Independent Director: The Unbiased Decision Maker

Independent Director: The Unbiased Decision Maker

Governance is the action or manner in which a state or a country or an organization is governed. Through Governance, policies & decisions are taken which may concern the well being & operational growth of that state, country or the organization. To put it in simple terms, Governance is a way in which things are done by those on whom power to take decisions is vested upon.

In a company, decision making process is enacted through various types of meetings conducted by the Board. It may be done either through mutual consensus, in absence of which a Majority vote is weighed upon. This decision is then documented in the next issue of Board meeting. Wherever the question of taking a decision arises , there is always a chance of having either conflict of interests or having a vested interest in the matter to be resolved. Such decisions may sometimes not be optimal for shareholders or stakeholders interests.

Hence there is always a statutory requirement to include someone in the Board, who is literally an outsider, having no personal interest in the matter to be resolved at such meetings. She/he is generally a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. This ensures not just Governance but Good Governance. Such a person / position in the Board room , is generally termed as an ‘Independent Director’

Another point of view of having an Independent Director on Board is that we have seen Businesses run within a family for over a decades, whereby generations to generations have been acting as Board Members in order to generate wealth in abundance for that family who owns the business since its inception. This in a way is a good control to ensure a financial well being of that particular family, but on the other hand, there always lies a question of having biased actions being taken at the cost of good corporate governance. We may also have skill sets deficiency due to the torch of Directorship being passed to a family member without a check on His/ Her Academic qualifications. That is again a different zone to be thought upon.

It became the need of hour for such Companies, run by families, to move & hunt towards outer circles in order to comply with good corporate governance. It also ensures the needs of the company are different from the needs of a family. Having an Independent Director on such Boards can not only ensure the decision making process as unbiased one , but also on the other hand, assist in scaling up the company’s operational efficiency as such Independent Directors may posses excellent skills with a profound experience & exposure to the industry in which the said company operates .

Companies can also depend upon Independent Directors when it comes to forming tactical strategies at Board Meetings. New Opportunities can spring up anytime through Independent Director’s networks.

From the shareholders interests perspective, Independent Directors are the ones who may raise queries as to where & how the company’s assets & surplus profits are being utilized.

Even External Auditors find a comfort in obtaining findings & evidences of a possible fraud or a wrong done , especially in a business run by a family. Relying upon Independent Directors Report is indeed a safe harbor for such Auditors.

It is to be mentioned here ,that there has to be a criteria to determine ,whether a director is actually an Independent one .Various definitions have been chalked out by various international regulatory & statutory bodies which in a way filters down to few basic criteria such as a person :

1.    Not being connected to company’s advisors/ auditors or senior employees or for that matter not being a friend or a relative of an existing board member;

2.    Has never entered into a material business transaction with the company in recent years

3.    Or has never represented a shareholder holding significant percentage of shares of the company in which s(he) is to be appointed as an Independent director.

4.    Is or has never received anything over & above director’s remuneration.

There are many other such criteria’s to be taken into account before appointing an Independent director. The basic objective is to ensure the level of Independence that person possesses w.r.t the Board & the company as a whole while performing his / her duties as an Independent Director. There is a large divergence in reality to understand & interpret the true meaning of the word ‘ Independent’  Hence in many countries, it has been made a regulatory requirement more,  than just relying on the precise criteria, which may differ from country to country , depending upon the regulations & statute the abide to.

To conclude, it is due to the gloomy performance under the financial crisis , that has led to this position of having an independent director. Many Policies & guidelines have been framed in order to ensure better management control & to protect the rights of shareholders / stakeholders. There is again a reservation as to how to maintain a balance between having an Independent Director & the accountability with which they shall perform their duties. We conclude here by some questions for our readers:

1.    How far can we assure dependence on such Directors [ complying with the regulations] , when it comes to major decision making like having a Venture Capital Investor on Board / sharing of Confidential strategies to such an outsider  ?

2.    What if such Independent Director is not actually Independent? i.e: S(he) himself is a party to some undetected misconduct / fraud ?

