"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, August 28, 2012

Whether Undue Delay Can Constitute Reason for Setting Aside the Arbitral Award- Part II

In the last post on this topic, we had briefly dealt with the law on setting aside arbitral awards for undue delay in passing the award. In this post, we discuss two recent cases on this issue.

NIKO Resources:
In Union of India v. NIKO Resources & Anr.(pdf)*, the tribunal consisted of three retired judges of the Supreme Court- Mr. Justice DP Wadhwa, Mr. Justice PN Bhagwati, and Mr. Justice MH Kania. Mr. Justice PN Bhagwati was nominated by NIKO. Mr. Justice DP Wadhwa was appointed by the court and both the arbitrators appointed Mr. Justice MH Kania, who was the presiding arbitrator.

Final arguments were heard in August 2005 and the tribunal reserved its award. An application was filed in the interim by NIKO, which was heard by the tribunal in November 2006. Mr. Justice Wadhwa had apparently circulated his draft award to the other members of the tribunal but did not receive comments from the tribunal. Further, it appears that the other two arbitrators drafted and passed the award in August 2009 without consulting with Mr. Justice Wadhwa, therefore making him conclude: "We exchanged letters in which I expressed my disappointment  and anguish about I do not know where and when both of them met to discuss the draft Award. If that being so, it appears to me rather unusual."

The other two judges in their joint award stated that for "several reasons" they could not have a meeting with the other member of the tribunal and when they received his arbitral award, they had "basic differences" in "approach and reasoning" and therefore they had to write a separate award. The majority also held that the delay caused was on account of health problems. The majority award was in favour of NIKO.

Union of India challenged the award on the ground (among others) that there was an extraordinary delay of four years since the final arguments concluded and the explanation regarding health problems was unsatisfactory.

The Delhi High Court held that it is true that there was an extraordinary delay of four years in passing the award (such awards shall hereafter be called "Delayed Awards"). Even if NIKO's 2006 application is taken into consideration, the award was passed only after three years. Importantly, the court found that if the tribunal unreasonably delays the parties in pronouncing the award, two options were available to the parties: (1) approach the tribunal and pray for expediting the award, (2) if that is not successful, invoke Section 14. As regards the second option, the High Court felt that the decision of the Delhi High Court in Progressive Career Academy v. FIIT JEE did not cover the situation where there was extraordinary delay in pronouncing the arbitral award. Having held so, the court held:
"Given the scheme of the Act, it might be appropriate to exhaust the above remedy before the stage of challenge to the Award. It hardly needs to be stated that delay per se is not identified as one of the grounds under Section 34 of the Act. It would have to be shown that the Award suffered from patent illegality on account of such delay."
Importantly, the court held that in setting aside Delayed Awards, courts should have consideration to the time and expenses incurred by the parties and that if delay alone was the reason for setting aside, several awards would have to be set aside.

However, the court found, after relying on PEAK Chemicals (discussed in the last post) that the majority, having received the draft award of Mr. Justce Wadhwa, did not deal with the points raised therein. These aspects were important as the failure, according to the court had vitiated the award. Nevertheless, the court clarified: "Consequently, while in the present case the delay in pronouncement of the Award per se does not vitiate it, the delay appears to have led to the Award being vitiated by patent illegality for the reasons discussed hereafter."

Subsequently, the court went on to conclude that the majority suffered from patent illegality as it sought to "rewrite the PSC by deeming an amendment to the the PSC to include the 36" pipeline as a part of the Development Plan and deeming a changed Delivery Point when there was no approval to such change" and that it overlooked several facts which led to the conclusion opposite to the one reached by the majority.

