Independent directors (IDs) came to India as a moral and institutional remedy to corporate fraud — a structural bulwark designed to keep promoters in line and maintain boardroom accountability. But over a decade since their statutory birth under the Companies Act, 2013, the position of IDs is still tenuously stuck between symbolism and scrutiny.
Regardless of the law providing them with a clear responsibility — to offer non-partisan monitoring — IDs still work within promoter-dominated cultures, normally with restricted access, vague protection, and increasing legal jeopardy. The question is no longer if independent directors exist only on paper, but whether or not they can operate with intent. Are they in fact empowered to contest executive power, or are they quickly becoming collateral damage in the battle for accountability?
Boardroom Reality vs Statutory Ideal
Section 149(6) of the Companies Act prescribes the qualifications and independence thresholds that IDs must meet — no significant pecuniary ties, no promoter relations, and professional expertise. Schedule IV elaborates their ethical code: independent judgment, safeguarding minority interests, and raising red flags in case of misconduct.
In principle, these provisions equip IDs to act as neutral overseers. In practice, however, appointments are often driven by boardroom comfort, not dissonance. True independence is rare — not because the law fails to define it, but because Indian boardrooms are not incentivized to tolerate it.
Worse, Section 149(12), while capping liability, ties it to “knowledge” and “non-diligence,” both of which are vague thresholds. In effect, IDs remain exposed to legal scrutiny without operational power.
Satyam: The Case That Changed Everything — And Nothing
The 2009 Satyam scam was a watershed moment. Founder Ramalinga Raju’s confession of inflating assets by over ₹7,000 crore exposed one of India’s biggest corporate governance failures. Shockingly, the board — including its five independent directors — had approved a related-party transaction involving the acquisition of “Maytas Infra and Maytas Properties” (also controlled by the promoter group) without serious resistance.
While the scandal led to regulatory reforms, including the mandatory presence of IDs on key committees and improved disclosure norms, it did not alter the cultural power dynamics within boards. If anything, it showcased how IDs, even when present in number, can remain ineffective in substance.
Recent Case Laws: The Courts Are Watching Closely
Post-Satyam, the judiciary has moved towards demanding more from IDs:
- In Satvinder Jeet Singh Sodhi v. State of Maharashtra, the Bombay High Court clarified that IDs cannot be prosecuted under the Negotiable Instruments Act merely by virtue of their designation. There must be evidence of direct involvement.
- In Sunita Palita v. Pancham Stone Quarry, the Supreme Court again reminded that a non-signing director’s liability cannot be founded on his title per se — it is founded on his actual decision-making role.
- Most importantly, in SEBI v. Brightcom Group Ltd. (2023), SEBI penalized IDs for failing to have raised evident inconsistencies in accounts even though they were members of audit committees. The message is clear: passive surveillance will no longer suffice.
These rulings expose a contradiction in regulatory expectations. Regulators call for more active regulation, but offer little real protection for risk. The net result is a chilling effect: professionally qualified individuals now shun ID work.
Structural Barriers to Genuine Independence
India’s business environment presents four year-round challenges:
1.Promoter Capture: The companies promoters tend to employ IDs that are intended to control them, thus raising doubts about their impartiality.
2. Information Asymmetry: IDs rely on internal disclosures as they have limited direct access to operations information or whistleblowing reports.
3. Fear of legal backlash: Due increased enforcement by SEBI and NCLT, IDs bear disproportionate liability in relation to their effective control.
4. Unclear Expectations: IDs alternate between serving as governance watchdogs and strategic advisors — two mindsets which are completely contradictory in nature.
A Reform Agenda for the Next Decade
For substance over form to prevail in IDs, India needs radical measures such as:
- Independent Selection Panels: Appointments must be vetted through neutral panels, ideally with oversight by SEBI or MCA, to eliminate promoter bias.
- Safe Harbour Provisions: IDs who act in good faith and rely on board processes must be legally protected from criminal and civil liability.
- Mandatory Disclosures: Boards should be required to disclose reasons for selecting specific IDs, including past relationships and diversity metrics.
- Training and Evaluation: Regular training on risk, finance, and compliance must be mandated, along with formal evaluations of ID performance.
Conclusion: Accountability Must Come with Agency
More vigilance on the part of independent directors — from courts, regulators, and civil society — is in order. But it must be balanced against a simple truth: accountability without agency is punishment, not governance. If we are to turn our independent directors into watchdogs, we must provide them with teeth — and above all, not penalize them for barking. Only then can India’s corporate governance move beyond checkboxes to real checks and balances.
Author Bio
A well-written piece on board room realities, though from a distance.