In the corporate world it is common practice that relatives of promoters and even independent directors are conferred with contracts, loans and so on. This practice is considered to be one of the main causes for the prevalence of monopoly and fraudulent acts in the company management.

To put an end to this practice, the Ministry of Corporate Affairs has amended the Companies (Appointment and Qualification) Rules, 2014 to mandate companies to ensure that no relatives of the independent directors are in any way associated with or indebted to the companies and its associated companies, promoters or directors.

The underlying intent is to ensure that any relatives of independent directors are in no way associated with the decision making of the companies.

The fresh rules are applicable to all transactions worth INR 5 million or more in the last two preceding financial years or in this year.

Another prospect is that no guarantee to any such relatives or security in connection with indebtedness to any third party to the company, promoters and its subsidiaries will be permitted.

Following the flurry of various corporate frauds, severe concerns has been aroused about the functionality and independence of the independent directors in the decision making related to the company matters as in most of the cases independent directors are persons closely associated with the promoters – who remain silent spectators in board meeting and blindly support the decisions of the board of directors without any knowledge of the consequences of such decision on the development prospects of the company. If their kin are to be involved in substantial financial transactions with the company, the ‘independence’ of the independent director could be compromised.

Uday Kotak Committee also has made diversified recommendations with respect to eligibility parameters of the independent directors with the objective to exclude persons’ part of the promoter group from the ambit of the independent directors.

Latest provisions should instill true ‘independence’ among independent directors and enabling them to take fair decisions on their own without succumbing to the pressure or influence from the promoter group.

Independent directors should work independently for the well being of the company and enhance transparency in the company management and administration – no relatives or close friends should be beneficiaries of the company’s largesse and the corporate governance standards should be uplifted.

Research inputs by Paruchuri Baswanth Mohan