In this article, Aditya Shrivastava discusses how to become an independent director.
How can I become an independent director in India?
Independent directors in India have seen a been pretty sharp increase in demand over the years. Detested initially by promoters as an external intervention to the board and unrecognized by the Companies act 1956, independent directors became more relevant when the JJ committee recommended that the board of a listed company should comprise of at least 1/3rd of Independent Directors for the first time in 2004. Consequently SEBI revised clause 49 of the listing agreement, mandated that at least one third of the board should comprise of independent directors in case of a non-executive chairman or fifty percent of the board should comprise of independent directors in case, the chairman is on executive role
This saw a massive increase in number of independent directors being appointed to the board of dozens of companies at once and earning big sitting fees. In the light of scams like Satyam, The MCA realised that independent directors are not really solving the purpose of ethical corporate governance. Thus, Companies Act, 2013 and amended SEBI Rules now carry stricter regulations imposing a ceiling on the number of companies that one independent director could be a part of. These rules also imposed a ceiling on the amount of remuneration Independent Directors can receive (upto INR 1 lakh sitting fee and 1% of the total profit of a company can be paid towards the total compensation of all the independent directors). This sudden change, led to several incumbent directors stepping down from their positions from many companies paving a way for new entrants in the market.
Is demand for skilled independent directors going to increase or decrease?
This brief history of independent directors in India is reflective of how the demand for independent directors has increased with time. It suddenly becomes all the more relevant because Uday Kotak Committee on Corporate Governance has suggested that the number of independent directors on listed companies should be raised from 1/3rd to half and it must be ensured that at least 1 independent director on the board is a woman.
How many independent directors are there in India? How many new independent directors will be needed in next 10 years?
In 2004, the demand for independent directors suddenly rose the minute JJ committee came up with a recommendation mandating 1/3rd of the board to comprise of independent director. The surge in the demand for independent director has never declined since then. The enactment of Companies Act 2013 and rules, further fuelled the demand of independent directors upto 25%.
A study by business-standard.com in 2014 suggested, that 1500 companies listed on NSE need to have women on and 1, 821 directorship positions are still vacant. The companies have only increased in number since then, however the number of individuals have remained constant, creating a huge scope for independent directors in India.
Let’s try to do this simple maths, there are approximately 10.76 lakh companies in India. Out of these 5000 companies are listed, which mandatorily need to have 1/3rd board as an independent director. Further it lays down that Public Companies having paid up share capital of Rs.10 crore or more; or (ii) Public Companies having turnover of Rs.100 crore or more; or (iii) Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs.50 crore. Which makes another 7000 companies in total. In case there is a 10% increase in companies eligible to have an independent director, and for every company there is a need of 3 independent directors and 1 person serves as an independent director for 3 companies, India Inc would still need 22,000 independent directors by 2028.
Do unlisted public companies appoint independent directors?
In terms of Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014, the following class or classes of companies should have at least two directors as independent directors
- Public Companies having paid up share capital of Rs.10 crore or more; or
- Public Companies having turnover of Rs.100 crore or more; or
- Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs.50 crore.
Where a company ceases to fulfill any of three conditions laid down above for three consecutive years, it shall not be required to comply with the appointment of independent directors until such time as it meets any of such conditions. In case a company is required to appoints higher number of independent directors due to composition of its Audit Committee, the company must appoint such higher number of independent directors.
Rule 4 above, also provides that a company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.
Further for companies having a subsidiary company as per clause 49VA of the listing agreement, at least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary company.
Thus, even the unlisted public companies would need to have independent directors on board.
Do private companies appoint independent directors?
A simple interpretation of the 2013 Act leads to the conclusion that it is not mandatory for the private companies to appoint independent director. Even in case they, it is not necessary for them to adhere to any requirement under the act with respect to independent director.
However, companies to safeguard the interest of their shareholders, and to bring more credibility on board to attract investors are actively appointing independent directors on board.
Representation of women in Indian boards
A study by the law firm Khaitan and Co. in 2014, revealed that amongst 1470 public listed companies only 350 of them have women on board. With the constant rise in the number of companies and stagnancy in the number of available independent directors in the market, the prospect of making a career as an independent director seems promising, especially for well qualified women.
