Thursday, December 19, 2024

TO SAFEGUARD THE SHAREHOLDERS INTEREST,CAN AN INDEPENDENT DIRECTOR CONVENE A BOARD MEETING?

 TO SAFEGUARD THE SHAREHOLDERS INTEREST,CAN AN INDEPENDENT DIRECTOR CONVENE A BOARD MEETING?

Yes, an Independent Director can convene a Board Meeting in certain situations if the company does not respond to their legitimate request. Here's how it works:

                LEGAL PROVISIONS

Section 173(3) of the Companies Act, 2013:

The Act empowers any director to convene a meeting of the Board, provided due notice is given to all directors.

ROLE OF INDEPENDENT DIRECTOR (ID):

Under Schedule IV of the Companies Act, 2013 (Code for Independent Directors), an Independent Director has specific obligations, including ensuring that the Board adheres to proper governance practices.

Clause VII(2) states that if the company fails to convene a meeting on the Independent Director's request, the Independent Director can convene the meeting independently.



The functions of independent directors, inter-alia, include to bring independent judgment and value addition to the decision making process of the board and its committees; evaluate the performance of board or management; safeguard the interest of all stakeholders including minority shareholders etc.

Since IDs are not involved in day to day functioning of the companies, provisions of Section 149 (12) of the Act provide that an ID shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board process, and with his consent or connivance or where he had not acted diligently.

SEPARATE MEETING OF INDEPENDENT DIRECTORS

VII. of Schedule IV of Companies Act, 2013

(1) The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management;

(2) All the independent directors of the company shall strive to be present at such meeting;

(3) The meeting shall:

(a) review the performance of non-independent directors and the Board as a Whole

(b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

LISTING AGREEMENT

Clause 49.II.B.6 of the listing agreement also contains the similar provisions for the separate Meeting of Independent Directors.

SECTION 149 (12) -NON OBSTANTE CLAUSE

Section 149 (12) of the Act is a non obstante clause which provides that notwithstanding anything contained in the Act, the liability of an independent director (ID) or a non-executive director (NED) not being promoter or key managerial personnel would be only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

INDEPENDENT DIRECTORS PUNISHED FOR NON FULFILLING THEIR FIDUCIARY DUTIES

ILFS FRAUD

1.   In Infrastructure Leasing and Financial Services crisis in 2018, independent directors were charged with non-exercising due diligence in overseeing the financial health of the company.  The crisis exposed important governance lapses and some independent directors were charged for not fulfilling their fiduciary duties.

PUNJAP NATIONAL BANK FRAUD

2.    PNB Fraud involving Nirav Modi raised concerns over the role of independent directors in preventing fraudulent activities.

CHITRA SHARMA V. UNION OF INDIA

3.   Chitra Sharma v. Union of India, the Hon’ble Supreme Court, while issuing orders, failed to appreciate the distinction between the liabilities between an executive and independent director and placed restrictions from leaving the country as well as alienating their property.

SOMENDRA KHOSLA V. STATE

4.Somendra Khosla v. State, accepted the arguments that an independent director is responsible for the daily affairs of the company and therefore denied quashing complaint against the independent director

ORDER GIVEN BY THE WHOLE TIME MEMBER OF SEBI DATED 20TH JUNE, 2017 IN THE MATTER OF ZYLOG SYSTEMS LTD.

After noticing the violation of non-payment of dividend by the company within prescribed time, Mr. S Rajagopal and Mr. V K Ramani, two independent directors on the Board have taken strong stands to convince the company’s Board about the necessity of ensuring that the statutory dues and the dividends are paid without any delay, in a Board meeting. One of these two independent directors was also the chairman of the company, and he ensured that this point raised at the meeting was recorded in the minutes.

As the company failed to comply, the two independent directors resigned from the company’s Board. Considering these facts and circumstances, the Whole Time member of SEBI opined that since both the independent directors did not have any role in the day-to-day management of the company and have discharged their responsibility as independent directors putting in their best efforts, there should be no action taken in respect of them.

SEBI ORDER DATED 14TH OCTOBER, 2021 IN THE MATTER OF GDR ISSUE OF EDSERV SOFTSYSTEMS LIMITED

In this case , SEBI observed that independent directors had actively sought information and details from the Chairman  and Chief Executive Officer of the company regarding the utilisation of the GDR proceeds and thereafter resigned.

Upon a holistic view of the facts, SEBI WTM granted the benefit of doubt to independent directors, especially in view of the diligence exhibited by them with respect to the utilisation of the GDR proceeds followed by their decision to step down from the Board of Edserv, soon thereafter. In view of the findings, the proceedings initiated against them were dropped down without any directions.

CONCLUSION

·      Independent Directors are not involved in day to day functioning of the companies, provisions of Section 149 (12) of the Act provide that an ID shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board process

·      Independent directors may be charged with non-exercising due diligence in overseeing the financial health of the company.

·      The independent directors did not have any role in the day-to-day management of the company and have discharged their responsibility as independent directors putting in their best efforts, there should be no action taken in respect of them.

·      An Independent Director can convene a Board Meeting in certain situations if the company does not respond to their legitimate request to convene a board meeting to discuss matters affecting the corporate governance.

R V SECKAR , FCS,LLB

Compliance Expert, LODR Specialist

79047 19295

rvsekar2007@gmail.com