The concept of independent directors was initially introduced with a view to increase transparency, fairness and independence in decision making and, protect stake holders’ interest. So far only listed public companies were required to appoint independent directors under the Listing Agreement. Now, the Companies Act, 2013 extends such requirement to cover big public companies also. The move may infuse more objectivity in decision making of companies, but it is set to create some turmoil as well.Finding a person who has all the prescribed qualifications will be a challenge.

Independent Directors Under the Companies Act, 2013

• At least 1/3^rd of the total number of directors of every listed public company should be independent directors. As per the provisions of Draft Rules prescribed for this section, apart from listed companies following companies to have at least 1/3^rd of the number of directors as independent directors:
• Public companies having paid - up share capital of Rs 100 crore or more; or
• Public companies having turnover of Rs 300 crore or more; or
• Public companies which in aggregate have outstanding loans, or borrowings, or debentures, or deposits, exceeding Rs 200 crore or more.

It is to be noted that, the Draft Rules prescribe that the these criteria shall be applicable for the first year and shall continue to apply to that company in the subsequent years during the tenure of the ID even if the paid up share capital or turnover, or borrowings/ deposits, fall below the specified limits.

• Definition of an Independent Director:

• Other conditions to be met:

Transitional phase for companies:

Companies existing on or before the date of commencement of this Act are to comply with the requirement of appointing independent director within one year from such commencement or from the date of notification of the Rules in this regard, as may be applicable.

Independent Directors under Present Laws
While the concept of independent directors is new in the Companies Act, 2013 , it was already provided for in the Listing Agreement of the Stock Exchanges. A brief comparison is provided hereunder:-:

So it is clear that there will be a drastic change in the eligibility criteria for independent directors with the introduction of the Companies Act, 2013, where the relationship of these individuals not only with the company but also with its holding, subsidiary and associate companies has to be checked in the beginning and also subsequently. This will make the task of finding an independent director who meets all the criteria very difficult for companies.
From the point of view of stakeholders it is certainly a very good move, provided that companies do not face problem in finding such persons.

Facts and Figures
A total of 7,521 individuals occupy a total of 9,811 independent directorship positions on 2,827 BSE-listed companies, as on 15th July 2012, according to Directors Database website, an initiative of the Bombay Stock Exchange (BSE) and Prime Database.

Independent directors of following companies have been associated with the company for more than 10 years.

Industry Impact & Concern Factors
While the Independent Director would focus on safeguarding stake holders’ interest, there are some concerns that implementation will not be easy.

Moreover, the Board is also required to qualify that the proposed appointee fulfils all the eligibility conditions. This would mean that the audit or concurrence system for such independent directors should be so strong that the Board is able to get comfort that qualification conditions are fulfilled.

• Secondly, there is a limit on the term of an Independent Director. A person can be appointed for a term of 5 years and thereafter for 5 more years, beyond which, he would not be eligible to be appointed as such until 3 years have lapsed, during which the person should not have any association with the company. This implies that a person may be appointed as an independent director of a company for a maximum of 10 years at a stretch. This has both negatives and positives , negative would be that many companies will have to part with persons of integrity who have done a good continuous job as independent directors on its Board and positive , it will reduce the chances of development of any nexus between the independent director and the promoters.
• Thirdly, with regard to liability of independent directors, it has been provided that they would be responsible only for such acts of omission or commission by a company which had occurred with their knowledge, attributable through Board processes, and with their own consent or connivance or where they had not acted diligently. This means that on any Board decision on which they have consented, even after acting with complete diligence and in good faith, they would be held liable for default, if it occurs. The liability of such directors has always been the cause of concern and will continue to be.

Though the concept tries to create objectivity and fairness in decision making of a company and the qualification criteria is meant to minimize chances of any nexus between the company and independent directors, it would be interesting to see how much of this is implementable and more so, how strong a database the government is able to create so that such desired independent directors are easily available to companies. Moreover, what is also required is drastic shift in the mind set of promoters to acknowledge the independent directors on their board and allow them the freedom to contribute.