Who are Independent Directors and what do they do?
Securities and Exchange board of India defines Independent Director as someone who does not have any material or financial relationship with the company or its directors. An independent director cannot be a managing director, a whole time director or a promoter of the firm or its executive directors. Which means, that apart from receiving director’s remuneration these directors cannot have a pecuniary interest, relationships or transactions with the company.
Directors of the company are often entrusted with a lot of responsibilities to deal with. They can sometimes ignore or forget the interests of the shareholders. To balance this situation out, corporate governance laws require that the companies to have independent directors on board, who can take care of overall well being of shareholders, ethical management of the business and compliance to laws. They are expected to play the role of a watchdog on the boards, the highest decision making authority in these companies.
Further, because independent directors act as trustees of shareholders, they often act as a connecting link between the board and other stakeholders. You can envisage an independent director as an autonomous director who is required to have a third person perspective, not marred by any short term financial incentives, or any conflict of interest. This keeps the other directors of the company, who obviously have direct financial interest in the success, failure and operations of the company under check..
Thus, an independent director is someone who improves the credibility of the corporation, ensures that government compliances and standards are duly met and mitigate the risks that the shareholders might be exposed to in the absence of independent third parties.
Why should you be interested in becoming an independent director – Perks, Remuneration and Benefits
As per a report by vccircle.com, the highest-paid independent directors who sit on the boards of public companies in India have received a hike which is greater than the average increment that top salaried executives got in the financial year 2016-17. Figures reflect that the median increase for the top 10 highest paid independent directors was 11.82%, while the top executives only got an increase of 7.83%. It is therefore evident that being an independent director is a lucrative career.
Evidently, bigger companies tend to pay more to their independent directors than smaller companies. They may not be paid as well as C-suite executives, but usually quite close to that. It is a widely appreciated that good independent directors also bring great deal of experience, skill and knowledge with them for the company which can be very beneficial. The companies generally lobby very hard to get independent directors who have a great deal of goodwill in the industry, as it may bring them more business and new opportunities. Thus, it becomes imperative for the companies to compensate them aptly
How do the independent directors get paid?
An independent director majorly receives his/her compensation in two parts. One is the sitting fee for attending the board meetings and the other is commission, which is a bigger deal as this is mostly a cut from the profit that the companies make. As per the rule, an independent director can be paid upto 1 lakh as a sitting fee and upto 1% of company’s profit as the total commission to the board.
Infosys for example has following compensation fixed for its independent director.
Apart from this remuneration, they are also entitled to other benefits like D&O insurance amounting to US $200 million with an excess insurance of US$100 million to pay for the personal liability of the directors and officers and for any claims made against them while serving on the board as an officer of the company
Independent director, Aman Mehta who is presently empanelled with 4 companies gets 2.71 crore from TCS alone. Companies Act allows a person to be on board of 10 companies and SEBI restricts the limit of the companies a person can act as an independent director with as 7 listed companies, which means that a person can be effectively empanelled with 7 listed and 3 unlisted companies. One can only imagine how much a person can earn if empanelled with 10 companies.
However, I would not like to give any false hopes. According to Prime Database, the average remuneration of Independent Directors including sitting fees and commissions is Rs. 6.82 Lakhs from one company in 2017. In an interview with vccircle.com, Amit Tandon, the founder and managing director of Mumbai based proxy advisory firm Institutional Investor Advisory Services says “it takes typically 150-200 days of work for being on board of five to six companies in India”.
However, owing to such tremendous workload, the Kotak commission has suggested that the top 500 firms should pay directors at least 5 lakh and a minimum of 50,000 as sitting fee per board meeting. If the commission’s proposal is implemented, it would mean an additional INR 132.63 Crore payout to the independent directors annually.
Qualifications of an independent director – what do companies look at
Naina Lal Kidwai who is the former Chairperson of HSBC India and an independent director, in an interview with the Economic Times said that search for independent directors have begun to break away from old boys’ networks, and begun to become more professional, which is good news for new people wanting to break into this circle. Also, many Indian companies are looking to go global and are looking outside of India to find Independent Directors.
