O insurance, if any;
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Issue 4: Numbers of IDs
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ii.
iii.
Following companies shall have at least 1/3rd of
the total number of directors as IDs:Every listed public company;
Public Companies having:
paid up share capital of ₹ 100 cr or more; or
turnover of ₹ 300 cr or more; or
in aggregate, outstanding loans or borrowings
or debentures or deposits exceeding ₹ 200 crs.
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Issue 5: Tenure of IDs
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ID can hold office for 2 consecutive terms of
5 years each (total 10 years).
IDs are eligible for re-appointment after
cooling period of 3 years.
ID shall not be appointed/associated with the
company in any other capacity, directly or
indirectly, during the cooling period.
Any tenure of an ID on the date of
commencement of the Act not to be counted.
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Issue 6: Role & Functions of ID
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Board of Directors
Audit Committee
Corporate Social Responsibility Committee
Nomination and Remuneration Committee
IDs role in Separate Meetings
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Duties of Directors
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To act in accordance with the articles of the
company.
To act in good faith to promote objects of the
company for the benefit of its members, employees,
community and for protection of environment.
To act with due care and exercise independent
judgment.
No conflict of interest with the company.
Not to achieve any undue gain or advantage.
Not to assign his office which shall be void.
Punishment for contravention: Fine of ₹ 1 to ₹ 5 lac.
By: N K Jain
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Role & Functions 0f ID
Help in bringing an independent judgement
on the Board’s deliberations specially on the
issues of:i.
Strategy
ii.
Key Appointments & Performance
iii.
Risk Management
iv.
Resources
v.
Standards of Conduct
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Role & Functions 0f ID
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Bring an objective view in the evaluation of
the performance of board and management;
Scrutinise the performance of management
and monitor the reporting of performance;
Satisfy on the integrity of financial information
and that financial controls and the system of
risk management are robust and defensible;
Satisfy the interests of all stakeholder,
particularly the minority shareholders;
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Role & Functions 0f ID
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Balance the conflicting interest of stakeholders;
Determine appropriate level of remuneration of
EDs, KMPs, and senior management and have
a prime role in appointment and removal of EDs,
KMPs and senior management;
Moderate and arbitrate in the interest of the
company as a whole, in situations of conflict
between management and shareholder’s
interest.
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IDs Role on Audit Committee
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Majority of members shall have ability to read
and understand the financial statement.
Terms of reference include:Auditor’s performance, effectiveness of audit;
Examination of FS and auditor’s report;
Approval of related party transactions;
Scrutiny of inter-corporate loans/investments;
Monitoring of end use of funds of public offers
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IDs role on N & R Committee
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Not less than ½ members shall be IDs.
To identify persons for appointment as
directors and in senior management and to
recommend their appointment and removal;
Evaluation of every director’s performance;
Formulate and recommend to the Board a
policy relating to the remuneration for the
Directors, KMPs and other employees.
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IDs role on CSR Committee
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At least one ID shall be on the CSRC.
To formulate and recommend to the Board a
CSR Policy indicating the activities to be
undertaken by the company;
Recommend the amount of expenditure to be
incurred on the activities specified in Sch VII.
Monitor the CSR Policy from time to time.
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IDs Role in Separate Meetings
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IDs shall hold at least 1 meeting in a year
without non-ids and management personnel.
All IDs shall strive to attend such meeting.
The meeting shall review the performance of:
Non-IDs and the Board as a whole;
Chairperson of the company, taking into
account the views of EDs and non-EDs;
Asses the quality, quantity and timeliness of
flow of information to the Board.
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Issue 7: Performance
Evaluation
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Performance Evaluation of IDs shall be done
by the entire Board of Directors excluding the
director being evaluated.
On the basis of the report of performance
evaluation, it shall be determined whether to
extend or continue the term of appointment of
the ID.
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Issue 8: Rewards
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IDs shall be entitled to profit related
commission and sitting fee.
IDs not entitled to stock option.
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Issue 9: Quorum
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Board Meeting may be called at shorter
notice to transact urgent business subject to
the condition that at least one ID shall be
present at the meeting.
In the absence of an ID in such meeting, the
decisions taken at the meeting shall be
circulated to all the directors and shall be final
only on ratification thereof by at least one ID.