3.    Are Family run Businesses ready to give up controls to an outsider, just for the sake of complying with a regulation? What is the Net effective Cost of such an action? Is governance the only parameter to run a company?

There may arises many other uncertainties / view points regarding the need of having an Independent Director. You may share these by mailing us at : csnehaseth@gmail.com .

Should one sell the company or wind up the inoperative company

Should one sell the inoperative company or wind up the company? This is the question which is in the minds of those who registered their company a year or some years back with a vision in mind to grow their businesses. However, unfortunately they didn't succeed for one or other reason maybe because of slowdown economy. 

In order to advise or answer that first question, various factors are to be assessed;
  
1. What is the paid up share capital, main objects and date of registration of the company?
2. Are there any accumulated losses/ Reserves?
3. Are there any IPR, Litigation, Regulatory issues?
4. What are the number of years of business done
5. What is the current state- running or dormant?
6. What is the average cost of running and closure?
7. What will be expected amount for sale?

With the amendment in incorporation rules i.e. Spice+ web based form, there has been ease of doing business in India. Given the cost of registration is reasonable now, person needs to evaluate cost vs benefit of buying v/s incorporating.

If you really liked our write up, please subscriber our blog. For more details, contact us at CS Neha Seth at 9871903449

Independent Director-under Companies Act, 2013

Independent Director-under Companies Act, 2013

Independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. He/ She does not have any kind of relationship with the company that may affect the independence of his/ her judgment.

They act as a guide, monitor, and guard and keep a balance on the conflicting interest of the stakeholder. Their roles broadly include improving the corporate credibility and governance standards functioning as a watchdog, and playing a vital role in risk management.

Independent directors play an active role in various committees set up by company to ensure good governance. Independent directors must also play a pivotal role in professionalizing board operations.

Other important role he does is to be part of succession planning, evaluating the performance of board and management of the company, scrutinizing, monitoring and reporting management’s performance regarding goals and objectives agreed in the board meetings, take an active part on issues such as strategy, performance, risk management and resources. Their ultimate aim should be to safeguard the interests of all stakeholders.

The companies which are required to appoint independent directors:

-Every listed public company shall have at least one-third of a total number of directors as independent directors.

-Unlisted Public Company shall have at least 2 directors as independent directors, in case

• Its paid-up share capital of Rs. 10 crores or more.
• Its turnover is Rs. 100 crores or more.
• Its aggregate outstanding loans, debentures, and deposits, exceeding  Rs. 50 crores

There was an Amendment in the provision of the Independent Director of the Companies Act, 2013 in November2019 which has come into force with effect from December 1. 2019.

The amendment says

 a)Every individual, who has been appointed as an Independent Director in a Company shall within a period of three months from the commencement of the said Rules, or who intends to get appointed as an Independent Director in a company after 01/12/2019 shall before such appointment, apply to the 'Indian Institute of Corporate Affairs (IICA) for inclusion of his name in the data bank for a period of 1 (one) year or 5 (five) years or for his lifetime as the case may be.

The major impact of this amendment is on the individuals who are already appointed as the independent directors, i.e. existing independent directors. They have to get themselves registered in the Data bank of the IICA on or before February 29, 2020.

Currently the fees for 1 year subscription is Rs. 5000 plus 18% GST. Fee plan for 5 years is yet to be notified.

b)It also says that the Membership has to be renewed within 30 days from the date of expiry of the above period of 1 year, 5 years or lifetime as the case may be.

c) Every independent director to submit a declaration of compliance with these rules to the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.

d)Also the individual shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, with minimum score of 60%, failing which, his name shall be removed from the databank of the institute.

After this amendment, companies can appoint the independent director only amongst the individuals registered under the Databank of the IICA and the companies has to do the self due diligence of the person before his/her appointment as the independent director.

This is a new beginning on accountability and eligibility and will curb promoters placing their own ineligible candidates and family members on the listed companies’ boards which have public money also invested in the company.

Companies Winding up Rules 2020

The Central Government made new rules in relation to Winding up of companies "Companies (Winding up) Rules 2020" notified on 24th January 2020.

