New stringent law for independent directors makes posts unattractive

MARCH 03,2014

NEW DELHI: Indian companies are struggling to find independent directors for their boards, as increased responsibilities, more accountability and a cap on remuneration mandated by recent changes in law have turned these once-sought-after posts unattractive.

The new Companies Act and the Securities & Exchange Board of India's latest listing norms require a company with an executive chairman to have at least half of its board made up of independent directors. If the company has a non-executive chairman, then onethird of the board should comprise independent directors.

While this means more vacancies for independent directors, experts say those eligible have become wary of joining or continuing on the boards given the new restrictions. "With the current limits on remuneration under the Companies Act, most senior directors would not want to continue with their directorships," said Sai Venkateshwaran, head of accounting advisory services at KPMG India.

The Companies Act has capped the sitting fee for an independent director at Rs 1 lakh per meeting. Independent directors are together also eligible for 1% share of the net profit of a company. While independent directors were earlier entitled for employee stock options, Sebi's new listing norms have restricted these ESOPs.

Experts disagree with the argument that an independent director would lose his independence if he avails ESOPS. "ESOPs only increase the shareholder value rather than impact independence of the director," said Ketan Dalal, joint tax leader at PwC India.

The restriction on the number of directorships a person can hold has also added to the problem. As per Sebi's latest corporate governance norms, a person can serve as an independent director only on the boards of seven listed companies. A whole-time director in alisted firm can serve as an independent director in a maximum of three companies.

Most directors ET spoke to saw increased risk management and compliance as an issue. Most felt that focus of key managerial persons will have to shift from business to compliance and remuneration is not consistent with the responsibility. Rana Kapoor, CEO at Yes Bank, said it will be even more difficult for banks since the role of independent directors is going to rise in deteriorating NPA (non-performing asset) situation.