Essar Oil:
In Oil India Limited v Essar Oil Limited (pdf), a similar question arose before the Delhi High Court. Disputes between the parties were referred to a three member arbitral tribunal consisting of Retired judges- Mr. Justice R.S. Pathak, former Chief Justice of India (Presiding Arbitrator), Mr. Justice Rajinder Sachar, retired Chief Justice of High Court of Delhi and Mr. Justice J.K. Mehra, retired judge of Delhi High Court. The presiding arbitrator and Mr. Justice J.K. Mehra decided in favour of Essar while allowing some counter-claims of OIL.
Relying on Harji Engineering and other decisions, OIL contended in the Delhi High Court that the award was delivered more than three years after it was reserved and the extraordinary delay therefore rendered the award contrary to the public policy of India. When it was pointed out that in Peak Chemical, the court held that delay per se did not constitute a ground for setting aside the arbitral award, OIL stated that since both the judgements held opposite views, the matter was to be referred to a larger bench. The court took notice of Harji Engineering, Peak Chemicals and NIKO Resources. On NIKO Resources, the court held: 
"In a subsequent decision in Union of India v. Niko Resources 2012 V AD (Del) 573 the Court noticed both the above decisions and further explained the circumstances under which the delay in pronouncement of the Award could be but one factor, among others, that might persuade the Court to set it aside. It was explained that when an Award was challenged on the ground of delay in its pronouncement, the Court would examine the facts and circumstances and ascertain if such delay had led to the Award being rendered patently illegal or opposed to the public policy of India. On the facts of Niko Resources it was observed that the delay in that case had indeed led to an invalid Award being passed."
In view of the observations in NIKO Resources, the Court rejected OIL’s prayer to get the matter referred to a larger Bench.
The court held that although the applicable Rules of the Indian Council of Arbitration provided for two years as the outer limit for the conclusion of arbitration proceedings, since OIL participated in the arbitration proceedings with the knowledge that that the said provision or requirement had not been complied with but without objecting thereto in writing, OIL is deemed to have waived its right to object to such non-compliance, in line with Rule 58 of the Rules of the ICA. The court suggested that OIL should have persuaded the arbitral tribunal to expedite delivering the award and could have approached the relevant court under Section 14 for terminating the mandate of the tribunal for unreasonable delay. The court also noted the inconsistency in the plea of OIL that a portion of the award against it should be set aside on the ground of unreasonable delay while the portion of the award in its favour should not be set aside.
The court proposed to apply the NIKO Resources test- “examine if the delay in the pronouncement of the impugned Award has led to its being vitiated in law” - and found the following: 
  • The impugned Awards, both the majority and the dissenting Awards, are detailed and reasoned and deal with each claim and counter claim at great length.
  •  The passage of time since the reserving the Award has not led to any plea or submission of the parties being overlooked. Unlike in Union of India v. Niko Resources Ltd. where this Court found that the majority Award had failed to deal with the issues raised in the dissenting Award, in the present case the majority Award deals with each of the issues dealt with by the dissenting Award.
Consequently, the court concluded: “It cannot therefore be said that delay in pronouncement of the Award has rendered it patently illegal or opposed to the public policy of India.”

Having briefly surveyed the legal position under the 1996 Act on the issue, we'll critically evaluate the law on the same in the next post. 

[*- Disclaimer: the author has worked in the past as an employee of one of the parties to this case but before the application for setting aside was made.] 

Wednesday, August 22, 2012

Whether Undue Delay Can Constitute Reason for Setting Aside the Arbitral Award- Part I

Two recent judgements of the Delhi High Court deal with the question as to whether long delay in passing of award by the arbitral tribunal is sufficient reason for setting aside the arbitral award. The answer to the question, according to these judgements is, it depends on the facts and circumstances. A clear-cut answer to the question is not as easy as have been made out by the Delhi High Court and the previous decisions on this issue. In this post, we critically analyse the law on the issue. It would do good to first look at the law and the reason(s) for the law on the point. 

One of the earliest cases under the 1996 Act is the well-known judgement of the Supreme Court in ONGC v. SAW Pipes wherein the following observations were made:
It is true that under the Act, there is no provision similar to Sections 23 and 28 of the Arbitration Act, 1940, which specifically provided that the arbitrator shall pass award within reasonable time as fixed by the Court. It is also true that on occasions, arbitration proceedings are delayed for one or other reason, but it is for the parties to take appropriate action of selecting proper arbitrator(s) who could dispose of the matter within reasonable time fixed by them. It is for them to indicate the time limit for disposal of the arbitral proceedings. It is for them to decide whether they should continue with the arbitrator(s) who cannot dispose of the matter within reasonable time. However, non-providing of time limit for deciding the dispute by the arbitrators could have no bearing on interpretation of Section 34. Further, for achieving the object of speedier disposal of dispute, justice in accordance with law cannot be sacrificed. In our view, giving limited jurisdiction to the Court for having finality to the award and resolving the dispute by speedier method would be much more frustrated by permitting patently illegal award to operate. Patently illegal award is required to be set at naught, otherwise it would promote injustice.”
The context in which the above observations were made by the Supreme Court needs to be noted. It was the contention of the Counsel for SAW Pipes that the purpose of the court had limited jurisdiction to examine the validity an arbitral award was to afford finality to the arbitral award passed by a body constituted through consensus of the parties. The counsel for ONGC opposed this argument and contended that since the Legislature had not provided for any time limit in the Arbitration and Conciliation Act, 1996 it implied that the said contention of the Respondent does not have any bearing on the interpretation of Section 34. This argument of ONGC’s counsel was rejected through the above quote.  However, the court also rejected the stance of SAW Pipes’ counsel and held that the pursuit of speedier disposal of a dispute does not mean that justice in accordance with law should be sacrificed. 