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Issue 10: Liability of IDs
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An ID shall be liable for acts of commission or
omission by a company which had occurred
with his knowledge, attributable through
board processes, and with his consent or
connivance or where he had not acted
diligently.
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Liability of IDs
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Liability to outsiders
Liability to company
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Liability to shareholders
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Liability for statutory defaults and violations
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Liability for fraud.
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Acts of Co-director
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Criminal Liability
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Other Laws
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Liability for Frauds (Sec 447)
•“fraud”
in relation to affairs of a company or any body
corporate, includes any act, omission, concealment of
any fact or abuse of position committed by any person
or any other person with the connivance in any manner,
with intent to deceive, to gain undue advantage from,
or to injure the interests of, the company or its
shareholders or its creditors or any other person,
whether or not there is any wrongful gain or wrongful
loss;
•Director shall be held guilty of fraud
Actions for which punishment for
fraud is provided for in the Act
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Incorporation of a company - furnishing any false or
incorrect information or suppression of any material
information.
Mis-statements in Prospectus – Where a Prospectus, issued,
circulated or distributed includes any statement which is
untrue or misleading in form or context in which it is included
or where any inclusion or omission of any matter is likely to
mislead.
fraudulently Inducing persons to invest money - Any person
who, either knowingly or recklessly makes any statement,
promise or forecast which is false, deceptive or misleading, or
deliberately conceals any material facts, to induce another
person to invest money
Actions for which punishment for
fraud is provided for in the Act
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Deposits had been accepted with intent to defraud the
depositors or for any fraudulent purpose.
Where business of a company has been or is being carried
on for a fraudulent or unlawful purpose, every officer of the
company who is in default shall be punishable for fraud
Furnishing of False Statement- If in any return, report,
certificate, financial statement, prospectus, statement or
other document required by, or for, the purposes of this Act
or rules thereunder, any person makes a statement,- Which is false in any material particulars, knowing it to be
false; or
 Which omits any material fact, knowing it to be material,
he shall be liable under clause 447.
Penalty for fraud (Sec 447)
Any person who is found to be guilty of fraud, shall be
punishable:
•imprisonment not less than six months but which may
extend to ten years
•fine not less than the amount involved in the fraud, but
which may extend to three times the amount involved in
the fraud:
Provided that where the fraud in question involves
public interest, the term of imprisonment shall not be
less than three years.
Prohibition on forward
dealings Sec. 194
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The Act provides for prohibition on forward dealings by
Directors and KMPs in securities of the company or in
its holding, subsidiary or associate company .
Liability for contravention: To surrender such
securities to the company and the securities shall
continue to remain in the name of the transferor.
Punishment for contravention: Imprisonment up to 2
years or fine of ₹ 1lac to ₹ 5lac or with both.
By: N K Jain
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Prohibition on Insider Trading
Sec.195
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No Director or KMP of a company shall enter
into insider trading in respect of securities of
the company.
Punishment for contravention: Punishable
with imprisonment up to 5 years or with fine
of ₹ 5 lac to ₹ 25 crore or 3 times the amount
of profit made out of insider trading,
whichever is higher or with both.
By: N K Jain
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Issue 11: Challenges for IDs
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To uphold ethical standards of integrity;
To act objectively and constructively;
Devote sufficient time for informed decisions;
Not abuse his position for personal gains;
Not to lose his independence;
To inform the Board immediately upon loss of
independence.
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Issue 12: Way Forward for IDs
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Undertake induction to regularly update and
refresh skills and knowledge;
Thoroughly read the Board agenda papers
before attending the board meeting;
Seek clarification , information and outside
expert advise/opinion at company’s cost;
Attend all meetings of the board, its
committees and the general body;
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Way Forward for IDs
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Ensure that your concerns about company
are addressed by the board;
Make sure that unresolved concerns are
recorded in the minutes of the board meeting;
Act within the authority;
Do not disclose confidential information.
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“It is easy to dodge our responsibilities, but
we cannot dodge the consequences of
dodging our responsibilities.”
Josiah Charles
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THANK YOU
N K Jain
B.Sc, LLB.,DCL,FCS,FCPS
Corporate Advisor
Cell: 09818348811
Landline: 0120 - 4263965
E-mail: [email protected]