women independent directors: challenges and opportunities krupa r.gandhi, bansi s. mehta & co....

Women Independent Directors: Challenges and Opportunities

Krupa R.Gandhi, Bansi S. Mehta & Co.

An overview of the statutory provisions

International Scenario Globally, statistics show that men occupy more board seats compared to women.

Several countries have enacted laws for appointment of WD. The objective being to

reduce disproportionality on corporate boards which is rooted in the principle of

equality of treatment.

Two metrics are used to examine the proportionality of women on corporate boards,

(1) % of companies that have at least one woman on their board, and (2) % of women

holding Corporate Board seats.

Eg: In United States Amongst S&P 500 companies, 90% have at least one woman on

their board. In 2012, 17% of the Corporate Board seats of S&P 500 companies were

held by women.

In United Kingdom Amongst the FTSE 100 companies, 93% have at least one

woman on their board. Krupa R.Gandhi, Bansi S. Mehta & Co.

https://en.wikipedia.org/wiki/S&P_500

https://en.wikipedia.org/wiki/FTSE_100_Index

Provisions under the Companies Act, 2013 (“the Act”)


Earlier Provisions

Companies Act, 1956 did not contain separate provisions on appointment of Women Directors (“WD”s).

The earlier Listing Agreement (prior to October 1, 2014), too, did not contain provisions on WDs.


Woman DirectorSecond Proviso to sec149(1) and Companies (Appointment and Qualification) Rules,2014


Companies required to have at least 1 woman

director

Listed Company Other Public Companies

Paid-up share capital>= Rs.

100 CrTurnover >= Rs.

300 Cr

NO SPECIFIC REQUIREMENT OF WOMAN DIRECTOR TO BE INDEPENDENT

Independent Director (“ID”)Sec 149(4) r.w. Companies (Appointment and Qualification) Rules,2014

Composition of a Board

Listed Public Companies Public Companies

Paid-up share capital>= Rs. 10

Cr

Turnover >= Rs. 100 Cr

Aggregate of outstanding loans,

debentures, deposits > Rs. 50

Cr

At least 2 IDs

1/3rd IDs

or or


Qualifications of an IDSection 149(6)

Other than MD or WTD or Nominee Director.

In the opinion of the Board, a person of integrity, possessing relevant expertise and experience.

Not a promoter of the company or its holding, subsidiary or associate company

Not related to promoters of the company or its holding, subsidiary or associate company

No pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year


Relatives not to have pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors

Threshold- two per cent or more of its gross turnover or total income or fifty lakh rupees, whichever is lower during the two immediately preceding financial years or during the current financial year.

Neither himself nor his relatives

is or was KMP/employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed is or has been employee or proprietor or a partner, in such three financial years, of—

a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;


holds with his relatives two per cent or more of the total voting power of the company

is a CEO or a director of any non-profit organisation that receives twenty-five per cent or more of its receipts from the company, its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the Company.

Companies (Appointment and Qualification) Rules, 2014 - IDs to possess appropriate skills, experience and knowledge in finance, law, sales, marketing etc.


Pecuniary Relationship - Meaning

Dictionary Meaning of ‘pecuniary’ – Oxford definition - “something to do with money”.

General Circular 14/2014– IDs entering into transactions with the company that are at par with the members of general public and at the same price will not be said to have ‘pecuniary relationship’. Also, receipt of fee, reimbursement of expenses and profit related commission to be excluded from “pecuniary relationship.”


Appointment and TenureSection 149(10), 149(11), 150(1) and Schedule IV

IDs can be selected from the databank containing names, addresses and qualifications of persons who are eligible and willing to act as IDs. Databank to be maintained by an entity notified by Central Government.

ID can be appointed for not more than 2 consecutive terms of 5 years each.

Breathing period of 3 years for re-appointment after 2 consecutive terms.

Appointment to be approved at shareholders meeting; explanatory statement to be annexed to the notice of meeting.

Appointment to be communicated to the director through a letter of appointment.

Reappointment to be based on performance evaluation of the ID.

Tenure of 5 years to be considered from the commencement of Act i.e. April 1, 2014

Provisions of rotation specified in section 152 not to apply to IDs.


Contd..