It is pertinent to note that Sections 23 and 28 of the Arbitration Act, 1940, quoted below, dealt with time limits in arbitrations which were so referred when the disputes were pending as civil suits:
23. Order of reference.
(1) The Court shall, by order, refer to the arbitrator the matter in difference which he is required to determine, and shall in the order specify such time as it thinks reasonable for the making of the award.
(2) Where a matter is referred to arbitration, the Court shall not, save in the manner and to the extent provided in this Act, deal with such matter in the suit. “
28.Power to Court only to enlarge time for making award.
(1) The Court may, if it thinks fit, whether the time for making the award has expired or not and whether the award has been made or not enlarge from time to time the time for making the award.
(2) Any provision in an arbitration agreement whereby the arbitrators or umpire may, except with the consent of all the parties to the agreement, enlarge the time for making the award, shall be void and of no effect.”
No such provision exists under the 1996 Act. 

Harji Engg. Works
Under the 1996 Act, Harji Works seems to be an important decision on the issue. In Harji Engg. Works v. BHEL, the award was challenged on the ground that there was substantial time gap between the final hearing and the award. There was about three years of time gap between the last effective hearing and the award. A Summary of the pertinent portion of the judgement is below:
  • It is natural and normal for an arbitrator to forget contentions and pleas raised by the parties during the course of arguments if there is a huge gap in time between the date of last hearing and the date of award.
  • Abnormal delay by the arbitrator causes undue delay and prejudice.
  • Since the 1996 Act provides for limited grounds on which an arbitral award could be set aside, arbitrator is additionally responsible for publishing the award within reasonable time.
  • A party must be satisfied that the arbitrator had duly considered their contentions before rejecting or accepting them.
  • An award which is passed after a period of three years from the date of last effective hearing, without satisfactory explanation for the delay, will be contrary to justice and would defeat justice. It defeats the very purpose and the fundamental basis for alternative dispute redressal. Delay which is patently bad and unexplained, constitutes undue delay and therefore unjust.
The court also found that the arbitrator had passed the award without concluding the hearings.  Consequently, the court set aside the award.

Peak Chemical
In Peak Chemical Corporation v. NALCO, it was contended that the arbitral award should be set aside as although orders were reserved in the arbitration in August 2000, the award was only pronounced in February 2005. The cour rejected this contention. The court's justifications are summarized below:
  • Whether delay in the pronouncement of the award after conclusion of final arguments would vitiate the award depends on facts and circumstances.
  • "Significantly, delay has not been specified as one of the grounds under Section 34 of the Act for setting aside an Award. It would be straining the language of that provision to hold that delay in the pronouncement of an Award would by itself place it in "conflict with the public policy of India" within the meaning of Section 34 (2) (b) (ii) of the Act."
  • Since the dispute is pending since 1996, it would not be in the "interests of justice" to set aside the award and remand it for fresh consideration by the tribunal. Further, since the arbitrator had expired, fresh arbitration would considerably waste the time and resources of the parties.
Therefore, the court held that "it is not considered expedient to simply set aside the impugned Award on the sole ground of delay in the pronouncement of the Award..."

More on this issue in the next post.