It is a well known fact that earlier independent directors were the people who were in the good books of the promoters. We have seen instances of Satyam scam back in 2009, when B Ramalinga Raju confessed to manipulate the accounts to the extent of 7, 136 Crores and the entire country were puzzled as to why any of the independent directors did not point any discrepancy earlier. While Satyam is a high profile example, there are numerous cases of many such corporate misdemeanours where the independent directors have failed to point a single flaw, unease or suspicion. These facts are demonstrative of the cordial ties between the executive management and independent directors, which generally are unhealthy for good corporate governance.
However, the above facts are not to undermine the capabilities or contribution of independent directors. With the regulations growing stringent and the realization of the value of effective corporate governance, independent directors are not just board room decorations anymore.
The Companies Act, 2013 gives a lot of teeth to the independent directors, making them more accountable than ever at the same time. This accountability was a result of independent directors being liable for the acts or omission or commission of the act by a company resulting from the board’s decisions. This has led to a rise in conscious and more informed hiring of the independent directors just like any other appointments, as these liability costs are generally covered by companies themselves through D&O insurances.
As most of the investors look for companies which have better corporate mechanisms in place and independent directors are the custodians to ensure best practices by the boards, the race to hire people with credible records has intensified in recent times.
What is the minimum qualification for an Independent Director?
The Companies Act, 2013 does not specify the qualification of an Independent Director. It simply gives a definition under section 149(5) similar to SEBI 2009 regulation and imposes certain restrictions on who cannot be an independent director. However, it goes ahead to give a very general suggestion that any person who is above 21 years of age and has appropriate skills, experience or knowledge in one or more fields of finance, law, management, sales, marketing, administration, corporate governance, technical operations or other disciplines related to company’s business can be an independent director.
The qualification requirement of independent director is very open ended and opens gate for almost anyone to become one. The eligibility criteria laid down under the revised clause 49, mainly requires the individuals to be financially literate and understand the various aspects of law and associated regulations. Thus, ideally individuals like lawyers, CAs, CSs, cost accountants, or people with significant experience of working in large corporations in management roles are considered to be good options.
However, the road to become an independent director is not easy. Companies these days are looking for people who can make significant contributions towards the strategic growth of the company. A specialisation in economic understanding of the global environment, ease with corporate governance, understanding of business and strategies to contribute towards important managerial decisions and providing boost to the business of the company are some of the key skills companies are looking at
What do modern companies want in their Independent Directors?
Strategy formation and having expertise on issues like private equity, mergers and acquisitions, corporate governance are key areas companies want independent directors to specialise in. Apart from a mere name on the board, they want an advisor to the CEO and watchdog to their corporate governance process. Another reason for it is the increase in the number of foreign companies which are privately held in India. These companies mostly belong to European, Japanese or American origin and even though it’s not mandatory for their board to have an independent director or comply with the regulations pertaining to it, however, they are on a hiring spree to get an advisor for understanding the Indian market better
However, with this new outlook, companies often complain that the need for talent realisation is not generally met as most of the people are not skilled enough or do not have sufficient market or legal knowledge to be an apt member on board. This leads to only a handful of individuals approached by majority of the firms and restricted entry for someone looking for a first time directorship.
However, a credible expert can actually pave a path for himself/herself even if there is no vacancy. R Suresh, Managing Director of RGF executive in an interview with ET, states, “I just showcased a high quality Indian talent to three large companies, who are not proactively looking out for people, and all three were interested.”
There are a number of ways in which you can qualify to be an independent director, if you have a relevant degree for it. However, it is the dearth of skills or practical market knowledge where the experience takes over. People from non-legal background often find it hard to understand the corporate governance and related legal issues and people from legal background find it difficult to deal with grim business environment.
To overcome this you can opt for this corporate governance course very relevant for independent directors in their advisory role. Another great idea will be to acquire general business law expertise through this course on Entrepreneurship Administration and Business Laws as a specialized course meant for entrepreneurs and directors. It can also be a good idea to learn more about the Companies Act of 2013.