Companies (Appointment and Qualifications of Directors) Rules, 2014 –

Vacancy of woman director to be filled up not later than:

immediate next Board meeting

three months from the date of such vacancy

General Circular 14/2014 on appointment of existing IDs under 149(10)/(11) and appointment for less than five years.

Whichever is later


Separate Meeting of IDsSchedule IV

IDs to hold atleast 1 meeting without attendance of non-independent directors

In such meeting, IDs to:

Review performance of non-independent directors, Board and the Chairperson of the Company.

Assess the data flow between the Board and Management that is required for the Board to effectively perform their functions.


Limit on number of Directorships (Sec 165)

Companies in which Directorships are held Limit

All companies 20

Public Companies (including private companies which are holding or subsidiary company of such public company) included in 20

10

Above limits also apply to Independent Directorships In case of directorships of more than the above-stated limit, director

to regularise it before April 1, 2015.


Schedule IV

Code for IDs

Professional Conduct

Roles and FunctionsDuties


I. Professional conduct To act objectively and constructively while exercising duties.

To exercise responsibilities in bona fide manner.

Refrain from abusing position to the detriment of the company or its shareholders.

To inform the Board on loss of independence.

To assist in implementing the best corporate governance practices.


II. Roles and Functions Bring an independent judgment on the Board’s deliberations on issues

of strategy, performance, risk management, resources, key appointments and standards of conduct.

Objectively evaluate Board and management performance.

Satisfy on integrity of financial information, financial controls and the systems of risk management.

Safeguard interests of all stakeholders, especially minority shareholders.

Determine appropriate levels of remuneration of executive directors, KMPs and senior management, have a prime role in their appointment and recommend their removal, where necessary.

Arbitration in the interest of the company in case of conflict between management and shareholder’s interest, etc.


III. Duties Regularly update and refresh skills, knowledge and familiarity with the company .

Seek appropriate clarification or amplification of information.

Seek professional advice and expert opinion at the expense of the company wherever necessary.

Strive to attend all meetings of the Board, Committees and shareholders

Be well informed about the company and the external environment in which it operates.

Maintain confidentiality of information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

Ensure that-

adequate deliberations are held before approving related party transactions

company has an adequate and functional vigil mechanismKrupa R.Gandhi, Bansi S. Mehta & Co.

Other provisions

Sec 149(9) - IDs not eligible for Stock Options.

Sec 149 (12) - IDs to be responsible only for any omission or commission committed with their knowledge or consent or connivance or where they have acted without diligence.


Listing Agreement Clause 49(II)(A) and 49(II)(B)


Applicability of the Listing Agreement

Listing Agreement to apply to all listed companies except the following:

Companies having paid-up share capital <= Rs. 10 Crores and networth <= Rs. 25 Crores as on the last day of the previous year

Companies whose equity shares are listed exclusively on SME and SME-ITP platform.


Composition of Board -

Non-executive directors not less than 50%.

At least one woman director.

No requirement of woman independent

director.

ExecutiveNon-Executive


If the Chairman is a non-executive director

- at least 1/3rd directors should be independent.

If the Chairman is :

executive director or;

non-executive being promoter/related to promoter

or managerial person

– at least 1/2 directors should be independent.

Inde-pendent Directors

Independent Directors


Time Limit for Compliance

Time limit for compliance with provisions other than appointment of woman director – October 1, 2014

Time limit for compliance with appointment of woman director – April 1, 2015. No further extension granted.

SEBI has directed SE to impose graded fine (depending on the compliance status) on non-compliant companies.


Qualifications of an ID

Definition similar to the one given under the 2013 Act.

Additional conditions:

Pecuniary relationship to be “material” to become non-eligible as an ID.

ID not to be the material supplier, service provider, customer, or a lessor or lessee of the company.

ID not to be less than 21 years of age.


Limit on number of Independent Directorships in Listed Companies

Scenario Limit

Basic Limit 7

Individual serving as WTD in a listed company 3


Appointment and Tenure

Similar to the 2013 Act

Performance evaluation criteria for IDs to be laid down by nomination committee; evaluation to be done by the entire Board (excluding the ID being evaluated)

Reappointment to be based on performance evaluation.

