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Be an independent director. Earn millions!
Manu A B in Mumbai
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August 17, 2005

With the J J Irani Committee on Company Law recommending that one-third of the board of a listed company should comprise independent directors, there will be a huge demand for independent directors.

According to Vatsaraj, Convenor of the Independent Directors' Studies course jointly started by Bombay Chartered Accountants' Society and S P Jain Institute of Management and Research, there will a requirement of about 30,000 independent directors by December 31, 2005.

What do independent directors do?

Independent directors are directors who apart from receiving director's remuneration do not have any other material or pecuniary relationship, or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect the independent decision of the directors.

Independent directors are supposed to ensure good corporate governance. Their role is to provide unbiased and independent views to the board and represent shareholder's interest. But scams in companies, like Enron and WorldCom, have exposed the collusion of independent directors with the management, leading to a major crisis.

So can there be better governance by increasing the number of independent directors? "Yes, over a period of time, it will ensure better corporate governance," says Vatsaraj.

The Sebi ruling

The Securities and Exchange Board of India, in the revised Clause 49 of the Listing Agreement, mandated that at least 50 per cent of the board of a listed company should comprise independent directors. The regulator had made it clear that Corporate India should comply with the revised Clause 49 by December 31, 2005 or face severe penalties.

The revised Clause 49

If the chairman of the board is a non-executive director, at least one-third of the company's board should comprise independent directors. If the chairman is an executive director, at least one-half (or 50 per cent) should be independent directors. The definition of an independent director has been expanded. It now means that --

In the case of subsidiary companies:

At least one independent director on the Board of the listed company shall be a director on the board of the non-listed Indian subsidiary company.

The audit committee of the listed holding company will review the financial statements, in particular investments made by the unlisted subsidiary company.

The minutes of the board of the unlisted subsidiary shall be placed at the board meeting of the listed holding company.

What does India Inc say?

Eight five per cent of country's chief executive officers and managing directors have said that the strength of independent directors in listed companies should not be more than one-fourth of the board's strength, according to the Associated Chamber of Commerce and Industry Business Barometer survey, which sought the opinion of about 200 chief executive officers and managing directors in the country on the issue.

Irani Committee's recommendations

The committee has laid down guidelines on what independent directors should be doing on company boards to look after the interest of the minority shareholders.

The committee recommends full liberty to the shareholders and owners of the company to operate in a transparent manner.

It has also suggested a number of areas where shareholders could take the final decision and the government need not have a role.

There should be no cap or limit on the remuneration payable to directors and that the shareholders should decide the extent of remuneration.

The expert panel has said that non-executive directors and independent directors should not be punished for day-to-day actions of the company that have not been brought to their notice.

Is there a shortage for qualified independent directors?

There is a shortage at the moment but there is enough time till December 31 to fill up these posts. Besides, a director can be on the board of more than one company. According to Vatsaraj, "Companies with a good track record and image will not have a problem in filling up their board with independent directors. A company with a good corporate governance policy would not mind the one-third limit."

Is there enough time for companies to comply with Sebi requirement?

"The proposition is difficult. Since Sebi has made the announcement well in advance and all efforts should be made to comply. If there is a will, there will be a way," says Vatsaraj.

Do you want to be a part of the 'ID' boom?

The Bombay Chartered Accountants' Society, in association with S P Jain Institute of Management and Research, has begun a programme on Independent Directors' Studies since last year. This programme trains professionals and directors to take up positions as independent directors and provides them with a tool kit of how to go about their duties as independent directors.

The institute has completed a batch of 30 participants. The next class will commence on August 27.

"Additionally, the BCAS will also conduct various seminars and programs to educate its members and the other professionals on corporate governance, audit committees and independent directors. The society will also keep a databank of IDS participants," says Vatsaraj.

What is the IDS course like?

This orientation programme will be covered in six-weekend sessions, which will include discussions on functions of independent directors, audit committee, board dynamics, organisational behaviour and corporate strategies.

Additionally, the course also offers a conceptual framework based upon current advanced thinking of the responsibilities of independent directors. Both technical and behavioural components of the role of the independent directors will be discussed.

Are you eligible to be an independent director?

The eligibility criteria are laid down in the revised Clause 49 of the Listing Agreement, which mainly requires the person to be financially literate and who also understands various laws and regulations. Therefore professionals like chartered accountants, company secretaries, cost accountants, lawyers and people with similar experience are ideally qualified.

What is the fee for the IDS course conducted by Bombay Chartered Accountants' Society?

It is a 6-week course held on weekends. The fee is Rs 21,000, inclusive of all study materials and food on Saturdays.

According to an a former participant of the course, R N Sharma, executive director (internal), Hindustan Petroleum Corporation Ltd [Get Quote], "This course gave me the opportunity to sharpen my competitive edge, excellence and professionalism to meet the emerging challenges as well as opportunities in the corporate sector."

What are independent directors paid?

The pay packets of independent directors range from Rs 8 lakh to 12 lakh (Rs 800,000 to Rs 1.2 million) a year per company as commission. Besides this, they are also entitled to sitting fees, which can further hike their total income to Rs 12 to Rs 16 lakh (Rs 1.6 million) a year.

What's more, an independent director can be on the board or more than one company.

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