company law

Understanding Independent Director Appointments in Central Public Sector Enterprises

Overview of Central Public Sector Enterprises and Independent Director Appointments

As of March 31, 2024, India hosts 448 Central Public Sector Enterprises (CPSEs), of which 272 are operational. The Companies Act, 2013 delineates specific requirements regarding the appointment of Independent Directors for publicly listed companies and certain public entities based on set financial criteria. Furthermore, the Department of Public Enterprises (DPE) stipulates that at least one-third of board members in CPSEs must be Independent Directors, with stricter mandates for listed CPSEs informed by the chairman's status. Notably, reports suggest that approximately 86% of Independent Director roles in CPSEs are currently unoccupied.

Appointment Process for Independent Directors

The appointment pathway is as follows:

  • Submissions by Administrative Ministries: These ministries propose candidates by submitting a panel of names to the DPE.
  • Review by Search Committee: A Search Committee chaired by the Secretary of the Department of Personnel & Training evaluates the candidates.
  • Processing Recommendations: Upon obtaining recommendations, the DPE forwards them to the relevant ministry, which then seeks final approval from the government.

The Ministry of Corporate Affairs emphasizes that addressing these vacancies is an ongoing effort.

Parliamentary Inquiry on Independent Directors in Central PSUs

Question to the Minister of Corporate Affairs

The following inquiries were raised regarding Independent Directors in Central Public Sector Units (CPSUs):

  1. Total Number and Appointment Status:

    • (a) What is the total count of Central PSUs and the mandatory positioning of Independent Directors/Non-official Directors in these CPSUs?

  2. Current Occupancy of Positions:

    • (b) Is it true that 86% of Independent Director roles are vacant in CPSUs?
    • (c) Can details be provided on vacant positions, broken down by CPSU?

  3. Communication with Other Ministries:

    • (d) Has there been any dialogue with the Ministry of Personnel and DPE regarding this matter?
    • (e) If so, what were the details and outcomes of those discussions?

  4. Future Appointments:

    • (f) Will the Ministry expedite the process of appointing Independent Directors?

Response from the Minister of State for Corporate Affairs

Shri Harsh Malhotra, Minister of State in the Ministry of Corporate Affairs and the Ministry of Road Transport and Highways:

(a) The Ministry of Corporate Affairs oversees the Companies Act, 2013. As defined in Section 2(45), a government company is one in which at least 51% of the paid-up share capital is owned by the Central Government, any State Government, or partially by both. According to the Public Enterprises Survey for FY 2023-24, there were 448 CPSEs as of March 31, 2024, with 272 being operational.

Independent Director Requirements:

  • Under Section 149(4) of the Companies Act, 2013, listed companies must appoint Independent Directors.
  • Rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 specifies that certain public companies must include at least two Independent Directors if they meet any of these criteria:
    • A paid-up share capital of ₹100 crores or more.
    • A turnover of ₹100 crores or more.
    • Outstanding loans, debentures, and deposits exceeding ₹50 crores.

DPE Guidelines:

  • The DPE guidelines indicate that for CPSE boards, at least one-third of their composition must consist of Independent/Non-official Directors.
  • For listed CPSEs with a non-Executive Chairman, one-third must also be Independent Directors, while those with an Executive Chairman must have at least half of their board as Independent Directors.

(b) to (f) The process of filling Independent Director vacancies is ongoing. The DPE confirms that each proposal for appointments is initiated by the respective administrative Ministry/Department, which sends a name panel to DPE. These proposals are evaluated by the Search Committee, and upon receiving recommendations, the DPE communicates these back to the administrative Ministry, which then proceeds with the appointment after complying with necessary formalities and securing the required approvals.