MCA Clarification on Independent Directors

Based on a request made by various stakeholders, the
Ministry of Corporate Affairs (MCA) has issued a clarification
explaining some of the provisions of the Companies Act, 2013 relating to
independent directors.
Some of the aspects clarified include the following:

– For the purposes of the
definition of an independent director, the concept of “pecuniary relationship”
will not include transactions between a company and the independent director
that are carried out in the ordinary course of business at arm’s length. This
is consistent with a similar exclusion available from the definition of related
party transactions in section 188;
– Remuneration paid to an
independent director would not be considered “pecuniary interest” while
considering the appointment of such person as independent director on boards of
a holding company, subsidiary or associate company;
– The appointment of
existing independent directors under the provisions of the new Act has been
clarified;
– A director may be
appointed for a term of less than 5 years, although that would be considered a
full term for purposes of computing the maximum two terms permissible for
independent directors;
– Appointment of existing
IDs under the new Act would also have to be formalized through a letter of
appointment.
These clarifications sought for a provided by the MCA
are more procedural in nature, essentially to iron out issues that have arisen
in the operation of the new legislation. While in some cases, they ease the
burden on business (e.g. definition of “pecuniary relationship”), in other
cases they adopt a more stringent approach (e.g. in the case of “existing”
directors). In any event, the issuance of such clarifications is beneficial in
introducing greater certainty in the implementation of, and compliance with,
the 2013 Act.

At
a broader level, press reports indicate that representations have been recently
made for a review of the Companies Act, 2013, particularly by industry
associations. The new Government has also indicated its intention to undertake
a review. Evidently, some of the provisions of the new legislation are too
onerous and raise the costs of doing business in India. In other cases, the
grouse seems to relate to drafting issues, inconsistencies and the lack of
clarity in the Act. The implementation of the Act itself is incomplete given
that not all provisions are notified yet. It appears that the transitional
phase of company law reform in India and the element of uncertainty surrounding
it are set to continue for a while.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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