Strict compliance requirements and failure in distinguishing the liabilities have made the job of independent directors less attractive for seasoned professionals in India.
Independent directors form the backbone of the corporate governance framework. But strict compliance requirements and failure in distinguishing their liabilities have made this job less attractive for seasoned professionals in India. Limited authority in making a meaningful contribution to the firm, while facing the risk of being summoned, investigated, arrested and harassment by investigators and adjudicating authorities has prompted independent directors to resign their posts. The situation has discouraged many potentially well-qualified candidates from joining boards of companies.
Resignation letters fly
It is becoming increasingly difficult for independent directors to hold their posts as the information provided to them is much less than that given to a full-time director, a director at an unlisted firm told Financial Express Online. Thus independent directors do not have equal chances to discover the frauds, but ironically they are sent notices, hurting their reputation and taking up a lot of litigation time and effort.
As many as 606 independent directors resigned in 2018, a number projected to rise sharply in 2019, as 412 independent directors have already resigned till July this year. Surprisingly, 377 of such directors who resigned since last year, did not state any reason for their resignation.
Where the problem stems from
Independent directors are expected to bring objectivity into the functioning of the board and improve their effectiveness. They are also required to safeguard the interests of all stakeholders, particularly minority shareholders. It is mandatory for every listed public company to have at least one-third of the total number of directors to maintain checks and balances, and to question the decisions of the board as an independent authority in an impartial manner. Independent Directors are required to keep a vigil, failing which, they can be held responsible.
However, their liability is limited by the law. “The [Companies] Act provides safeguard to the independent directors and they can be held responsible for any wrongdoing only if the act is in their knowledge,” Debanshu Mukherjee, Founding Member, Vidhi Centre for Legal Policy, told Financial Express Online. But in reality, this does not happen. “In the summoning stage, the independent directors are treated as equal to the full-time directors, which is not right,” Debanshu Mukherjee said.
What is needed
Independent directors should step up and raise an objection; the level of protection should be looked at, Debanshu Mukherjee said. At the same time, the enforcement agencies should maintain coordination mechanisms among themselves. While the Serious Fraud Investigation Office (SFIO) looks differently at a different class of directors, many agencies neglect the protection given to a certain class of directors, he added.
The extent of the independence of the independent directors is also a major issue because the limited scope of action and knowledge restricts their power. “In the current environment, the role of independent directors is becoming more and more challenging. In view of growing risks of actions from various quarters, there should be a clear framework defining the rights and responsibilities of independent directors, which should be commensurate with their roles and access to management information on decision making,” Hari Hara Mishra, Independent Director, UV Strategic Advisers, told Financial Express Online.
Meanwhile, law think tank Vidhi Centre for Legal Policy has recommended that the enforcement agencies must send notice to an independent director only after due permission from the court. The think tank also recommends that the independent directors must file copies of their resignations with detailed reasons with the registrar of companies within seven days of such resignations.