Introduction 

Though India has one of the best corporate governance framework, still we are witnessing the corporate scams, poor corporate governance which leading to corporate governance as an unfinished agenda for regulators and this  creating the need for further reforms in corporate governance. The expectations of regulators from independent directors are increased now. Earlier the role of the independent directors was an arbitrators between the controlling shareholder and public shareholders, legislation has now tasked them with providing oversight and exercising control role. Are this expectations of regulators are right from independent directors in India Inc.?

The duties of Independent Directors have undergone sea change 

According to a recent research report published by Credit Suisse, India, with a total of 111 companies and $839 billion total market capitalisation, ranks third globally on the list of countries with the highest number of  family-owned companies. The report further said that among top 50 profitable companies globally, 24 were from Asia, with a total market capitalisation of $748 billion, of which 12 were Indian family-owned companies valued at $192.2 billion. It’s common that wherever we have dominant shareholder or management, there is a high level of cynicism. As rightly said by Mark Twain that “Whenever you find yourself on the side of the majority, it is time to reform (or pause & reflect).” Here it come the important role of Independent directors where they neutralize the dominance of controlling shareholders and protect the rights of minority shareholders and ensuring better corporate governance.

Because of the regulatory changes in the recent years, the role of independent directors has become more challenging. “The duties and responsibilities of independent directors have undergone a sea change, and they are expected to play an active and vigilant role in the decisions that are being taken by the company at the board level. A majority of the independent directors are finding it difficult to discharge these stringent statutory duties that have been thrust on them by the changes made to the Companies Act and listing regulations,” said Akila Agrawal, partner at the law firm Shardul Amarchand Mangaldas & Co.

Independent directors have to plays two roles one is monitors of controlling shareholders that work on behalf of minority shareholders; second as the brain trust, consultant, or strategic advisor to the controlling shareholder. Under the monitoring role, independent directors are supposed to help and address corporate governance concerns of controlled entities. Section 177 (1) of the Companies Act, 2013 repose the responsibility on the independent directors to approve related party transactions, review auditors independency, etc. If independent director does not fulfill their duty as a watch dog then it would amount to committing an offence. “The authority is not acting honestly where an authority has a suspicion that there is something wrong and does not make further enquiries. Being aware of possible harm to others, and action in spite thereof, is acting with reckless disregard of consequences. It was worse than negligence, for negligent action is that, the consequences of which the law presumes to be present in the mind of the negligent person, whether actually it was there or not.” [1] So an independent director cannot escape from his liability. He will be held liable equally if he will not take any action against the wrong committed in his knowledge.

The independent directors are not allowed to interfere in the day-to-day operations of company and also most of them even not understand the operation of the business. They have right to intervene only in misgivings or misdeeds. Their role is supposed to support the management in attaining goals of the company and creating value for shareholders. If Independent directors cannot get into a company’s day-to-day operations, they cannot understand how it is governed and will not be in the position to fulfill their responsibilities.

Why independent directors are hired? 

It’s a bitter truth that the independent directors are hired only for the sake of compliance of the Companies Act, 2013 and listing regulation, they are neither hired for better corporate governance nor for protecting minority shareholders interests. Therefore, it’s apt to say that independent directors are though appointed in the interest of the Company and the Stakeholders, they end up doing good to the Promoters. Even if few of them discharging their duties and responsibility prudently and effectively but at the end of the day the decision of the majority prevails, which dilutes their effectiveness.

The dilemma of independent directors

The Supreme Court judgement restraining independent directors of Jaiprakash Associates from transferring any personal assets over a group company’s insolvency issue jolted all independent directors’ fraternity. Recently NCLT upheld the Ministry of Corporate Affairs’ plea to freeze assets of independent directors of companies belonging to Nirav Modi and Mehul Choksi, in connection with the Punjab National Bank fraud case. The independent directors argued in court that they were only ‘independent,’ and had no role in the day-to-day operations of these companies. It is also pity to know that as per law these independent directors can’t even claim legal expenses when fighting a case as a non-executive director.

