In 1991, India faced its worst economic crisis and was on a brink of a sovereign default. With less developed market regulators and not so technically updated reforms the stakeholders had witnessed a couple of security market scams which had lured the Indian government to build stringent policies and legislations. Following this the introduction of SEBI (abbreviated form of Securities exchange board of India) was made in the Indian securities market by framing the SEBI Act,1992. The SEBI was conferred requisite powers and was made responsible to oversee the functioning & code and conduct of the plateauing securities market. Within a span of time the SEBI had caught a grip over the corporates by introducing various rules and regulations.
In order to promote good and fair corporate governance practices SEBI & other regulators took manifold efforts to institute various committees under the chairmanships of industry stalwarts and other industry experts to recommend and put forth different compliance practices to be undertaken by the corporates for a better and fair view of governance. The very first step into promoting governance practice was ushered by the constitution of a National Task Force by the Confederation of Indian Industry which thereafter recommended a code of desirable corporate governance which was voluntarily adopted by a few companies. Hereafter a committee was constituted by SEBI under the chairmanship of Kumar Mangalam Birla to promote and raise the standard of corporate governance in India, the committee submitted a report to SEBI which recommended an equity listing agreement that was applicable to all listed companies of a certain limit.
India’s corporate governance norms thereafter came to be governed through a clause in the listing agreement popularly known as Clause 49. Although both the CII Code as well as the Kumar Mangalam Birla committee’s report expressly cautioned against mechanically importing forms of corporate governance from the developed world, some the concepts highlighted by them were indeed those that emerged in countries such as U.S & the U.K. The recommendations of these associations included practices such as formation of independent board & committee in the matters of audit & assurance. The thread on independent directors & its importance in the board is eyed upon in various reports, now-a-days the role of independent directors is drawing wide attention especially in the context of publicly listed companies. An independent director is a type of director on the board who is not an executive director & does not take part in the day-to-day happenings of the company, he is also recognized to have a key role in entire mosaic of corporate governance. It is a widely accepted fact that the shareholders are the real owners of the company who are vested with requisite powers to take decisions, however these shareholders do not look into the day-to-day matters of the company, the board of directors are responsible for the day-to-day activities of the company. Due to this the shareholders fall prey to the decisions of the board in certain cases which causes detriment to their interest. Globally, many times in the past, it has been observed that the members of the board have taken decisions prejudicial to the interest of the shareholders at large and ran the corporates for the material benefit of few. This called for the independent members on the board in the process of adopting fair & transparent business practices, who also help bring an independent judgement to bear on board’s deliberations especially on issues of strategy, performance, management of conflicts & standard of conduct.
The concept of independent director is new to India & the same has been flourished into various committee reports with a recommendation to adopt the same for better governance practice & provide shareholders a way to represent their opinion on the board. Although, the institution of independent director has been a subject of debate lately, the concept itself is hardly of recent vintage. Independent directors were introduced voluntarily as a measure of good governance in the United States in the 1950’s before they were mandated by the law. Thereafter owing to sustained efforts by the Delaware courts & stock exchanges in deferring to decision of independent boards, independent director took on greater prominence.
Like many other emerging economies, the legal & regulatory framework in India is arguably not altogether conducive to corporate activity and investor protection, although significant improvements have been made effected to the system after the liberalisation process began in the 1991. For instance, the Indian Companies Act, which was enacted in the 1956 and has subsequently undergone several amendments, is unduly complex and still contains vestiges of strong government control of companies.
In the present paradigm the concept of independent director is given equal attention with other provisions of law. The Indian Companies Act, 2013 has an eclectic definition for independence which majorly glares light upon pecuniary interests & shareholding in the capital of the entity. Section 149(4) of the Companies Act, 2013 specifically lays down thresholds which, if breached would result into mandatory appointment of an independent director on its board, whereas Section 149(6) ushers upon the criteria to be met by the individual to be qualified for his appointment as an independent director, in addition, Section 149(8) & Schedule IV lays down the duties & responsibilities of the independent directors towards the shareholders & the company. However the provisions were made stringent by an amendment where an individual would be admitted as an independent director only if he has qualified a specific exam and has his name included in the independent director’s data bank, through which only genuine & financially sound candidates would be admitted as independent directors.
One may think that the person finally appointed as an independent director is truly independent, but the law fails to make adequate provisions to safeguard his independence post appointment. In a well celebrated case of Tata & Cyrus Mistry where, the then chairman of Tata Sons Cyrus Mistry was removed as incumbent due to trust issues & non adherence of code of conduct, where further Cyrus was encouraged by independent directors of IHCL & Tata chemicals to move an application in court of law to question the same, this led to an extensive debate on the true independence of independent directors.
The Companies Act places a colossal responsibility on the shoulders of independent directors. It, however, fails to provide sufficient safeguard for them to ensure that such responsibilities are discharged in the manner envisaged by the code. The change in the law must come to secure the independence of independent directors, & sooner the better.
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