Are independent directors on the company boards really independent? The deluge of resignations by them over the last one to two years tells a worrying tale. There have been 412 resignations (largely no reason, personal or preoccupation ascribed as reason for resignation) during the first six months of calendar year 2019, data available with NSE showed. In 2018, 606 IDs had resigned with nearly 45 per cent of them ascribing no particular reason for their resignations. The recent resignations by IDs in troubled companies such as IL&FS, YES Bank, PMC Bank and Coffee Day Enterprises also raise several questions around not just the true nature of their independence but also the status of existing legal and regulatory framework governing the liability of independent and non-executive directors in India.
A report by legal think-tank Vidhi Centre for Legal Policy 'The Liability Regime For Non-Executive and Independent Directors in India: A Case for Reform' points out several challenges in India's current director liability framework. The regulatory framework, especially penal statues, imposes vicarious liability on directors based on the powers and responsibilities assigned to them and the actual commission of any particular wrongdoing on their part through means such as consent or connivance. The Companies Act has codified directors' duties under section 166 that applies to all categories of directors, including independent and non-executive directors. Today, contravention of the provisions of section 166 results in civil liability with directors being punishable for a fine of not less than Rs 1 lakh, which may extend to Rs 5 lakh.
The general perception is that independent directors on the boards of companies are not really independent. "Even if some directors act truly independently, the regulatory intensity does not distinguish them from others. The perception at the enforcement level is that all of them work closely with the directors," says Debanshu Mukherjee, one of the founding members of the Vidhi and the lead author of the report.
This could be one of the big reasons why some troubled companies are seeing IDs abandoning the sinking ship.
The report that will be shortly submitted to the Ministry of Corporate Affairs has made some recommendations that could bolster their positions on the board:
- Ensuring that non-controlling shareholders play a significant role in the appointment and removal processes of independent directors in order to keep a check on the controlling shareholders' influence in the processes.
- Independent directors must file copies of their resignations with detailed reasons with the registrar of companies within seven days of such resignations.
- In order to effectively safeguard independent and non-execute directors, formulation of specific guidelines to be followed by all investigating agencies concerned must be considered.
- Permanent co-ordination committee (with representatives from all major investigation and prosecution agencies) should be set up for overseeing the implementation of such guidelines.
While such safeguards would help IDs discharge their duties much efficiently, it should also take into account the facts and circumstances of individual directors when they are part of various audit committees. "Audit is core function and directors on the committee are privy to extensive information in relation to the company. So, safeguards for such auditors should be limited," says Mukherjee.