Vacancy created on resignation or removal of ID to be filled up not later than: immediate next Board meeting

three months from the date of such vacancy

If the company fulfils the requirement of independent directors without filling the vacancy, the provisions of filling up of vacancy shall not apply.

whichever is later


Separate Meeting of IDsProvisions same as those under the Act

TrainingCompany to provide training to IDs on their roles, rights,

responsibilities in the company, nature of the industry in which the company operates, business model of the company, etc


Status of Compliance by companies of the provisions of the Listing

Agreement and the Companies Act, 2013


Compliance Status

180 NSE-listed companies had not appointed a woman director on their respective boards within the due date (as per the information gathered by Prime Database)

The above number includes 32 PSUs (Public Sector Units) and PSBs (Public Sector Banks).

As on April 1, 2015, about 832 women had been appointed to 912 directorship positions in 872 companies.

Of these 872 companies, 43 companies already had a woman on the board before the SEBI guideline was announced but appointed a second woman director on their board.


Compliance Status

Of the remaining, 829 firms which complied with the SEBI norms, as many as 278 did so in the month of March this year.

Data further showed that across all 1,456 NSE-listed firms, after the recent appointments of women, there are now 1,222 women presently occupying 1,431 directorship positions.

Of the above number, 671 women are holding 713 non-independent directorship positions.

The companies with the highest number of women directors (four each) are Apollo Hospitals Enterprise, Indraprastha Medical Corp and Monte Carlo Fashions.


Fine Structure for Non-compliance of the Listing Agreement

Compliance Status Fine Structure

Listed entities complying betweenApril 1, 2015 and June 30, 2015

₹ 50,000/-

Listed entities complying betweenJuly 1, 2015 and September 30,2015

₹50,000 + 1000/- per day w.e.f. July 1,₹2015 till the date of compliance

Listed entities complying on orafter October 1, 2015

₹1,42,000/- + 5000/- per day from₹October 1, 2015 till the date of compliance

For any non-compliance beyond September 30, 2015, SEBI may take any otheraction, against the non-compliant entities, their promoters and/or directors orissue such directions in accordance with law, as considered appropriate.


Compliance Status

As per Recent News Articles, NSE has issued notice to 260 companies, including 145 suspended firms, for their alleged failure to comply with SEBI norms to appoint at least one woman director on their respective boards, and for prompt compliance with the same.


Committees


Committees that require ID as a

member

Audit Committee Nomination and Remuneration Committee

Corporate Social Responsibility Committee


Audit Committee(Sec 177)

Particulars The 2013 Act LA

Composition • Committee to consist of minimum 3 directors

• IDs to form majority.

• Committee to consist of minimum 3 directors

• 2/3rd members to be independent• Chairman to be independent

Functions • Recommendation for appointment and Remuneration of Auditors

• Examination of financial statement an Auditors’ report

• Approval of Related party transactions

• Evaluation of internal financial controls and risk management systems

• Monitoring end use of funds raised through public issue

Functions in addition to those mentioned in the Act• Reviewing the adequacy of internal

audit function• Looking into the reasons for

substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors

• Approval of appointment of CFO


Nomination and Remuneration Committee(Sec 178)

Particulars The Act LA

Composition • Committee to consist minimum 3 non-executive directors

• IDs to form majority

• Committee to consist minimum 3 non-executive directors

• IDs to form majority• Chairman to be independent

Functions • Appointment & Removal of Directors

• Evaluation of Directors performance

• Formulate criteria for qualification and independence of directors

• Recommend remuneration policy for directors, KMPs, key employees

Functions similar to those mentioned under the Act


Corporate Social Responsibility(“CSR”) Committee(Sec 135)

Particulars The Act LA

Composition • Committee to consist of minimum 3 directors

• Of this minimum 1 must be ID

No requirement under the LA to form the committee

Functions • Formulate and recommend CSR Policy to the Board in line with Schedule VII

• Recommend expenditure to be incurred on CSR activities

• Monitor CSR policy


Overview of provisions of the Act and LAParticulars The Act LA

Composition of Board • Listed company – 1/3rd to be IDs• Other prescribed public companies –

minimum 2 IDs

• If chairman is non-executive director – 1/3rd directors to be independent

• If chairman is executive or non-executive but related to promoter - ½ directors to be independent

Requirement of Woman Director

• Listed companies and other prescribed companies to have minimum 1 woman director

• All listed companies to have minimum 1 woman director

Qualifications of IDs • Not an MD/WTD/nominee director• Possess integrity, skills, knowledge• No pecuniary relationship with the

company-remuneration excluded from pecuniary relationship

• Not a KMP/employee• Not a part of auditing firm, legal

consulting firm• Does not hold directly or through

relatives >= 2% of the voting power• Other conditions

• ID not to have material pecuniary relationship except for receiving remuneration

• ID not to be the material supplier service provider or customer or a lessor or lessee of the company

• ID not to be less than 21 years of age.• Other conditions similar to the 2013

Act.