Saturday, August 18, 2012

Guest Post:: Mediation and Conciliation under Indian Law

Ms. Madhavi Nalluri, Associate, Amarchand & Mangaldas & Suresh A Shroff & Co has written this descriptive post on the state of Mediation and Conciliation in India.
Until 1996, the law governing arbitration in India consisted mainly of three statutes: (i) the 1937 Arbitration (Protocol and Convention) Act, (ii) the 1940 Indian Arbitration Act, and (iii) the 1961 Foreign Awards (Recognition and Enforcement) Act.4 The 1940 Act was the general law governing arbitration in India along the lines of the English Arbitration Act of 1934, and both the 1937 and the 1961 Acts were designed to enforce foreign arbitral awards (the 1961 Act implemented the New York Convention of 1958). The government enacted the Arbitration and Conciliation Act, 1996 (the Act) in an effort to modernize the outdated 1940 Act. The 1996 Act is a comprehensive piece of legislation modeled on the lines of the UNCITRAL Model Law. This Act repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940 Act). Its primary purpose was to encourage arbitration as a cost-effective and quick mechanism for the settlement of commercial disputes. The Act covers both domestic arbitration and international commercial arbitration.[i] Thus, up till the enactment of this Act, arbitration was the only recognized exception to traditional court litigation. Conciliation, mediation or any other alternative dispute resolution procedures were not permissible for settling civil disputes between parties.[ii]

ADR is now an integral segment of modern practice in India. In order to accord statutory recognition to ADR including mediation, the Law Commission in its 129th Report made recommendation for making it obligatory for the Court to refer the dispute to ADR including mediation for settlement.

The ADR framework in India finds statutory recognition in a two –fold manner:
(i) Under the Arbitration and Conciliation Act 1996 and
(ii) Under Section 89 of Code of Civil Procedure 1908 read with Order X, Rules 1A, 1B and 1C

As a part of the scheme under Section 89 of the Code,[iii] various High Courts in India framed their own rules with respect to mediation and conciliation.[iv] The mediations and/or conciliations happening under the aegis of the respective High Courts resort to the said rules for proper implementation of the ADR methods.

As can be seen from the two statutes, the Act covers (a) arbitration and (b) conciliation whereas the Code is wider in its scope and covers five kinds of ADR mechanisms one adjudicatory – arbitration and four non-adjudicatory - (a) conciliation, (b) judicial settlement, (c) settlement through Lok Adalat and (d) mediation.

In the modern techniques of dispute resolution of commercial conflicts, emphasis has drifted from litigation to arbitration. As things are never static, emphasis is further sliding from arbitration to alternative dispute resolution procedures. Apart from arbitration, which is primarily dealt with under the Act[v], the other forms of ADR which are being seen as popular choices include ‘mediation’[vi] and ‘conciliation’. Whilst arbitration is a more formal adjudicatory process, conciliation offers greater flexibility to the parties as it is facilitative, non-adjudicatory and yet binding if the parties reach a settlement.[vii] Conciliation may play a pivotal role, particularly in settling commercial disputes. It is more economic, convenient, speedy and less formal mode of dispute resolution.

There exists much confusion and ambiguity with respect to the meaning of the terms ‘mediation’ and ‘conciliation’. In India, though Section 89 treats the two as being different from each other, in some jurisdictions like the US the terms are used interchangeably.[viii] Let us understand the concepts of ‘conciliation’ and ‘mediation’ under the Indian law.

What is conciliation?
Conciliation is statutorily regulated by the Arbitration and Conciliation Act, 1996 but not defined by that statute. Section 67(1) of the Act however impliedly defines “conciliation” as assistance rendered by a conciliator or parties to a dispute, in an independent and impartial manner, in their attempt to reach an amicable settlement of their dispute.[ix] Confidentiality of conciliation proceedings has been statutorily guaranteed under Section 75 of the Act.

What is mediation?
The interpretation accorded by the Supreme Court to Section 89(2) (c)[x] makes mediation a non-binding, non-adjudicatory dispute resolution process, where a neutral third party renders assistance to the parties in conflict to arrive at a mutually agreeable solution. To put it differently, it refers to a voluntary and flexible negotiated conflict resolution process with the assistance of experts. It involves a structured negotiation where the mediator listens to the parties, ascertains the facts and circumstances as also the nature of the grievance, conflict or dispute, encourages the parties to open up to identify the causes therefor, creates a conducive atmosphere to enable the parties to explore various alternatives and ultimately facilitates the parties to find a solution or reach a settlement. In short, it is a professionally and scientifically managed negotiation process.[xi]

The confidential nature of the mediation proceedings was upheld by the Supreme Court in its decision in Moti Ram v. Ashok Kumar (2011) 1 SCC 466 where it observed that in the event the mediation is successful the mediator should only send the agreement executed between the parties to the Court and not mention what actually transpired in the proceedings. However, if the mediation is unsuccessful, the mediator is expected to send only a statement to the court conveying the failure of the mediation proceedings.