The country is moving from poor governance to extreme governance. “It is unfair to place the entire onus on independent directors who are only privy to the information shared with them by the management. Instead of penalising independent directors, the management and promoters should be penalised.” Said Kiran Mazumdar Shaw, chairperson of Biocon.

Independent directors need to be given immunity and protection except in cases of willful fraud or gross neglect. They should not be held liable for the business losses or business financial failure of the company.

Deepak Parekh, chairman of HDFC Bank, said independent directors are bound to closely monitor operations of the company on which they are a board member. “In case they come across any governance issues they should put across their views strongly to the promoters or step off such boards,” he said. “While the judgement may be seen as harsh, independent directors cannot alienate themselves from company issues.” If you opt to raise your voice then you should be ready to bear the consequences. Though independent directors appointed to protect the interest of minority but in reality they can’t even protect themselves in the organization because it’s on the whims of the controlling shareholders whether to keep or remove them. When Mr. Nusli Wadia who was independent director in some of the TATA group companies, when he voiced his support for Mr. Cyrus Mistry, sacking then the TATA group removed him

When can the independent directors held responsible ?

Sec 149(12) of the Companies Act, 2013 provides that “Notwithstanding anything contained in this Act,—(i) an independent director; & (ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.”

Whether a director acted diligently and whether knowledge could be attributed to a director by mere presence at board meetings it is hard to answer. Some of the Acts treats independent directors equally with the executive board and held them equally responsible.

An individual can be held liable for an offence by the company (i) if there is sufficient evidence of the individual’s active role coupled with criminal intent; or (ii) where the statute itself stipulates the liability of directors and other officials, such as under the Prevention of Money Laundering Act (PMLA).[2] It is pertinent to know that though the exception is been carved out by the independent directors under the Companies Act, 2013 that the act was done without their knowledge and they are acted diligently but there is no such exception under other Acts as like PMLA. This throws the question does it is right to penalize independent directors for the largely promoter-driven acts?

Recent India Inc. incidents:

It is prevalent from the recent cases that independent directors opted escape route when the sailing isn’t smooth. Recently, Vikram Mehta abruptly resigned from Jet Airways where he was an independent director and member of the audit committee Mehta cited time constraints as the reason for his departure and he continues to be on the boards of Apollo Tyres, HT Media, Mahindra and Mahindra, Larsen and Toubro, Vodafone India, and Colgate Palmolive India.

Gitanjali Gems, which was embroiled in the loan scam involving Punjab National Bank, reported that their independent director Mr. Anil Umesh Haldipur resigned citing personal reason. He was the second independent directors of Gitanjali Gems who left the company after the alleged fraud surfaced.

Analjit Singh, Max Group’s chairman emeritus, left Tata Global Beverages when the dispute between Ratan Tata and Cyrus Mistry erupted.

Where most independent directors cites shortage of time, other commitments or such generic reasons for stepping down but Mr. R Chandrashekhar, independent director of YES Bank cited candid reason for his stepping down. According to media reports, he cited that he wasn’t happy with the developments taking place in the recent past and the way it was handled in Yes Bank. He was appointed for a five-year term but he left within seven months. Similarly when Anil Khandelwal resigned from the board of JM Financial  ARC Ltd., he cited candid reason for his resignation he cited that “ the company’s perception about governance issues is in wide variance to my own understanding about a transparent governance process” he said that he raised many governance issues but got no response from the board and management.

Arun Nanda, non-executive chairman of Mahindra LifeSpace and Mahindra Holidays, said “it’s important for any independent director to provide governance but the system ought to protect them. If I was on a board, I would prefer to support the new management instead of resigning. But I should be assured that I will not be held liable or harassed for acts which I had not committed,” he said, citing how directors of a bank were charged before investigations recently, or in another case how the assets of all independent directors were frozen.”

Many experts say it is high time the government and the Securities and Exchange Board of India ensured that independent directors are protected adequately in case of any wrongdoing by a company. “Independent directors don’t have any powers. They are not operating the company; they can only rely on whatever is presented to them or told to them during the board meetings. They can ask questions in the meetings, but beyond that you can’t make them liable,” said Sudip Bandyopadhyay, chairman of Inditrade Capital.

