Term of independent directors cannot exceed 6 years, says MCA report

Term of independent directors cannot exceed 6 years, says MCA report
The Financial Express, December 22, 2009, Page 12

fe Bureaus, New Delhi

An individual may not remain an independent director in a company for more than six years, according to the report on voluntary corporate governance guidelines, prepared by the ministry of corporate affairs. Currently, no such limit exists for independent directors under the Company's Act, 1956. The report also adds that a period of three years should elapse before such an individual is inducted in the same company in any capacity.

According to an MCA official, the ministry will bring out a mandatory corporate governance code after one year, which would be a mix of these voluntary guidelines and recommendations of India Inc. The report suggests that companies may have a nomination committee comprising independent directors, inclu- ding its chairman. The committee should consider proposals for searching, evaluating and recommending appropriate indepen- dent directors and non-executive directors.

The report further says that in order to maintain the independence of auditors with a view to look at an issue (financial or non-financial) from different perspectives, the audit partner should be rotated once every three years and audit firms should be rotated once every five years. Under the Company's Act, there is no such provision for the rotation of auditors. The corporate governance report says a cooling-off period of three years should elapse before a partner can resume the same audit assignment. In order to ensure proper and accountable audit, there should be clarity between the management and the auditors on the nature and amount of information and periodicity for supplying such information.

To prevent unfettered decision-making powers resting with a single individual, there should be a clear demarcation of the roles and responsibilities of the chairman of the board and that of the managing director or chief executive officer, according to the report. Also, in order to ensure the independence and credibility of the process of internal audit, the board may appoint an internal auditor and such an auditor should not be an employee of the company.

The companies should also ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate independent directors of the quality required to run the company successfully. Companies should have the option of giving a fixed contractual remuneration, not linked to profits to NEDs. At present, the managerial remuneration for all directors cannot exceed a maximum of 11% of the net profits of the company.