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Independent Directors- How much

independent in India?

Ca Jai Prakash Agarwal

posted on 12 March 2015

The concept of independent directors is very holy

concept and it has been derived mainly from
capital market code and corporate code of US
and European country. This concept was
introduced mainly to increase the autonomy of
board in talking decision and to promote the
transparency, accountability and fairness of
disclosures in financial statements. Independent
directors are assumed to play the pivotal role in
ensuring independence of the Board from
management. They bring outside perspective and
express their independent views in boardroom
deliberations and monitor the executive
management Recently Companies Act, 2013 has
mandated the appointment of independent
directors in Indian corporate. The under given diagram explains the provision of Companies Act,
2013 about appointment of independent directors.

Now in view of above provisions, various companies are required to appoint the independent
directors at its Board. Majority of the Indian companies are owned by business families/groups
/government where the owners play a very dominant role in Board working. There are very few
companies which are professionally managed. In order to comply the above cited provisions of the
Companies Act, 2013, Indian Corporate are facing difficulties. In order to keep focus on the topic of
this article, we will keep our discussion concentrated only on the provisions relating to independence
of Directors and the present state of the independence enjoyed by the non executive directors on the
board. The provisions relating to independent directors in India have got their roots mainly from
Sarbanes Oxley Act, 2002 of USA and clause 49 was introduced in year 2005 in listed agreement
which mandates the appointment of independent directors in specified listed entities.

This may be noted that even after 10 years of its regime, this provision of clause 49 has not made
much improvement. It is perceived that in India, independent directors have failed in monitoring the
executive management. One reason might be weak regulatory institutions. But the more important
reason is that in Indian business environment, where the issue is principal-principal conflict and not
a typical principal-agent conflict, it is too much to expect effective monitoring by independent
directors. This is worth notable fact that in India, concentration of ownership is a norm rather than an
exception. Public sector enterprises, family businesses and group companies dominate the corporate

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Independent Directors- How much independent in India? http://www.caclubindia.com/articles/independent-directors-how-much-i...

sector.

The dominant shareholder, who enjoys significant power, manages the company through its nominee
managers. The Board has very little say in the appointment of CEO, directors and senior
management. Recently, the UOI has removed many independent directors from the board of various
public companies which is a fine example of abuse of dominance by the government. This fact
provides strong evidence to belief that in Indian PSE, independent directors are not independent and
they are mere the nominees of the government. This may please be noted that the case is not
different even in case of family managed companies.

As per the companies act,2013, the independent directors are appointed by the shareholders but in
case of family owned business majority of the equity is held by a group or a concentrated family
members and they appoint the independent directors according to their suitability. Although,
companies Act, 2013 mandates to form the remuneration and negotiation committee by specified
classes of the companies, but it is doubtful whether this provision will make much difference.

In a family-managed company, family governance takes precedence over the governance of the
company. In case of a company that belongs to a business group, group policy assumes importance
in decision-making. The dominant shareholder expects the Board to take into consideration issues in
family governance and the policy of the business group. Therefore, companies adopt strategies,
which not necessarily aim to maximize firm value. Too much focus on strengthening the institution
of independent directors would not radically change the quality of corporate governance. We have to
search for innovative solutions. Issues are challenging.

In view of make a investment friendly regime, the government of India is taking various steps i.e.
implementation of Indian AS, empowering SEBI for taking adjudications. The Ministry of corporate
affairs has already issued notification for implementation of Indian AS by specified classes of
Companies in year 2015 onwards. Hope, the implementation of Indian AS in an effective manner
will improve the state of transparency in the Indian Corporate.

Jai Prakash Agarwal

ACA, ACS, ACMA, LL.B, DISA (ICAI),

DIRM (ICAI), UGC (NET) Ex. Deputy Director

Published in Corporate Law

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