Although ‘mediation’ and ‘conciliation’ may seem fairly similar to each other a key distinction lies with respect to recognition and enforceability of the settlement arrived at through the two- methods. If the parties arrive at a settlement through conciliation the Agreement is enforceable as if it is a decree of the court whereas a settlement reached at in mediation needs to be placed before the court which will make it a decree.[xii]

There is a growing concern as regards the interventionist stance adopted by the Courts with respect to arbitration. The business community as well as the legal fraternity has time and again hinted at the need for the courts to re-look at the way arbitration is perceived to make it an effective alternative remedy.

The Supreme Court has assumed a proactive role while dealing with ADR and went to the extent of setting out the manner in which courts should approach/recommend the ADR methods to litigants under Section 89.[xiii]

It is therefore heartening to see the trend evinced by the various Supreme Court decisions cited earlier which point towards a more conducive approach being adopted by the courts with respect to mediation and conciliation. The two can be seen to be gaining momentum thereby making the ADR system in the country an effective means of tackling the problem of arrears as well as providing comfort to the business community.

[i]Sarma K., Oinam M. & Kaushik A., (October 2009) Development and Practice of Arbitration in India – Has it evolved as an effective legal institution? Working Papers, CDDRL Stanford http://iis-db.stanford.edu/pubs/22693/No_103_Sarma_India_Arbitration_India_509.pdf

[ii] Malhotra, O.P and Indu, The Law and Practice of Arbitration and Conciliation, Lexis Nexis, 2nd Edn. at page 63

[iii]Discussing the intent behind introducing Section 89 in the Code, the Supreme Court in Salem Advocate Bar Association v. Union of India AIR 2003 SC 189 held (in paragraphs 9 and 10):

It is quite obvious that the reason why section 89 has been inserted is to try and see that all cases which are filed in court need not necessarily be decided by the court itself. Keeping in mind the law’s delays and the limited number of judges which are available, it has now become imperative that resort should be had to alternative dispute resolution mechanism with a view to bring to an end litigation between the parties at an early date.”

[iv]See http://www.delhimediationcentre.gov.in/MediationConciliation.htm - Mediation Conciliation Rules 2004 framed by Delhi High Court; http://bombayhighcourt.nic.in/libweb/rules/R2006.01.html - Civil Procedure Alternative Dispute Resolution Rules, 2006 framed by the High Court of Bombay.

[v] The Act would apply if there exists an arbitration clause in an agreement between the parties. In absence of an express agreement to arbitrate, a court can only direct parties to a suit/proceeding to arbitrate upon mutual consent and cannot force the parties to arbitrate.

[vi] The Delhi Mediation Centres statistics shows that out of 42984 cases referred to mediation, 25038 cases have been settled as on June 2011. http://www.delhimediationcentre.gov.in/april-2011.pdf

[vii] Section 74 of the Act accords sanctity of an arbitral award to a settlement arrived at between the parties in a conciliation proceeding.

[viii] Henry J. Brown and Arthur L. Mariot, ‘ADR Principles and Practice’ (1997, 2nd Ed. Sweet & Maxwell, Lord on Chapter 7, p. 272)

[ix] Justice R.V. Raveendran , Mediation – Its importance and relevance, (2010) 8 SCC (Jour) 1

[x]In Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd. and Ors. (2010) 8 SCC 24 (at paragraphs 15 and 16) – “……. for "mediation", the court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authority Act, 1987 (39 of 1987) shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act.”

[xi] Justice R.V. Raveendran , Mediation – Its importance and relevance, (2010) 8 SCC (Jour) 1

[xii] In Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd. and Ors. the Supreme Court dealt with the ADR system in India and clarified a key distinction between ‘mediation’ and ‘conciliation’ in paragraph 27 as under:

