The Companies Act,1956 does not give us the particular meaning of an Independent Director. In any case, Independent Directors are in the spotlight according to the Companies Act, 2013. A different basis has been set up for the organizations to have an Independent Director.
Essentially, we can state Independent Director that an autonomous chief is a non-official executive of an organization who helps the organization in enhancing corporate believability and administration norms. He/She doesn’t have any sort of association with the organization that may influence the freedom of his/her judgment.
The expression “Independent Director” has been characterized in the Act, alongside a few new necessities identifying with new prerequisites identifying with their arrangement, obligations, job, and duties. The arrangements identifying with arrangement of Independent chiefs are contained in Section 149 of the Companies Act, 2013 ought to be perused alongside Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014
Role of an Independent Director
Autonomous Director goes about as a guide, mentor, and tutor to the Company. The job incorporates enhancing corporate validity and administration guidelines by functioning as a guard dog and help in overseeing hazard. Free executives are in charge of guaranteeing better administration by effectively including in different councils set up by organization.
Ventures made by a financial specialist in an organization are based on speculator trust in the solid establishment and eventual fate of the organization and also the administration of the organization. The financial specialists emphatically trust that the administration won’t take part in any untoward practice that won’t decisively hurt their venture. Such speculator certainty was disintegrated by numerous corporate tricks that became visible in the United States of America amid 2001-02. A portion of these tricks included organizations of notoriety, for example, Enron and WorldCom which denied the investors of a huge number of dollars.
Enron keenly controlled its books of record to conceal billions of dollars paying off debtors from fizzled arrangements and undertakings. Therefore investors neglected to discover the total assets of the organization and put vigorously in the organization, accordingly bringing about an ascent of market estimation of its offers. At the point when the trick was uncovered, investors lost monster measures of cash. The trick came as a major hit to financial specialist certainty everywhere throughout the world. It featured the requirement for pressing measures to be taken for straightforwardness in organizations and resuscitate speculator trust in the corporate world.
With the question “restore speculator trust in the honesty of corporate divulgences and money related detailing” the US legislators ordered ‘People in general Company Accounting Reform and Investor Protection Act’ (in the Senate) and ‘Corporate and Auditing Accountability and Responsibility Act’ (in the House). It accommodated the initiation of the Public Company Accounting Oversight Board (PCAOB), accused of supervising, managing, investigating and restraining bookkeeping firms in their jobs as reviewers of open organizations. The demonstration additionally secured issues, for example, reviewer freedom, corporate administration, inside control appraisal, and improved money related divulgence.
The simple reason behind naming free chiefs is to put balanced governance on every single movement of the organization and bring autonomy, unprejudiced nature and wide experience.
Need for Independent Director’s in India:
In wake of the money related embarrassments in the United States of America, the requirement for proportions of corporate administration was felt in India. This was satisfied by the idea of ‘Autonomous Director’ (ID) as impacted by the US controls for Corporate Governance.
More than 75 percent of expansive recorded Indian organizations are family-possessed, in which a family has a huge (30 percent upwards) shareholding in the organization.
In an organization overseen by “proprietors”, there is an extremely solid inspiration for administrations to work at a long haul share cost increment, i.e. long haul income increment, in light of the fact that the family’s success and notoriety ride on the flourishing and moral dealings of the organization. With the advertisers having the controlling shareholding and for every viable reason, the advertiser really selects the executive, free or something else, how autonomous can the free chief genuinely be. In the present situation, this whole routine appears to be excess and in fructuous.
Role and Liability of Independent Directors:
It has been constantly talked about with respect to whether the autonomous chiefs are required to add to the improvement of corporate methodology, auditing the execution of administration or whether their essential job is to ensure the premiums of the general population investors by contradicting sketchy administration strategies and building up satisfactory controls against low advancement by the advertisers and the administration. While a business warning job may sound perfect, it may not be basically achievable as free chiefs are not accountable for official capacities, not conscious of the everyday undertakings and practically speaking release their obligations just at the gatherings of the board.
The Independent Directors have a trustee obligation towards the organization and by law the Independent chiefs may confront common and criminal risk for their demonstrations and exclusions. The job of Independent Directors on the Board of an organization went under examination by and by after the Satyam disaster where the Serious Fraud Investigation Office (SFIO) had recorded seven bodies of evidence against eleven ex-chiefs (counting IDs) of Satyam. The capture by the AP legislature of the Independent Director of Nagarjuna Finance in the supposed association of reimbursement of open stores exacerbated the circumstance.
