New rules to ensure independence of independent directors

The Ministry of Corporate Affairs has amended the Companies (Appointment and Qualification of Directors) Rules, 2014 and has ordained that no relative of an independent director should be in any way “indebted” to the company, its holding, subsidiary or associate company, promoters or directors.

The government has further tightened norms for independent directors in order to strengthen the corporate governance structure in companies. In a move that is bound to bring in better corporate governance practices, the government has notified that even relatives of independent directors should not have a financial relationship with the concerned companies.
 
The Ministry of Corporate Affairs has amended the Companies (Appointment and Qualification of Directors) Rules, 2014 and has ordained that no relative of an independent director should be in any way “indebted” to the company, its holding, subsidiary or associate company, promoters or directors.
 
Additionally, relatives can also not give guarantee or provide any security in case of indebtedness of any third person to the company or its promoters and subsidiaries. 
 
The new rules would govern all transactions involving “an amount of ₹50 lakh” or more in the preceding two financial years or even the current year.
 
The independence of independent directors has for long been a subject of discussion and the Uday Kotak committee on corporate governance that looked into the issue had commented: “Independent directors are expected to bring objectivity in to the functioning of the board and improve its effectiveness”.
 
The Kotak panel, in its report, had recommended several steps including changes in the eligibility criteria of independent directors, in order to screen out persons who in any way constitute part of the “promoter group”. It had also recommended taking an undertaking that the independent director is not aware of any factor that could impact their judgment.
 
The latest move by the government is being widely welcomed by experts who say that it is sure to maintain the  independence of an independent director by ensuring that she/he is not influenced by the promoter or company in any way.
 
Media reports quoted Pranav Haldea, Managing Director, Prime Database as saying that earlier the guidelines and eligibility criteria for independent directors were loosely defined and the recent norms are a step in the right direction. It will ensure that independent directors are truly independent and not just ‘yes men’ on the Boards of companies, Haldea added.
 
(Source: BL, media reports)

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