Effective date: 1st April, 2020

New Rules name: Companies (Winding up) Rules, 2020

Notified date: 24th January 2020

The new rules have elaborated process for winding up of those companies whose;
1) Asset size of Rs. 1 Crore and
2) Not accepted deposits exceeding Rs. 25Lakhs and
3) Turnover less than Rs. 50 Crores and
4) Total loan under Rs. 25lakhs
https://www.business-standard.com/article/companies/mca-notifies-winding-up-rules-gets-easier-for-small-firms-to-shut-business-120012900049_1.html

http://www.mca.gov.in/Ministry/pdf/Rules_28012020.pdf

Should I register my company first before trademark registration, or can I register a trademark?

The answer to this is not straight forward. It depends upon various factors;

1. How soon you want to get “TM” affixed after your wordmark? If in case you are in hurry to do so, then, do not wait, file it on Individual name and get started. Though these days, company registration is not a lengthy process but still it takes a week approx to register given little paperwork etc.
2. Fees- If the applicant filing the trademark is Individual then Govt fees would be around Rs. 4500 per Wordmark per class while if Company files it, Govt fees is Rs. 9000 per Wordmark per class. So its double. Here we assume that the company is not registered as Start up/ MSME. Because if company is registered as Start up/ MSME, Govt fees would be lesser which is Rs. 4500
3. Long term Goals- If you are focused and wish to work long term under company structure, then only, it is advised to go for applying through company. Otherwise, later assignment/ transfer of ownership would be lengthy and time consuming.

Given the above factors, decide and file the trademark application.

https://www.quora.com/Should-I-register-my-company-first-before-trademark-registration-or-can-I-register-a-trademark/answer/Neha-Wadhawan-Seth

Companies required to appoint a Company Secretary and Secretarial Audit- New Rules dated 3rd January 2020

MCA amends limits for appointment of CS and Secretarial Audit

Happy New year 2020!

Amendment in Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (the Rules)
Substituted	Rule 8A
Amended	Rule 9
Date of notification	3rd January 2020
Date of effect	1st April 2020
Rule 8A Prior	Appointment of Company Secretaries for all  the companies not covered under Rule 8(1) and having a paid up share capital of Five Crore INR or more
Rule 8A After amendment	Post amendment every private company which has a paid-up share capital of Ten Crore INR or more shall have a whole-time company secretary. The following companies are mandatorily required to appoint a whole-time Company Secretary: 1)    Listed Company, 2)    Unlisted Public Company having paid-up share capital of INR 10 Crore or more, 3)    Private Company having paid-up share capital of INR 10 Crore or more.
Rule 9 Prior	Secretarial Audit Report Every listed company and companies belonging to such other class shall annex a Secretarial Audit Report, given by a Practicing Company Secretary, with its Board Report. Such other class of company which are required to comply with this provision are given in Rule 9 of the Rules Such class of companies were: – 1)    Every public company having a paid-up share capital of fifty crore rupees or more, or 2)    Every public company having a turnover of two hundred fifty crore rupees or more;
Rule 9 Post amendment	After amendment, one more class of companies have been added and now the following companies are mandatorily required to conduct a Secretarial Audit: 1)    Every public company having a paid-up share capital of fifty crore rupees or more; or 2)    Every public company having a turnover of two hundred fifty crore rupees or more; or 3)    Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.

Amendments in limits of Related Party transactions dated 18th Nov 2019

Changes in limits of Related party transactions

On 18^th November 2019, MCA has made amendments and has come up with the Companies (Meetings of Board and its Power) Second Amendment Rules, 2019. However, this amendment shall come into force from the date of publication in official gazette.

Related Section: 188 of Companies Act 2013

Changes Introduced:

In the rule with regard to ‘Contract or Arrangement with a Related Party’, that is rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 the following changes have been notified.

