Sunday, June 15, 2014

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.

1 comment:

Dhiraj Thakker said...

Whether past employee of private limited company can be appointed as independent director ?