ABSTRACT:
The Independent Directors are placed in a central role in the framework of the modern corporate governance in India, which is imagined as unbiased custodians charged with the responsibility of ensuring transparency, accountability, and protection of the interest of minority shareholders. The changing enforcement environment in India however, suggests an alarming paradox. Civil and criminal liability towards Independent Directors is becoming a reality in matters of corporate fraud, mismanagement and statutory non-compliance, which is often without any evidence of involvement, knowledge or mens rea. This pattern poses a crucial issue on proportionality of liability, erosion of judicial protections against vicarious liability and the general consequences of the trend on board independence.The paper is a critical analysis of the question of whether or not Independent Directors in India serve the purpose of effective corporate governance safeguards or have in practice become the easy scapegoats in the enforcement processes. It utilizes a doctrinal and analytical approach, exploring statutory provisions, regulatory frameworks and judicial precedents, including some of the major decisions of the Supreme Court and the Securities Appellate Tribunal which outline the boundaries of director liability. The paper also assesses the systemic effects of over-criminalisation, such as its chilling effect on board engagement, the growing unwillingness of good professionals to accept independent directorships and the consequent erosion of governance frameworks.Based on the comparative lessons on the United Kingdom and the United States, especially on the application of the business judgment rule and the proportional enforcement measures, the paper maintains that the idea of accountability is essential, but the idea of placing all indiscriminate liability on the shoulders of independent directors is in itself destructive to the concept of independent directorship.
KEYWORDS: Independent Directors, Corporate Governance, Companies Act 2013, SEBI LODR, D&O Insurance
INTRODUCTION:
Indian corporate governance reform has been significantly influenced by the occurrence of episodic corporate failures that have revealed structural weaknesses in board control, regulatory implementation as well as accountability systems. The Indian economy was liberalised in the early 1990s, which led to the development of the private enterprise and capital market, although it also brought forth the tricky governance issues due to the separation of ownership and control.[1] In the Indian context, however, the paradigm of concentrated ownership and the ubiquitous role of promoting groups give rise to a different paradox of outsourcing managerial opportunism, and expropriation of minority shareholders by controlling stakeholders.
It is as part of this that the institution of Independent Directors developed as an important regulatory measure. Independent Directors were originally conceived as the non-executive members of the board with neutrality, capable of objective judgment, alleviation of conflict of interest, and increased transparency in corporate decision-making,[2] as an external check on management and promoter control to ensure that corporate behavior conforms to the interests of a larger group of stakeholders.But a succession of high-profile corporate scandals has continued to cast doubt on the effectiveness of this institutional design. Of particular concern is how the Satyam Computer Services fraud in 2009, commonly referred to as the Enron moment in India, exposed how even highly regarded boards, including prominent[3] Independent Directors, could not notice long-term accounting anomalies. And how the collapse of Infrastructure Leasing & Financial Services (IL&FS) in 2018 was an expose of systemic governance failures in a complex web of subsidiaries, raising the following scandals such as the Punjab National Bank scam and the governance scandals at Yes Bank and Dewan Housing Finance Corporation Limited (DHFL) have further pointed to underlying flaws with regard to board-level supervision.
As a reaction to these failures, the Indian legislature and regulatory authorities have increasingly stepped up the legal framework of corporate governance. The codification of the duties of directors in the Companies Act, 2013, together with the prescribed requirements on eligibility of Independent Directors, and the use of stringent provisions regarding fraud and mismanagement, in some aspects, signifies the shift in the direction of more enforcement-oriented approach.[4] To supplement this statutory framework, the Securities and Exchange Board of India (SEBI) followed the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, that require the independence of the board, the composition of the key committees, and the specific obligations of the Independent Directors.[5]Despite these reforms, a serious conflict has arisen between the growing accountability of Independent Directors and the growing number of liabilities to which they are exposed. Although the legal system stresses their functions as custodians of corporate governance, enforcement procedures have over time also assumed that they are actors of liability in instances of corporate misconduct, in many cases without evident active involvement or intentional negligence. This is especially apparent in the propensity of investigative agencies to go on a broad-brush, when it comes to implicating all of the board members in criminal proceedings, since this is not only contrary to the accepted principles of criminal jurisprudence, which employs the necessary elements of proving mens rea and individual culpability, but also erodes the doctrinal differentiation between executive management and independent oversight.[6]
The courts have tried to redress this imbalance by restating the case that directors cannot be vicariously liable simply by the fact that they are the directors. Regardless of these defenses, as the Supreme Court made it very clear in the case of Sunil Bharti Mittal v. Central Bureau of Investigation[7], Independent Directors are often dragged through an extended court battle, reputational damage, and regulatory investigation, despite the fact that the ultimate liability was not ultimately proved.[8]This inconsistency between theory and practice of law enforcement raises a fundamental question which is central to this research: whether the Independent Directors in India do work as effective checks and balances on corporate governance, or have become in practice in the wake of corporate failure the scapegoats. The future of corporate governance in India is greatly dependent on the answer to this question. When the Independent Directors are seen to assume an unreasonable risk with no additional power or protection, the risk may be taken to untenable levels, and thus, the institution itself may not attract competent professionals to take up the board positions and, thus, undermine the quality of governance.Moreover, this imbalance is intensified by the lack of protections, including the most important one a codified business judgment rule. In contrast to the situation in other jurisdictions, where the directors have been granted a presumption of good faith in their decision-making as in the case of the United States, Indian law gives limited statutory protection against the liability due to bona fide business decision-making.
Against this backdrop, this paper will take a detailed look at the legal, institutional, and practical aspects of Independent Directorship in India. It is aimed at assessing whether the existing framework balances the issue of accountability and protection appropriately, or it is going against the goals that it is intended to advance. The paper seeks to add to current discussions on the reform of corporate governance in India by exploring statutory provisions, judicial precedents and real-life case studies and by providing comparative information to other jurisdictions to do so.In the end, the main argument that will be developed here is that although the presence of Independent Directors is crucial towards the operation of contemporary corporate governance, their usefulness depends on a legal system that balances accountability with authority and liability with responsibility. Without this alignment, the institution will tend to degenerate into a mere symbolic system of compliance whereby Independent Directors act not as governance guardians, but as a ready scapegoat to failures in the system that are outside their control.
[1]Lalita S. Som, Corporate Governance Codes in India, Econ. & Pol. Wkly. (2006)
[2]Companies Act, No. 18 of 2013, § 149 (India); SEBI (LODR) Regulations, 2015.
[3]Jayati Sarkar, Board Independence & Corporate Governance in India, 44 Indian J. Indus. Rel. 576 (2009)
[4]Companies Act, 2013, §§ 166, 447–48.
[5]SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
[6]Vikramaditya Khanna & Shaun J. Mathew, The Role of Independent Directors in Controlled Firms in India, 22 Nat’l L. Sch. India Rev. 35 (2010)
[7]Sunil Bharti Mittal v. CBI, (2015) 4 SCC 609.
[8]S.M.S. Pharms. Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.