Changes in rules introduced	Extant Rule	New Rule
Rule 15(3)(a)(i) and 15(3)(a)(ii) the words “or rupees one hundred crore, whichever is lower” shall be omitted.	(i) sale, purchase or supply of any goods or material, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;	(i) sale, purchase or supply of any goods or material, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;
	(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten percent or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;	(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten percent or more of net worth of the company as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;
Rule 15(3)(b) in sub-clause (iii), for the words "amounting to ten per cent or more of the net worth of the company or ten per cent or more of turnover of the company or rupees one hundred crore, whichever is lower", the words "amounting to ten per cent or more of the turnover of the company'' shall be substituted; and	(iii) leasing of property any kind amounting to ten percent  or more of the net worth of company or ten per cent or more of turnover of the company or rupees one hundred crore, whichever is lower as mentioned in clause (c) of sub-section (1) of section 188;	(iii) leasing of property any kind, amounting to ten per cent or more of the turnover of the company as mentioned in clause (c) of sub-section (1) of section 188;
Rule 15(3)(c) in sub-clause (iv), the words "or rupees fifty crore, whichever is lower" shall be omitted.	(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company or rupees fifty crore, whichever is lower as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:	(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

Author Analysis:

The Ministry has amended certain conditions, wherein the requirement of prior approval of company was required. In Rule 15 sub-rule 3 the limits specified in all the sub clause(s) of clause (a) have been either omitted or modified.

To conclude, the new limits and there implications are as under:

1)    If the company is involved in sale, purchase or supply of any goods or material, either directly or through appointment of agent, which amounts to 10% or more of the turnover of the company the consent of members will be required.

2)    In case the company is selling or otherwise disposing of or buying property of any kind, either directly or through appointment of agent, amounting to 10% or more of net worth of the company the consent of members will be required.

3)    If the company is into leasing of property any kind, amounting to 10% or more of the turnover of the company the consent of members will be required.

4)    If the company is availing or rendering of any services, either directly or through appointment of agent, amounting to 10% or more of the turnover of the company the consent of members will be required.

Example: A company having a Turnover of Rs. 1200 Crore and Networth of Rs. 100 Crore, wants to involve in following related party transactions with one of its directors, state whether consent of members of the company is required or not.

1)    Sale of Goods amounting to Rs. 110 Crores

In the extant provision, the criterion was sale of goods exceeding 10% of Turnover or Rs. 100 crore whichever is lower.

Therefore, Rs. 120 Crore or Rs. 100 Crore whichever is lower = Rs. 100 Crore. Thus approval of members was required if sale of goods amounted to Rs. 110 Crore. And in case sale of goods amounted to Rs. 90 Crore, approval of members was not required.

Now with the removal of lower limit of Rs. 100 Crore, company is not required to take members approval as this transaction is less that 10% of turnover of company.

2)    Company to buy a property through its agent for Rs. 50 Crores

In the extant provision, the criteria was 10% or more of Net Worth or Rs. 100 crore whichever is lower,

Therefore, Rs. 10 Crore or Rs. 100 Crore whichever is lower = Rs. 10 Crore i.e. the company to buy this property required members approval.

Even after amendment, in this case approval of members will be required as the consideration of Rs. 50 Crores is exceeding the criteria of 10% of Net worth.

3)    Leasing of property for Rs. 200 Crores

In the extant provision, the criteria was 10% or more of the net worth of company or 10% or more of turnover of the company or Rs. 100 crore, whichever is lower

Therefore, Rs. 10 Crore or Rs. 120 Crore or Rs. 100 Crore whichever is lower = Rs. 10 Crore. Thus approval of members was required.

Even after amendment, the approval of members is required as the value is in excess of 10% of turnover of company.

4)    The company to avail services from its associate company for Rs. 115 Crores

In the extant provision, the criterion was sale of goods exceeding 10% of Turnover or Rs. 50 crore whichever is lower.

Therefore, Rs. 120 Crore or Rs. 50 Crore whichever is lower = Rs. 50 Crore. Thus approval of members was required if sale of goods amounted to Rs. 115 Crore.

Now with the removal of lower limit of Rs. 50 Crore, company is not required to take members approval as this transaction is less that 10% of turnover of company.

The major impact is that the company can undertake transactions for value more than Rs. 100 / Rs. 50 Crore. There is no need of limiting transactions upto Rs. 100/ Rs. 50 Crore.