Independent Directors in Private Debt-Listed Companies

following guest post is contributed by Niddhi
of Vinod Kothari & Co.]
Earlier under Companies
Act, 1956 (section 2(23A)) the term “listed
public companies”
was in a manner that clearly excluded private companies.
Consequently, listed private companies were exempt from certain provisions that
were exclusively applicable to listed public companies. However, the Companies
Act, 2013 (section 2(52)) defines the term ‘listed company’ as one “which has any of its securities listed
on any recognised stock exchange”, so as to encompass
even a private
listed company whose debt securities are listed. This requires such private
debt-listed companies to comply with provisions that are applicable to all listed
This post analyzes
whether independent directors are required to be appointed on the board/committees
of private debt-listed company.
Provisions under Companies Act, 2013
In accordance
with Section 149(4) of the Companies Act, 2013, “Every listed public company
shall have at least one-third of the total number of directors as independent
directors and the central government may prescribe the minimum number of
independent directors as in case of any class or classes of public companies
Under Rule 4 of
the Companies (Appointment of Directors) Rules, 2014, the following class or
classes of companies shall have at least two directors as independent directors
the public companies having paid up share capital of ten crore rupees or more;
the public companies having turnover of one hundred crore rupees or more; or
the public companies which have, in aggregate, outstanding loans, debentures
and deposits, exceeding fifty crore rupees.
Further, in order
to comply with sections 177 and 178 relating to Audit Committee and Nomination
and Remuneration Committee, respectively, every listed company and the class or
classes of company specified under the rule 6 of the Companies (Meeting of
Board and its powers) Rules, 2014, need to appoint independent directors.
Provisions under Listing Agreement
Every listed
company is required to comply with the provisions under Clause 49 (i.e.
Corporate Governance) of the equity listing agreement. As per the listing
agreement, every listed company needs to appoint independent directors depending
upon the character of the chairperson, i.e. whether such person is executive or
non-executive or related to the promoter group.
According to sub-clause
III and IV of clause 49, the Audit Committee and Nomination and Remuneration
Committee need to have independent directors for better functioning and transparency
in the company. However there is no similar requirement under the Debt Listing
Agreement. So, what if a company gains the status of the listed company just
because its debt securities are listed on the stock exchange?
Do private companies need to appoint
independent directors on their Board or committees?
Even if private
companies had their debt securities listed, by virtue of section 2(68) of the Companies
Act, 2013, the securities of such companies cannot be offered to public. Hence,
even the debt securities of listed private companies are privately placed. The
intent behind appointing independent directors is to ensure that the company
functions independently and the decisions taken by the company do not get influenced
by the management. It is with the sole intention to safeguard the interests of
the stakeholders that independent directors are appointed. Although one may
argue that in case of listed companies also the interest of outsiders is
involved, however, in the case of debt securities in private companies that are
privately placed, the scope of publics interest is also considerably limited.
Further, Section
177 and 178 of the Companies Act, 2013 requires every listed company to
constitute an Audit Committee and Nomination and Remuneration Committee respectively
and to appoint independent director on their committee. Looking at these
sections, one may argue that the provisions contained therein pre-suppose the
existence of an independent director. However, as discussed above, the intent
behind appointment of independent directors is completely lost in case of
private companies even if their debt securities are listed.
The concept of
appointing an independent director was introduced for enhancing corporate
governance in the company. To strictly adhere with the letter of law, one is
compelled to say that private debt-listed companies should also appoint
independent directors.  However, going by
the overarching spirit of law, one needs to a take prudent call in this regard
to say that private listed companies need not appoint independent directors.
This is also backed by the fact that the debt listing agreement does not
require independent directors to be appointed on the board of a private listed
– Niddhi Parmar

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.


    The conclusion as reached by the writer is not readily understood, rather the underlying logic is questionable not without merits or substance. In brief, according to the well settled principles of interpretation, meant to serve as useful aids for the judiciary – for guidance, would invite attention to the decided court cases under the law on income-tax. As repeatedly held, and reinforced time and again, for reading and understanding any enactment, in its proper light, one has to go by the ‘letter’, not the ‘spirit’. Further, even a quasi judicial or judicial authority cannot rightly give preference to so called ‘spirit’ – particularly, in a case such as discussed herein, in which the most concern is pivoted on ‘good governance’ – instead of to the ‘letter’ , unless there are compelling reasons to do so in a given situation.
    In one’s long standing conviction, founded on reasoning deserving to pass muster as sane logic, what holds for tax law, must equally hold good to any other fiscal , more so to financial or commercial , law regime.
    No wonder, in recent decades, the detestable controversy and unholy conflict, has come to be experienced to be often raising its ugly head, unwittingly or otherwise, on the very basic constitutional sanctity of the line of demarcation/bifurcation/division between the two fundamental institutions namely, ‘legislature ‘ and ‘judiciary’, in relation to the inherent mutually exclusive powers those are vested with.
    Should the publicity given in the media not long before were to be borne in mind, that appears to be the very reason behind the paradigm shift in the thinking that for bringing about, and accomplishing the altruistic objective of ‘law and order’ in the society, co-ordination and co-operation between the government/legislature and the judiciary has become imperative and inevitable. For ready ref. look up on Facebook –
    Pratip Kar: Companies Act 2013 and internal financial controls
    Implementation will be weakened if we fail to define terms used in the Act clearly and precisely|By Pratip Kar

    Judiciary, legislature need to coordinate: CJI – The Times of India
    Viewing judiciary and legislature as "siblings", Chief Justice of India H L Dattu on Sunday pressed for coordination as well as correcting each other in case the path…

    And, more of the kind.

    A matter calling up constitutional experts to deliberate and opine.

  • Nice Article. I feel However in the case of constitution of CSR Committee , it is mentioned that the Committee should have an Independent Director. and the provisions of CSR applicable to Pvt Companies also. Could you leave your views on this

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