Particulars The 2013 Act LA

Appointment and Tenure • Approval at shareholders’ meeting• Communication through letter of

appointment• 2 consecutive terms of 5 years each• Breathing period of 3 years before

reappointment after 2 terms• Tenure of 5 years to be considered

from the commencement of the Act.• But fresh appointment to be made

under the 2013 Act within one year from April 1, 2014.

• Similar provisions

Limit on number of directorship

• Total Directorship limit – 20• Directorship in public companies -

10

• Basic Limit – 7• Limit if individual is serving as a

WTD - 3

Separate Meeting of IDs • IDs to hold atleast 1 meeting without attendance of non-independent directors

Similar Provisions


Director’s Database


Indian Boards Database

Database giving information of directors on the Board of NSE- listed companies and some prominent Unlisted Financial Sector Companies

The information provided of directors is their age, gender, nationality, educational qualifications, experience, position on the board, independent/non-independent status, date of appointment, committee memberships, remuneration, cessations, other directorships of each director and connectivity with other directors

Information is updated on an event basis.


ID Repository by ICAI, ICSI and ICWAI

By joint initiatives of ICAI, ICSI and ICWAI, the portal u/s 150 of the 2013 Act has been launched from August 2014.

The URL is: http://independentdirectors.in

The repository facilitates the persons who are eligible and willing to be appointed as IDs and also helps companies to select persons who are eligible and willing to act as IDs.

The responsibility to exercise due diligence before selecting an ID from any database lies with the company making the appointment.


http://independentdirectors.in/

Opportunities

The principle of gender equality is enshrined in the Indian Constitution. In modern era there is a greater recognition of women empowerment in various fields.

The statutory requirement to appoint a woman director is a step towards woman empowerment and recognition of growing contribution of women in business and economy.

Much before India, Norway, France, Italy, Spain and Belgium have already put in place the legislation for appointing women directors.

According to “Catalyst”, a non profit research organisation in the USA, many of the Fortune 500 companies which have highest representation of women directors on Boards have achieved better financial performance than those with less representation.


Contd. As per the report of Indiaboards.com, a joint initiative of Prime Database and NSE 'Women

on Boards-Companies Act 2013, the Iron & steel industry in India has maximum women representation of 10.98 per cent of the Board strength amongst the BSE Sensex companies.

There is a great scope for women to be appointed as directors especially IDs as evident from the report of Prime Database and NSE.

As per a news item, Infrastructure sector in India has a severe shortage of senior lady executive directors due to the typical nature- here grooming begins at remote construction sites so it is difficult to find female to accept such roles. Such companies could consider appointing women as IDs.

Companies which do not have any woman director on the Board, are actively appointing women ID since it also helps in achieving the ratio of IDs.


Challenges

The 2013 Act has greatly increased the role of IDs.

[See Schedule IV to the 2013 Act]. Some areas which pose challenges are:

Scrutiny of management performance, integrity of financial information, controls and risk management

Ensuring that their concerns on running of the company management are addressed by the Board or are minuted, if not resolved.

Approving RPT after deliberations and assuring themselves that they are in the company’s interests.

Ensuring that the company has an adequate vigil mechanism and protecting interests of persons who use them;

Report on actual or suspected frauds or violation of company’s code of conduct.


Contd.

IDs of listed companies who are members of Audit Committees have even more onerous task.

ID’s contribution to companies will be evaluated for their continuance so even IDs have to continuously evolve in their role as such.

The stated- objective behind the enlarged duties of IDs was to bring good corporate governance and to protect interests of minority shareholders.

Promoters may appoint female family members to the boards to meet the legal stipulation and to keep control within the family. One needs to view this objectively rather than with any bias against such appointment.


Thank You


women independent directors: challenges and opportunities krupa r.gandhi, bansi s. mehta & co....

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