The Satyam disaster has brought up issues over the duties and liabilities of the IDs. Also in the Bhopal gas catastrophe decision the court held Keshub Mahindra, ex-director, Union Carbide India, blameworthy and condemned him to two years of detainment. This made a dread psychosis in the brain of ID. Following these occasions, about 340 IDs have surrendered from their post. Numerous individuals are presently not coming to acknowledge the post of ID and stain their notoriety.
However, the Companies Act, 1956 recommends common and criminal risk for chiefs, it doesn’t make any refinement for free executives and even such executives can be held to be “officers in default” under Section 5. The foundation of free chiefs is the production of administrative prerequisites that are set somewhere around SEBI as it were. “Cases like Satyam and certain others, wherein the autonomous chiefs are confronting criminal risk for demonstrations of misfeasance by the board have raised impressive trouble and apprehension in the free executives’ locale”.
Past cases, be it check ricocheting or identifying with default in the result of a specific organization, uncover that chiefs of the organizations have been superfluously arraigned alongside the organization.
There have been a plenty of situations where the Supreme Court of India and the different High Courts have set out a specific criteria previously crediting the obligation on the chiefs of the organization. Since no particular arrangement has been accommodated the risk of Independent Directors they are incorporated under the term executives itself consequently same liabilities are pulled in as on account of chiefs. Some of them have been refered to underneath to empower us to draw a deduction as to the previously mentioned issue.
In M/s Pepsi Foods Ltd. v. Special Judicial Magistrate, the Supreme Court upheld that “the responsibility lies on the shoulders of the magistrate that he must apply his mind on the facts and the averments made against the directors or the officers of the company and then summon the concerned officers or directors of the company since summoning in a criminal matter is a serious matter and a criminal matter cannot be set into motion as a matter of course”.
SMS Pharmaceuticals v. Neeta Bhalla “case is by far the most comprehensive case on director’s liability. It summarizes the law on the issue of director’s liability and the defences available to directors. This case essentially dealt with Ss. 138 and 141 of the Negotiable Instruments Act, 1881. “The fact that a person is a director of company is not sufficient to make a person liable under Section 141. The director of the company cannot be deemed to be in charge of and responsible to company for conduct of its business. The basic requirement of Section 141 is that person sought to be made liable should be in charge of and responsible for conduct of business of company at relevant time no deemed liability of director in such cases. The Managing director or Joint Managing director admittedly in charge of company are responsible to company for conduct of its business. The holders of such positions in the company become liable under Section 141. The Managing Director or Joint Managing Director, by virtue of the office they hold is included under Section 141. Also, the signatory of cheque which is dishonored is concerned is clearly responsible for incriminating act and will be covered under Sub-section (2) of Section 141″.”
In K.K.Ahuja Vs.V.K.Vora & Anr the Supreme Court observed that “the liability arises from being in charge of and responsibility for the conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding designation or office in a company”.
In Keki Hormusji Gharda and Ors. V. Mehervan Rustom Irani & Anr “the Supreme Court following the Pepsi Food Ltd. judgment held that in order to impute liability on the officers of the company only on the basis of legal fiction, specific averments in the complaint must be made and the officer cannot be held liable only on the ground that he is holder of the office in the company.”
Nonetheless, an ongoing Supreme Court judgment limiting autonomous executives of Jaiprakash Associates from exchanging any close to home resources over a gathering organization’s bankruptcy issue has sent stun waves through the free chiefs’ society, with specialists cautioning that there would be couple of takers for this job. A few free chiefs on sheets of organizations are presently searching legitimate counsel to discover to what degree they can be held at risk for any operational issues in those organizations. Kiran Mazumdar Shaw, director of Biocon, said the nation is moving from poor administration to extraordinary administration. “It is uncalled for to put the whole onus on free executives who are just conscious of the data imparted to them by the administration,” she said. “Rather than punishing autonomous executives, the administration and advertisers ought to be punished.” A corporate veteran who is on the leading group of a few blue chip organizations as a free chief said they ought to be “gave invulnerability and insurance with the exception of in instances of wilful misrepresentation or gross disregard”. “We invest so much time and vitality to comprehend issues in spite of the fact that the pay for the equivalent isn’t sufficiently satisfactory,” the individual said.