Some Recent regulatory Changes pertaining to Independent Directors:

Recently MCA has proposed certain amendments in the Companies Act, 2013 some of which are related to independent directors which are as under:

1. Independent directors can be removed by passing the special resolution. Under the current requirement of Companies Act, 2013, independent directors can be removed by passing special resolution when he or she is in the second term.

2. The proposed amendment mentions that the independent directors have to file the particulars of his independency in a prescribed form with ROC. At present pursuant to section 149(6) of the Companies Act, 2013, companies are required to take yearly declaration from independent directors but there were no any requirement for filing the same with ROC.

3. Aliening the provision with the LODR MCA proposed that resignation of independent directors to be effective on the 30th day from the date of receipt of notice by the company or the date specified by the independent director, whichever is later. There is no such provision for executive directors. In general case the resignation is effective from the date which is mentioned in the resignation or receipt of notice by the company or the date specified in the notice, whichever is later.

4. As per present provision independent directors should not have pecuniary relationship other than remuneration as a director or have any transaction not exceed 10% of his or her total income or such amount as may be prescribed, with the company, its holding, subsidiary or associate company or their promoters or directors during the 2 immediately preceding financial years or during the current financial year. Now MCA proposed cap on total pecuniary relationship i.e. it should not be more than 25% of his total income. Professional or any other services rendered by him / her other than prescribed services should not be more than 10% of his/ her total income.

The remuneration received & expenses incurred for participating in the Board meetings & other meetings would not be counted for determining pecuniary relationship, unless otherwise provided.

5. Every independent director required to complete an assessment which would be conducted by board or an institution as may be prescribed.

6. Aligning the provisions of the resignation of the Independent directors with the LODR, MCA proposed that the independent directors are required to file the copy of his resignation along with the detail reason of the resignation to ROC within 7 days of giving the notice of his resignation. In the present requirement of Companies Act, 2013, it is optional to file the same within 30 days for other directors.

Suggestions:

1. At present there is no any provision under the law to allow the regulator to oversee the eligibility of independent directors although RBI and SEBI stipulate “fit and proper” conditions for persons in those roles. The Companies Act only requires “a person of integrity and” one who “possesses relevant expertise and experience” An regulators needs to evaluate the eligibility of the independent director and based on those finding the independent directors who are not fit to occupy the board should be debarred from taking any board positions.

2. Stricter norms should be there for the removal of the independent directors. Their removal should not be on the whim of controlling shareholder (Promoter group).

3. Board evaluation should be done by external independent agency. If it’s done internally then it wouldn’t be carried out effectively and at the end it would end up as a task of mere circulation of questionnaire with a range of numerical rating responses.

4. Except few companies no other companies imparting induction and operational trainings to independent directors. Independent directors need to be train so that they can discharge the responsibility cast on them effectively.

5. Instead of penalizing independent directors for the promoter-driven acts, the independent directors should be sheltered and more powers should be vested in their hands by the regulators. It is wrong to treat them equally with the executive board for the largely promoter-driven acts.

Conclusion:

The Companies Act, 2013 & LODR casted huge responsibility on the independent directors. Independent directors should well aware about the management decisions and should give their say and raise red flag wherever any mismanagement is been observed and ensure it is been recorded in the minutes. Mere stringent norms would not bring better corporate governance efforts should have been made for its implementations as well. Instead of cornering independent directors, the law should protect them if they are to shoulder responsibilities.

[1]  Municipality of Bhiwandi & Nizampur v. Kailas Sizing Works

[2]  Sunil Bharti Mittal v. CBI

Author Bio

Qualification: CS
Company: JSW Severfield Structures Ltd
Location: Mumbai, Maharashtra, IN
Member Since: 27 Mar 2019 | Total Posts: 3
Nagesh Rudrakanthwar is the associate member of Institute of Company Secretaries of India. He has done CS, LLB. MBA (Finance), PGDTL . He is young dynamic professional and he has Authored many articles, research papers on latest happening in Corporate Laws and articulated his views which are publis View Full Profile

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