Schedule IV: The Code for Independent Directors

The code for independent directors is Schedule IV of the Companies Act, 2013, read with section 149(8), which requires the company and its independent directors to abide by it. The Schedule opens by stating its own purpose: adherence to these standards will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors. It runs to eight numbered parts.

What does the code for independent directors contain?

The code for independent directors is organised as eight parts, and each part is a numbered list rather than prose. Reading them in order shows the design: conduct first, then what the role is for, then what the director must actually do, then the machinery around appointment and exit.

What conduct and role does the Schedule set?

Part I is written as things an independent director shall do or shall not do. Uphold ethical standards of integrity and probity. Act objectively and constructively. Exercise responsibilities in a bona fide manner in the interest of the company. Devote sufficient time and attention. Not allow extraneous considerations to vitiate objective independent judgment, whether concurring in or dissenting from the collective judgment of the Board. Not abuse the position to the detriment of the company or its shareholders, or for personal advantage or that of an associated person. Refrain from any action that would lead to loss of independence, and where circumstances arise that cost the director independence, immediately inform the Board. Assist the company in implementing best corporate governance practices.

That last conduct item connects to a statutory duty rather than sitting alone. Section 149(7) requires an independent director to declare that he meets the criteria of independence at the first Board meeting in which he participates, at the first Board meeting of every financial year, and whenever circumstances change. Independent director under section 149 covers the independence tests that declaration is made against.

Part II sets the role. Bring independent judgment on strategy, performance, risk management, resources, key appointments and standards of conduct. Bring an objective view to evaluating the board and management. Scrutinise management's performance against agreed goals. Satisfy themselves on the integrity of financial information and that financial controls and risk-management systems are defensible. Safeguard the interests of all stakeholders, particularly minority shareholders, and balance conflicting stakeholder interests. Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management, with a prime role in appointing and where necessary recommending removal of the same. Moderate and arbitrate in situations of conflict between management and shareholder interest.

Item (7) of Part II is the reason the nomination and remuneration committee reads across to this Schedule: the remuneration role the Schedule gives independent directors is discharged through that committee where one is constituted.

What are the specific duties in Part III?

Part III is the operational list, and three of its thirteen items are worth naming because they attach to identifiable filings and processes.

• Item (9): related party transactions. Pay sufficient attention and ensure adequate deliberations before approving related party transactions, and be satisfied that they are in the interest of the company. Related party transactions covers the section 188 regime those approvals sit in.
• Item (10): the vigil mechanism. Ascertain and ensure that the company has an adequate and functional vigil mechanism, and that the interests of a person who uses it are not prejudicially affected. The vigil mechanism covers that requirement.
• Item (6): dissent on the record. Where they have concerns about the running of the company or a proposed action, ensure the concerns are addressed by the Board and, to the extent unresolved, insist that their concerns are recorded in the minutes of the Board meeting.

The rest cover induction and refreshing of skills; seeking clarification and taking outside professional advice at the company's expense; striving to attend all Board meetings and the meetings of committees of which the director is a member; participating constructively in committees they chair or serve on; striving to attend general meetings; keeping well informed about the company and its external environment; not unfairly obstructing an otherwise proper Board or committee; reporting concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct; acting within their authority and assisting in protecting the legitimate interests of the company, shareholders and employees; and not disclosing confidential information, including commercial secrets and unpublished price sensitive information, unless expressly approved by the Board or required by law. Item (12) reads "act within their authority" following a substitution by Notification No. S.O. 2113(E) dated 5 July 2017, for the earlier "acting within his authority".

What does the Schedule require around appointment and exit?

Part IV keeps the process away from management. The appointment process shall be independent of the company management, and the Board shall ensure an appropriate balance of skills, experience and knowledge. The appointment shall be approved at a meeting of the shareholders, and the explanatory statement to that notice must state the Board's opinion that the proposed director fulfils the conditions in the Act and rules and is independent of management. The appointment is formalised through a letter of appointment covering the seven items listed in paragraph IV(4), from the term through to the remuneration. The terms and conditions of appointment must be open for inspection at the registered office by any member during business hours and posted on the company's website.

Part V ties re-appointment to evidence: re-appointment shall be on the basis of the report of performance evaluation. Part VIII says that evaluation is done by the entire Board excluding the director being evaluated, and that the report determines whether to extend or continue the term.

Part VI routes resignation and removal through sections 168 and 169 of the Act, which resignation of a director and removal of a director under section 169 cover, and requires replacement within three months. The India Code footnote records that period as substituted by the 5 July 2017 notification for "a period of not more than one hundred and eight days", and that pre-amendment figure is reproduced here as the consolidation prints it rather than as a verified reading of S.O. 2113(E): one hundred and eighty days is the more likely original, and nothing on this page turns on it, because the operative period is three months either way. Paragraph VI(3) disapplies the replacement duty where the Board still meets its independent-director requirement without filling the vacancy.

Part VII is the separate meeting: at least one in a financial year, without non-independent directors or management present, to review the performance of non-independent directors and the Board as a whole, review the performance of the Chairperson taking into account the views of executive and non-executive directors, and assess the quality, quantity and timeliness of information flow between management and the Board.

A Note inserted by the same 5 July 2017 notification disapplies parts of the Schedule to a Government company as defined in section 2(45), where the concerned Ministry or Department specifies the requirements and the company complies. The disapplied provisions are paragraph II(2) and II(7), the whole of paragraph IV, paragraph V, "clauses (a) and (b) of sub-paragraph (3) of paragraph VI", and paragraph VIII. That fourth item is quoted rather than paraphrased because it does not resolve: paragraph VI(3) is a single undivided proposition with no clauses, and the only sub-paragraph (3) on this Schedule carrying clauses (a) and (b) is paragraph VII(3), the separate-meeting agenda. The reference is reproduced as the India Code consolidation prints it, and a Government company relying on it should read the notification itself.

Where the code for independent directors shows up in a filing

Two of its requirements produce something a reader outside the company can actually see. The letter of appointment's terms and conditions must be posted on the company's website under paragraph IV(6). And the explanatory statement to the shareholder notice approving the appointment must carry the Board's opinion on independence under paragraph IV(3), which puts that assertion into a document circulated to members. Board composition and independence are separately reported in a listed company's corporate governance report, which how to read a corporate governance report covers.

Where this sits in the disclosure picture

• Independent director under section 149 covers the definition and the section 149(8) hook that makes this Schedule binding.
• The nomination and remuneration committee covers the committee through which the Part II remuneration role is discharged.
• The vigil mechanism covers the mechanism Part III item (10) requires independent directors to check.
• Duties of a director under section 166 covers the statutory duties that apply to every director alongside this code.
• Managerial remuneration under section 197 covers the fees and commission the letter of appointment must set out.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.