The Hindu Business Line : Bill soon to define `independent directors'

WITH the Naresh Chandra committee on corporate audit and governance making a case for a larger role of `independent directors' in the boards of India Inc, the Government is all set to come up with what it considers to be a more precise definition of an `independent director' in the Companies Act, 1956, itself.

Currently, the Companies Act has no definition of an independent director even as it is defined in the listing agreement of the stock exchange. The quality and role of the independent directors in the functioning of the boards and audit committees has been a topic of intense debate in the last decade.

According to the Department of Company Affairs (DCA) sources, "the Government is taking steps to define `independent directors' in the Companies Act. The definition is likely to toe the line of the one recommended in the Naresh Chandra committee report, which has come up with a definition without compromising on spirit or constraining the supply of such directors."

The definition of an `independent director' is set to be incorporated in the Companies Act, 1956 through an amendment Bill that is expected to be introduced in the current session. Sources said that this Bill is likely to have "the provisions recommended by the R.D. Joshi Committee which had examined the Companies Bill, 1997. It will also have provisions relating to the recommendations of the Naresh Chandra Committee."

The Naresh Chandra Committee had recommended that the criteria specified by it for an independent director be made applicable for all listed companies, as well as unlisted public limited companies with a paid-up share capital and free reserves of Rs 10 crore and above or turnover of Rs 50 crore and above with effect from the financial year beginning 2003.

The committee was of the view that `independent directors' can be really effective only if they have a substantial voice, by being a majority in the board.

In this context, the committee recommended that `not less than 50 per cent of the board of directors of any listed company as well as unlisted public limited company with a paid-up capital and free reserves of Rs l0 crore and above or turnover of Rs 50 crore and above should consist of independent directors".

The committee had also said that this norm should not apply to unlisted public companies, which have no more than 50 shareholders and which are without debt of any kind from the public, banks or financial institutions, as long as they do not change their character.

The percentage norm should also not apply to unlisted subsidiaries of listed companies, the committee has said.

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