Corporate Boards and Independent Directors

Kanika Bhagat

PGP1049

This article talks about a Hyderabad-based company Nagarajuna Finance, the accused are
Nimesh Kampani, AP Kurian and Minoo Shroff. They were the independent directors of
Nagarajuna Finance. As the company defaulted to pay back the public deposit of about Rs.
100 crores, the independent directors were complained for criminal breach of trust and
cheating under the Indian Penal Code and for violating the Andhra Pradesh of Depositors of
Financial Establishment Act. But the Andhra Pradesh High Court and Supreme Court
rejected criminal complaints against these directors. As the independent directors don’t
manage the company, the work as a non-executive member. However, the role of an
independent director includes the enhancement of corporate credibility and management
standards as watchdogs and the role of regulators in risk management. This raises an issue of
accountability, as independent directors who turn a blind eye to mismanagement can escape
without punishment, as it is a Sin of omission.
Corporate Governance guide how a corporate corporation is governed. Basic principles of
Corporate Governance are to conduct business with integrity and fairness, accountability and
responsibility towers the stakeholder, making necessary disclosures being transparent with
regard to all transaction and complying with applicable Law.
According to the Companies Act 1956, Clause 49(II) of the Listing Agreement, and the
Companies Act 2013, the composition of board should be an optimum combination of
Executive and non-executive directors such as the board must necessarily have 50% of non-
executive directors. One more thing, it is mandated that there must be at least one woman
director. In case, the chairman is a non-executive director, one-third of the board must
comprise of independent directors. and if the chairman is an executive director, then half the
board must comprise of Independent directors.
According to the clause, the Independent Director shall be person who in opinion of board
possesses integrity, relevant expertise and knowledge and no way related to the company. No
person may be a director independent of more than seven companies listed here. Where
someone works in a listed company as a full-time manager, then no more than 3 listed firms
are separate managers of that company. A tenure of independent director has been of five
years but with cooling period of three years in between. They shall hold a meeting where
only Independent director are present and no other member or director, so they can analysis
the performance of the company and the board for effective functioning. Company shall
provide suitable training to independent director whereby the director would be familiarising
with their role, functions in the company. The details of the Independent director should be
they’re on the website of the company.
Some other provisions are the board shall meet at least 4 times a year with a maximum time
gap between two meet shall not be more than 120 days. The director shall not be a member in
10 committees and chairman of 5 committee in which he is director
The average size of the Board is 8.2, and most Boards differ from 3 to 31. According to the
Corporate Library report. Some analysts assume that the optimal size is seven.

Moreover the independent members would consist of two important board committees
compensation committee and audit committee. The audit committee is a committee of the
board that manages the financial reporting process, hires the independent auditors and
collects all internal and external auditors' reports. A minimum of 3 directors shall be in this
committee and two-third shall be non-executive director.
For compensation committee at least three directors shall be in it and all be non-executive.
Half the members shall be Independent Directors. The role of this committee is set the criteria
for determining qualification, positive attributes and Independence of Directors,
Recommendation of remuneration policy. The Committee will also create standards for
managers that warrant becoming a manager.

With the help of revised clause 49 of the listing Agreement has broadened the scope of
Corporate Governance in India and for whistle blower policy, widened definition of
independent director, disclosure requirement etc. The revised clause should provide for good
governance framework in India