Companies could find it extremely hard to get reputed professionals from anywhere to fill up as independent directors in their boardrooms. After the experience of Nimesh Kampani, one of India?s renowned investment bankers, served a look-out notice by the Hyderabad police, for his stint as non-executive director at Nagarjuna Finance, India?s top corporate and political voices are asking for a thorough rewrite of the rules by the Centre.

HDFC chairman Deepak Parekh said it was bizarre that an independent director was sought to be put behind bars for something he was just not connected with. ?It is totally unjustified and does not make sense?, he asserted. The wide cross-section of leaders FE spoke to over the weekend confirmed they were very disturbed by the development. At stake were two issues. How could Kampani be held responsible for an alleged criminal act by a company long after he had quit its board? The other is the scare that it would create among well-known professionals from serving as independent directors.

To recap the issues involved, Kampani, chairman & managing director of JM Financial, has been named as one of the three accused in a case involving Nagarjuna Finance in 2000, a year after he had quit as independent director on its board in April 1999. (See box)

As Parekh told FE, the broader issue is that when there is a shortage of qualified independent directors across sectors, the entire episode will have negative fallout. ?Cyclical ups and downs do take place in a business. But for that you cannot haul up independent directors or use terms like absconding, as the Hyderabad police have used for him (Kampani).? On his part, Kampani has been in regular touch with the Hyderabad police even during his brief visit to Dubai.

According to former Sebi chairman, M Damodaran, ?prima facie Kampani is not responsible.? ?An independent director does not sit in the same shoes as the CEO of a company.? He said one needed to apply what he termed was the knowledge test in these cases, which would have shown that it was not possible for Kampani to be aware of the developments that happened way after he resigned from the board position. Damodaran, who had pushed the Sebi agenda to have at least 50% of a listed company?s board peopled with independent directors, said, ?Good guys will basically shy away from board positions after this episode.?

Endorsing that line of thought, Rajiv Chandrashekhar, president of Ficci, too, said the industry body has examined the subject of independent directors in depth, especially about the role of non-executive directors and criminal negligence by the company management. ?Events like this create a climate of fear. You send out a wrong signal by dragging an independent director down?.

And what are the ways forward to ensure that this murky episode is never repeated? Former finance minister Yashwant Sinha feels the onus is on the ministry of corporate affairs to look into the matter. ?As in the case of Mr Kampani, the distinction between the lines of responsibility of the independent and executive directors must be cleared fast.? Parekh also said it sent out a very negative image of how business was treated in the country. Sinha said it is unacceptable that you go after a man ten years after he has resigned from the board.

Minister Prem Chand Gupta agrees. ?The whole issue of independent directors is a complex one that needs to be looked into?, he told FE.

Gupta said the Company Law (Amendment ) Bill before Parliament has put in the term key managerial personnel, which would make only the CEO, the CFO and the company secretary responsible for crimes held against the company?measures that would leave independent directors free to examine only overall policy issues in the board room.

The case

Nagarjuna Finance Limited, an NBFC based in Hyderabad, is accused of defaulting in repaying several depositors in the year 2000. At that time, the company had about 90,000 depositors and a deposit base of Rs 100 crore. The defaults happened as the stock markets dipped and it affected the company?s profits. Acting on complaints, the city police have put Nagarjuna group chairman KS Raju and Maytas Infra CEO PK Madhav, who too was a director in the company at the time, in judicial custody in mid-December, 2008. The company was, meanwhile, sold to Mahalakshmi Factoring Services, Mumbai.