In today's context, the role of non-executive and independent directors is being met in India in four distinct, possibly not so perfect, ways. The first is to take on board-retired civil servants or private sector/public sector functionaries. The second is to accept non-independent directors of chosen companies as independent directors. The third is to induct working professionals such as lawyers, doctors, consultants and professors as independent directors. The fourth, resorted to by relatively high-profile companies, is to have on board executives, professors and consultants from other countries. The Indian system, thus, has bank customers serving on the boards of banks, founders/chief executives and professionals serving as mutual independent directors in each other's group entities, professionals whose firms or associates undertake work for the companies being on the boards of such companies and directors of other nationalities (including non-resident Indians) helping in business development and networking.

What India requires are boards with senior personnel who possess the requisite skills and attributes, and are economically independent to be able to analyze complex issues and voice their opinions without fear or favor. SEBI has recently brought about a change in the Clause 49 listing agreement between companies and stock exchanges, which deals with qualifications of independent directors. The clause was originally incorporated in February 2000. Subsequently, on October 29, 2004, SEBI amended the original clause and issued a new one. All existing listed companies will have to comply with the provisions of the new clause by December 2005. But it has already come into force for companies that have been listed on the stock exchanges after October 29, 2004.

The new clause lays down tighter qualification criteria for independent directors. It disqualifies material suppliers and customers from the board. It also disallows a shareholder with more than a 2% stake in the company from being an independent director, as well as a former executive who left the company less than three years ago. Partners of current legal, audit, and consulting firms, as well as partners of such firms that had worked in the company in the preceding three years, too, can't be independent directors. A relative of a promoter, or an executive director or a senior executive one level below an executive director, too, cannot be an independent director.

Another important difference is that while the original clause gave the board the freedom to decide whether a materially significant relationship between a director and a company affected his independence, the new clause takes this discretionary power away from the board. In the original clause, the maximum time gap between two board meetings could be four months. The new clause has reduced this time gap to three months. The original clause had stipulated that the audit committee must meet at least three times a year and at least once every six months. The new clause makes it mandatory for the audit committee to meet a minimum of four times a year with a maximum time gap of four months. Moreover, unlike the original clause, which was silent on the qualifications of audit committee members, the new clause states that all members should be financially literate and at least one should have financial or accounting management expertise. The new clause also defines "financially literate" and "accounting or related financial management expertise", and widens the role and responsibility of audit committees.

The new Clause 49 necessitates that:

1.The board will lay down a code of conduct for all members and senior management.

2.The chief executive officer and the chief financial officer will certify the company's financial statements and cash flow statements.

3.At least one independent director of the holding company will be a member of the board of a material non-listed subsidiary.

4.The audit committee of the listed company shall review the financial statements of the unlisted subsidiary, in particular its investments.

5.If while preparing financial statements, the company follows a treatment that's different from that prescribed in the accounting standards, it must disclose this in the financial statements and the management should also provide an explanation for doing so in the corporate governance report of the annual report;

6.The company will have to lay down procedures for informing board members about risk management and minimization procedures.

7.Where money is raised from the public, the company will have to disclose the uses/applications of funds according to major categories (capital expenditure, working capital, marketing costs, etc) as part of quarterly disclosure of financial statements.

8.Further, on an annual basis, the company will prepare a statement of funds utilized for purposes other than those specified in the offer document/prospectus and place it before the audit committee.

9.The company will have to publish in its annual report its criteria for making its payments to non-executive directors.