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More checks on powers of directors

New Delhi, May 11: The Companies (Amendment) Bill 2003, which seeks to amend the Companies Act 1956, proposes to bring in more independent directors in public sector undertakings (PSUs).

However, the Bill is also keen to ensure that the powers of these directors — both independent and nominated — are not misused. For example, clause 151 of the Bill provides that the appointment of the relative of a director (holding more than 2 per cent of the equity of the company) shall be subject to the approval of the central government, if remuneration of the appointee exceeds certain sum prescribed by the government.

Clause 136 in the present Bill proposes to amend section 292 A of the Companies Act. Apart from empowering the government to appoint the maximum number of independent directors in every public company, it also carries provisions that spell out the powers and function of the audit committee.

“Every public company having paid-up capital of not less than Rs 5 crore shall constitute a committee of board known as audit committee which shall consist of not less than two independent directors and not more than such number of maximum independent directors, as the central government may prescribe,” says the new Bill.

In tune with the recommendations of the Naresh Chandra Committee on audit practices and corporate governance, the amended Bill seeks to give greater transparency to auditing services and enhancement of the strength and numbers of independent directors.

The new Bill stipulates that every public firm having a paid-up capital and free reserves of Rs 5 crore or more or a turnover of Rs 50 crore or more shall have a minimum of seven directors, out of which majority shall be independent directors. The majority status of independent directors are being brought in section 251 of the principal Act.

Though industry reacted positively on strengthening the role of independent directors, it has its reservations too. According to the CEO of a top industrial house, the move can lead to a dearth of good independent directors, as quality and truly independent directors are few.

The new legislation also says that a person cannot be appointed as an independent director for a consecutive period of nine years or more.

Jamshed J. Irani, director, Tata Sons, said, “Such caps would mean that some of the best independent directors on the board, who are there for close to two decades, will have to quit.”

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