Even kin of independent directors should not have financial links with firms, promoters: Govt

In a bid to step up corporate governance practices, the government has tightened norms for independent directors so as to ensure that even their relatives do not have a financial relationship with the concerned companies.

The Ministry of Corporate Affairs has now amended the Companies (Appointment and Qualification of Directors) Rules, 2014 to specify that none of the relatives of an independent director should be in any way “indebted” to the company, its holding, subsidiary or associate company , promoters or directors.

Further, the relatives should also not have given guarantee or provided any security in connection with indebtedness of any third person to the company or its promoters and subsidiaries.

To ensure that a proper arm’s length is maintained, the new rules would govern all transactions involving “an amount of ₹50 lakh” or more in the preceding two financial years or even the current year.

Questions about the independence of independent directors on the Boards of companies in India and its impact on corporate governance have arisen time and again as promoters often try to appoint independent directors who are in some way known or related to them.

The Uday Kotak committee on corporate governance had also looked into the issue and said: “Independent directors are expected to bring objectivity in to the functioning of the board and improve its effectiveness”.

The committee, in its report, had also recommended a number of changes in the eligibility criteria of independent directors so as to exclude persons who constitute part of the “promoter group” and also taking an undertaking that the independent director is not aware of any factor that could impact their judgment.

Experts also welcomed the latest move by the government and said it would ensure that the independent director is not influenced by the promoter or company in any way.

“Guidelines and eligibility criteria for independent directors were very loosely defined. These norms are in the right direction to ensure that independent directors are truly independent and not just ‘yes men’ on the Boards of companies,” said Pranav Haldea, Managing Director, Prime Database.

UD Choubey, Director General, SCOPE, said the new provision would take care of issues of conflict of interest. “It is a very good move and will ensure that independent directors take fair decisions based on ethics, transparency and honesty,” he noted.