Emerging Role of Independent Directors in the Board

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: nkjain 1953@gmail. com

What Boards Ought to be ? l l l 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. nkjain 1953@gmail. com 9818348811 2

What Directors should do…. l l l 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. nkjain 1953@gmail. com 9818348811 3

Why Independent Directors ? l 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. nkjain 1953@gmail. com 9818348811 4

Issues & Challenges l l l l Qualifications Relationships Selection & Appointment Numbers Tenure Role & Functions Performance Evaluation nkjain 1953@gmail. com 9818348811 5

Issues & Challenges l l l Rewards Quorum Liability Challenges Way Forward nkjain 1953@gmail. com 9818348811 6

Issue- 1: Qualifications l l l 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. nkjain 1953@gmail. com 9818348811 7

Issue- 2: Relationships l l 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. nkjain 1953@gmail. com 9818348811 8

Issue- 2: Relationships l l i. ii. l 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. nkjain 1953@gmail. com 9818348811 9

Issue- 3: Manner of Selection l l l 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. nkjain 1953@gmail. com 9818348811 10

Issue 3: Appointment of IDs l l l 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. nkjain 1953@gmail. com 9818348811 11

Manner of Appointment l 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. nkjain 1953@gmail. com 9818348811 12

Letter of Appointment l Ø Ø 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; nkjain 1953@gmail. com 9818348811 13

Issue 4: Numbers of IDs Following companies shall have at least 1/3 rd of the total number of directors as IDs: Ø Every listed public company; Ø Public Companies having: i. paid up share capital of ₹ 100 cr or more; or ii. turnover of ₹ 300 cr or more; or iii. in aggregate, outstanding loans or borrowings or debentures or deposits exceeding ₹ 200 crs. Ø nkjain 1953@gmail. com 9818348811 14

Issue 5: Tenure of IDs l l 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. nkjain 1953@gmail. com 9818348811 15

Issue 6: Role & Functions of ID l l l Board of Directors Audit Committee Corporate Social Responsibility Committee Nomination and Remuneration Committee IDs role in Separate Meetings nkjain 1953@gmail. com 9818348811 16

Duties of Directors l l l l 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 17

Role & Functions 0 f 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 l nkjain 1953@gmail. com 9818348811 18

Role & Functions 0 f ID l l 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; nkjain 1953@gmail. com 9818348811 19

Role & Functions 0 f ID l l l 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. nkjain 1953@gmail. com 9818348811 20

IDs Role on Audit Committee l l Ø Ø Ø 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 nkjain 1953@gmail. com 9818348811 21

IDs role on N & R Committee l l 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. nkjain 1953@gmail. com 9818348811 22

IDs role on CSR Committee l l 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. nkjain 1953@gmail. com 9818348811 23

IDs Role in Separate Meetings l l l a. b. c. 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. nkjain 1953@gmail. com 9818348811 24

Issue 7: Performance Evaluation l l 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. nkjain 1953@gmail. com 9818348811 25

Issue 8: Rewards Ø Ø IDs shall be entitled to profit related commission and sitting fee. IDs not entitled to stock option. nkjain 1953@gmail. com 9818348811 26

Issue 9: Quorum l l 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. nkjain 1953@gmail. com 9818348811 27

Issue 10: Liability of IDs l 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. nkjain 1953@gmail. com 9818348811 28

Liability of IDs Ø Liability to outsiders Ø Liability to company Ø Liability to shareholders Ø Liability for statutory defaults and violations Ø Liability for fraud. Ø Acts of Co-director Ø Criminal Liability Ø Other Laws nkjain 1953@gmail. com 9818348811 29

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 l l l 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 l l l 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, -l Which is false in any material particulars, knowing it to be false; or l 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 l l l 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 ₹ 1 lac to ₹ 5 lac or with both. By: N K Jain 34

Prohibition on Insider Trading Sec. 195 l l 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 35

Issue 11: Challenges for IDs l l l 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. nkjain 1953@gmail. com 9818348811 36

Issue 12: Way Forward for IDs l l 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; nkjain 1953@gmail. com 9818348811 37

Way Forward for IDs l l 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. nkjain 1953@gmail. com 9818348811 38

“It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities. ” Josiah Charles 39

THANK YOU N K Jain B. Sc, LLB. , DCL, FCS, FCPS Corporate Advisor Cell: 09818348811 Landline: 0120 - 4263965 E-mail: nkjain 1953@gmail. com