ET CONTRIBUTORS By Varun Sriram
There has been a lot of hue and cry on how Nusli Wadia was removed as an independent director from the Board of certain listed Tata group companies.
According to recent newspaper reports, market regulator the Securities Exchange Board of India (SEBI) appears to have requested the Government to carry out changes to the Companies Act, 2013 to tighten the process for removal of independent directors.
Concept of Independent Director
JJ Irani Committee, an expert committee which was constituted by the Ministry of Company Affairs a decade back to provide advice on company law matters, observed that given the responsibility of the Board to balance various interests, the presence of independent directors on the Board of a company would improve corporate governance.
The Committee had also observed that while directors representing specific interests would be confined to the perspective dictated by such interests, independent directors would be able to bring an element of objectivity to the Board process in the general interests of the company and thereby to the benefit of minority interests and smaller shareholders.
Process of appointment and removal
Let us take a quick look at the existing law and process on appointment and removal of independent directors, before we get into deliberation on whether amendments are really needed to tighten removal of independent directors as well as factors to be considered.
As per the Companies Act, 2013, all listed public companies and certain classes of unlisted public companies (i.e based on the size of their share-capital/turnover etc) need to appoint independent directors on their Board.
The Companies Act prescribes the criteria for an individual to be eligible for appointment as an independent director. The key attributes are that the individual is a person of integrity and possesses relevant expertise and experience in the opinion of the Board. Further, that he/she is neither related to the promoters or other members of the Board nor has any pecuniary relationship, whether in relation to the company or its holding, subsidiary or associate companies.
It is also a requirement that the nomination and remuneration committee as constituted by the company will formulate the criteria for determining qualifications, positive attributes and independence of a director.
Subject to various appointment related criteria being fulfilled, an individual can be appointed as an independent director by way of an ordinary resolution (i.e by simple majority) passed in a general meeting of the shareholders of the company. Re-appointment of the independent director however requires a special resolution (i.e 3/4th majority), therefore having a higher threshold.
The extant legal framework provides numerous safeguards with regard to the manner of selection and appointment of independent directors. It can be argued though that it lacks objective comprehensiveness on certain aspects. On that limited note on appointment, I now shift my focus to the process surrounding removal of independent directors.
Section 169 of the Companies Act, 2013 deals with removal of directors and makes no distinction between removal of independent directors and other directors. It should be noted that this section is in addition to other sections dealing with disqualification or vacation of directors.
According to Section 169, a company may remove a director by way of an ordinary resolution (which is by a simple majority) passed in a general meeting of the shareholders of the company. In the normal course, any proposal to remove a director is initiated through a special notice, which is by members of the company holding at least 1% of the total voting power or holding shares on which such aggregate sum of not less than Rs. 5 lakh has been paid-up.
Upon receipt of such special notice, the company must give the notice of resolution to its members as well the concerned director. The director will be entitled to be heard on the resolution at the meeting. In addition to the right to be heard, the concerned director may also make a representation in writing to the company and request for its notification to the members of the company.
Thereafter, the wisdom of the shareholders' majority prevail, in deciding the fate of the concerned director.
Proposed amendment - factors to consider
According to newspaper reports, SEBI appears to have proposed alignment of removal of independent director with that of re-appointment, thereby requiring removal of director to be possible only by way of a special resolution. This proposal seems to be in the wake of recent corporate board-room battles and to mitigate promoter influenced ousters of independent directors.
While it is important to watch out for unwarranted independent director ousters, it is also key not to make the process more burdensome than required. No doubt it can be contented that a controlling promoter group, holding a little over 50% of the shareholding of the company could abuse this mechanism. But those are cases that need to be tested for abuse. Minority/affected shareholders in such cases have the right to initiate action for oppression and mismanagement.
Changes if any to the process of removal of independent directors should not be looked at only from the perspective of companies wherein promoters/promoter groups control majority. It needs to be viewed also keeping in mind companies having diverse categories of shareholders where possibly the promoter/promoter group does not have majority shareholding and where shareholders do not actively participate.
It appears that, the intent really is to avoid setting in motion malafide action for such removal and not necessarily to make the removal process more onerous in bonafide cases. While examining and addressing the removal process, weightage should be more towards the manner of initiation of the removal process, due explanation for removal and diversified shareholder group consensus. By way of example, the amendment could consider having a minimum non-promoter/varied shareholder category consensus necessary to initiate the removal process and/or form part of the majority decision.
It is also possible to prescribe and apply different models of thresholds for removal of independent directors under different circumstances, for instance based on the class and diversity of the shareholding category in a company. While increasing the threshold from ordinary to special resolution for removal is a simple and easy fix, only time will tell if it achieves the purpose.
The writer is a Partner with JSA, Advocates and Solicitors. Views expressed are personal.
