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One third of board should comprise independent directors: JJ Irani reportnews
Our Corporate Bureau
01 June 2005

New Delhi: The JJ Irani committee, appointed by the ministry of company affairs to advice on the amendment to the Companies Act, 1956, has recommended that listed public companies and companies accepting public deposits need not reserve half the seats on their boards for independent directors. The committee has said that a third of the total number of directors as independent directors should be "adequate" for a company having significant public interest, irrespective of whether the chairman is executive or non-executive, independent or not.

Irani said, "We have provided more powers in the hands of the shareholders and in many cases where the existing Companies Act requires the company to approach the government, we have suggested that shareholders should be allowed to take a decision."

The Irani committee report, which studied the concept paper on the Companies Act floated by the ministry, will now be examined by the government, and its recommendations considered when the Act is redrafted and introduced in parliament.

The concept paper floated by the government had suggested that at least half the seats on company boards should be reserved for independents leading to much consternation in the corporate world.

The Irani committee report also gives a fillip to entrepreneurship with the concept of a single-person company. There are provisions to help companies raise long-term capital without affecting voting rights of existing shareholders. On the M&A front, the new law will require an independent valuation of companies getting merged or restructured. It will also make mergers and acquisitions as well as corporate rescue and liquidation easier.

The Irani committee further says that the Company Act should not prescribe the maximum number of directors that any company, private or public, should appoint. "Law should provide for only the minimum number of directors necessary for various classes of companies." The report also adds that the government should not intervene in the appointment and removal of directors in non-government companies.

Other recommendations in the report says that there should be no age limit prescribed in the Act other than procedures for appointment of directors above a certain age. Earlier amendments to the Companies Act, introduced and withdrawn in the previous Lok Sabha had prescribed a retirement age of 75 for directors.

The report has also recommended setting up a single-window clearance mechanism for mergers, removal of the ceilings on director remuneration and suggested a system of deemed regulatory approvals in case proposals were not cleared within a stipulated period.

Minister for company affairs Prem Chand Gupta told the media that the government would harmonise this proposed company law provision with the listing agreement norms of the Securities and Exchange Board of India (Sebi) which require listed companies to reserve half the board for independent directors if the chairman is an executive director.

He said, "We are planning to introduce the new Companies Act by the end of this year and this report will be duly considered in framing the law," Gupta said.

Officials in the company affairs ministry said the report would be only one of the inputs for preparing the new law.

The JJ Irani report has made a number of recommendations on the working of companies in India.

The report has noted that the merger process in India was court-driven and suggested that contractual mergers be allowed without judicial intervention. Such mergers should only require subsequent approval of the shareholders by majority, the committee proposed.

The committee has come down heavily on directors who join the companies at the time of public issue or when investments are to be raised and resign soon afterwards. The report said that such directors should continue to be liable for two years for decisions taken when they were on the board. To ensure the responsibility of management, the report has suggested that the financial statement should be signed by the managing director, chief executive officer and the company secretary even if they were not present in the meeting to finalise the accounts.

To ensure uniformity in financial reporting, the committee has suggested that all companies should have their financial year ending on March 31.

To protect the minority interest during mergers and takeovers, the report has suggested that the audit committee should appoint an independent valuer in case of companies that have delisted and have 1,000 or more shareholders.

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One third of board should comprise independent directors: JJ Irani report