Independent Directors in Listed Companies


By

D. Aruna Kumar
Assistant Professor (Finance & Accounting Area)
Lokamanya Tilak P G College of Management
Ibrahimpatnam, Hyderabad-501 506
&
S. Suvarna
Faculty Member
ICFAI National College
Raichur-584 101, Karnataka
E-mail:
dakumars@gmail.com
 

________________________________________________________________________
Securities Exchange Board of India (SEBI) mandated that all (over 9000) listed companies are required by 31st December 2005, to have 50% of their Boards comprise of Independent Directors (IDs), an estimate puts the requirement of Independent Directors at over 30,000,  under Clause 49 of the listing agreement. The Concept of IDs is not there in the Companies Act, 1956. The Act has delegated the administration of some sections relating to listed companies to the capital market regulator, SEBI. SEBI in its circular to stock exchanges in October 2004, has reviesed the clause 49 of the listing agreement which mainly deals with IDs and audit committees. The circular says a public listed company with an executive chairman on the board should reserve at least half of the board to independent directors. If the chairman is non-executive, a third would suffice. In the case of non-listed companies there is no such requirement now.

Core Competencies and Qualifications of an ID

 An ID is a non-executive director on the board of a company who has integrity, sense of accountability, track record of achievements, financial literacy, experience and the independence to balance the interests of various stakeholders, ability to think strategically, degree of commitment, sense of devotion

Disqualifications of an ID

 According to SEBI some of the important disqualifications of IDs are listed below;

  • Having a 'pecuniary' relationship with the company or any of its arms, other than receiving the director's remuneration will be disqualified.
  • An ID should not be related to the promoters or anyone in senior management position from one level below the board. He should not have been an executive of the company or of its audit, consulting or legal firms in the past three financial years. Besides owning 2 per cent or more of the block of voting shares or being a service provider to the company, would disqualify one from taking up an Independent Directorship in a listed company.

Duties and responsibilities of IDs

IDs play an active role in various committees to be set up by a company to ensure good governance. Listed companies are required to set up audit committees of minimum three directors, on which, two-thirds should be IDs. The audit committee chaired by a ID, shall inspect the company's financial statements and can also recommend replacement of the statutory auditor.

IDs are responsible for formulating and implementing business strategies on behalf of shareholders and have to ensure that the business activities of the company are compatible with all legal requirements. They have to perform crucial governance functions.

A platform for IDs

How do listed companies go about finding IDs besides contacting persons known to them or by word-of-mouth, thereby limiting the horizon? On the other hand, how do thousands of professionals who are competent and willing to become IDs let the listed companies know about themselves and get invited? To resolve all these problems a website www.primedirectors.com  is launched by SEBI Chairman, Shri M. Damodaran, on September, 14, 2005. This is free-of-charge platform both for professionals to enroll themselves and for listed companies to reach them, with complete confidentiality.
 


D. Aruna Kumar
Assistant Professor (Finance & Accounting Area)
Lokamanya Tilak P G College of Management
Ibrahimpatnam, Hyderabad-501 506
&
S. Suvarna
Faculty Member
ICFAI National College
Raichur-584 101, Karnataka
E-mail:
dakumars@gmail.com
 

Source: E-mail November 18, 2005

   

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