“………When a matter is settled through conciliation, the Settlement Agreement is enforceable as if it is a decree of the court having regard to Section 74 read with Section 30 of the Arbitration and Conciliation Act. Similarly, when a settlement takes place before the Lok Adalat, the Lok Adalat award is also deemed to be a decree of the civil court and executable as such under Section 21 of the Legal Services Authorities Act, 1987. Though the settlement agreement in a conciliation or a settlement award of a Lok Adalat may not require the seal of approval of the court for its enforcement when they are made in a direct reference by parties without the intervention of court, the position will be different if they are made on a reference by a court in a pending suit/proceedings. As the court continues to retain control and jurisdiction over the cases which it refers to conciliations, or Lok Adalats, the settlement agreement in conciliation or the Lok Adalat award will have to be placed before the court for recording it and disposal in its terms. Where the reference is to a neutral third party ('mediation' as defined above) on a court reference, though it will be deemed to be reference to Lok Adalat, as court retains its control and jurisdiction over the matter, the mediation settlement will have to be placed before the court for recording the settlement and disposal. Where the matter is referred to another Judge and settlement is arrived at before him, such settlement agreement will also have to be placed before the court which referred the matter and that court will make a decree in terms of it. ….” (emphasis supplied)

[xiii] In Afcons case [at paragraph 30 (f)] it held that the if parties are not agreeable for arbitration and conciliation, which is likely to happen in most of the cases for want of consensus, the court should, keeping in view the preferences/options of parties, refer the matter to any one of the other three other ADR processes: (a) Lok Adalat; (b) mediation by a neutral third party facilitator or mediator; and (c) a judicial settlement, where a judge assists the parties to arrive at a settlement.

(The views stated in the below post are the author's personal views and do not represent the views of anyone else.)

Wednesday, August 8, 2012

Guest Post: Are Govt. Nominee Directors Independent?

The below guest post on the issue as to whether Directors nominated by the Government in Boards of  Government Companies are Independent Directors has been penned by Ms. Roshni Rajiv. Ms. Rajiv has completed her BSL LLB from ILS Law College, Pune (2011) and Company Secretaryship Professional Level Exams. She is currently working in a PSU.

Clause 49I(A)(i) of the Listing Agreement provides that Board of Directors of a company should have an optimum number of both Executive (full time) and Non-Executive (part-time) directors with not less than fifty percent of the Board comprising of non-executive directors. Usually the non-executive directors comprise of both independent and nominee directors. In the case of a Government company, the Board would also consist of Govt. nominee directors. These Govt. nominees are employees of the Government.

What is the position of these Govt. nominee directors under clause 49 of Listing Agreement?

Clause 49 defines independent directors but does not specifically state the position of Govt. nominee directors. However, it clarifies that nominee directors appointed by a public financial institution or bank which has invested in or lent to the company shall be deemed to be independent directors. Hence, can a view be taken that a Govt. nominated director is also independent?

A clarification is vital as the fundamental purpose of having independent directors on Board is to provide unbiased opinions and take decisions in the best interest of stakeholders. The Kumara Mangalam Birla Committee report which led to the incorporation of the Clause 49 in the Listing Agreement doesn’t address the position of Govt. nominee directors. Whereas, the Narayana Murthy Committee Report on Corporate Governance suggested that nominee directors should be excluded from the definition of independent directors in Clause 49 (Para 3.8). The Mandatory recommendation of the committee was that nominee of the Government on public sector companies should be elected by the shareholders and shall be subject to the same responsibilities and liabilities as other directors.

Later in 2005, J.J. Irani Committee had also suggested in their report on company law that nominee directors appointed by any institution or in pursuance of any agreement or Government appointees representing Government shareholding should not be deemed to be independent directors (Para 8.4, Chapter IV). The committee took a view that such Govt nominees represented specific interest and could not be correctly termed as independent.

SEBI took this matter forward in 2007 and proposed an amendment in Clause 49 to stipulate that nominee directors would not be considered as independent directors . Further, SEBI also clarified that government nominees in Government companies would not be treated as independent directors since they have a material pecuniary relationship with the Government as they receive salary among other perks from the Government.

By now, it was clear that SEBI and committee reports had unanimously held the same view. However, when the time came in 2008 to incorporate the same in Clause 49, surprisingly, SEBI did not implement its point of view. It is interesting to note that except for this proposed amendment relating to nominee directors, all other proposed amendments to Clause 49 were incorporated vide SEBI Circular dated 8th April 2008.

Attempts are still made to implement this view and the latest one is contained in Section 149(5) of the Companies Bill 2011. This section defines Independent director as a director other than a managing director, whole time director or a nominee director. Explanation to this section clarifies that a nominee director is a director nominated by any financial institution or appointed by any Government or any other person to represent its interests.

Enactment of the Companies Act will clear the air of confusion and provide a definite answer. Then there may be a need to reconstitute the Boards of Directors of some of the PSUs.