There has been a lot of hue and cry on how Nusli Wadia was removed as an independent director from the Board of certain listed Tata group companies.
According to recent newspaper reports, market regulator the Securities Exchange Board of India (SEBI) appears to have requested the Government to carry out changes to the Companies Act, 2013 to tighten the process for removal of independent directors.
Concept of Independent Director
JJ Irani Committee, an expert committee which was constituted by the Ministry of Company Affairs a decade back to provide advice on company law matters, observed that given the responsibility of the Board to balance various interests, the presence of independent directors on the Board of a company would improve corporate governance.
The Committee had also observed that while directors representing specific interests would be confined to the perspective dictated by such interests, independent directors would be able to bring an element of objectivity to the Board process in the general interests of the company and thereby to the benefit of minority interests and smaller shareholders.
Process of appointment and removal
Let us take a quick look at the existing law and process on appointment and removal of independent directors, before we get into deliberation on whether amendments are really needed to tighten removal of independent directors as well as factors to be considered.
As per the Companies Act, 2013, all listed public companies and certain classes of unlisted public companies (i.e based on the size of their share-capital/turnover etc) need to appoint independent directors on their Board.
The Companies Act prescribes the criteria for an individual to be eligible for appointment as an independent director. The key attributes are that the individual is a person of integrity and possesses relevant expertise and experience in the opinion of the Board. Further, that he/she is neither related to the promoters or other members of the Board nor has any pecuniary relationship, whether in relation to the company or its holding, subsidiary or associate companies.
It is also a requirement that the nomination and remuneration committee as constituted by the company will formulate the criteria for determining qualifications, positive attributes and independence of a director.
Subject to various appointment related criteria being fulfilled, an individual can be appointed as an independent director by way of an ordinary resolution (i.e by simple majority) passed in a general meeting of the shareholders of the company. Re-appointment of the independent director however requires a special resolution (i.e 3/4th majority), therefore having a higher threshold.
The extant legal framework provides numerous safeguards with regard to the manner of selection and appointment of independent directors. It can be argued though that it lacks objective comprehensiveness on certain aspects. On that limited note on appointment, I now shift my focus to the process surrounding removal of independent directors.
Section 169 of the Companies Act, 2013 deals with removal of directors and makes no distinction between removal of independent directors and other directors. It should be noted that this section is in addition to other sections dealing with disqualification or vacation of directors.
According to Section 169, a company may remove a director by way of an ordinary resolution (which is by a simple majority) passed in a general meeting of the shareholders of the company. In the normal course, any proposal to remove a director is initiated through a special notice, which is by members of the company holding at least 1% of the total voting power or holding shares on which such aggregate sum of not less than Rs. 5 lakh has been paid-up.
Upon receipt of such special notice, the company must give the notice of resolution to its members as well the concerned director. The director will be entitled to be heard on the resolution at the meeting. In addition to the right to be heard, the concerned director may also make a representation in writing to the company and request for its notification to the members of the company.
Thereafter, the wisdom of the shareholders' majority prevail, in deciding the fate of the concerned director.
Proposed amendment - factors to consider
According to newspaper reports, SEBI appears to have proposed alignment of removal of independent director with that of re-appointment, thereby requiring removal of director to be possible only by way of a special resolution. This proposal seems to be in the wake of recent corporate board-room battles and to mitigate promoter influenced ousters of independent directors.
While it is important to watch out for unwarranted independent director ousters, it is also key not to make the process more burdensome than required. No doubt it can be contented that a controlling promoter group, holding a little over 50% of the shareholding of the company could abuse this mechanism. But those are cases that need to be tested for abuse. Minority/affected shareholders in such cases have the right to initiate action for oppression and mismanagement.
Changes if any to the process of removal of independent directors should not be looked at only from the perspective of companies wherein promoters/promoter groups control majority. It needs to be viewed also keeping in mind companies having diverse categories of shareholders where possibly the promoter/promoter group does not have majority shareholding and where shareholders do not actively participate.
It appears that, the intent really is to avoid setting in motion malafide action for such removal and not necessarily to make the removal process more onerous in bonafide cases. While examining and addressing the removal process, weightage should be more towards the manner of initiation of the removal process, due explanation for removal and diversified shareholder group consensus. By way of example, the amendment could consider having a minimum non-promoter/varied shareholder category consensus necessary to initiate the removal process and/or form part of the majority decision.
It is also possible to prescribe and apply different models of thresholds for removal of independent directors under different circumstances, for instance based on the class and diversity of the shareholding category in a company. While increasing the threshold from ordinary to special resolution for removal is a simple and easy fix, only time will tell if it achieves the purpose.
The writer is a Partner with JSA, Advocates and Solicitors. Views expressed are personal.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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