Independent directors: Staying mindful of liabilities

The role of independent directors has recently come into sharp focus in India, as lax oversight has led to crises at large listed companies. Independent directors should be aware of and mitigate potential liabilities.

Liabilities

Directors of a company are governed by the Companies Act, 2013 (act), and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) (recently amended to incorporate recommendations of the Uday Kotak-led Committee on Corporate Governance).

Under the act, fraud is punishable by a minimum fine equivalent to the amount involved and a maximum of up to three times the amount, as well as imprisonment of between six months and ten years. Fraud is a congnizable offence. Liabilities can arise from making materially false statements or knowingly omitting material facts in any return, financial statement, prospectus or other documents; knowingly or recklessly making false statements to obtain credit facilities; or giving false information in an investigation. The act imposes unlimited personal liability for fraud. Directors may also be subject to civil and criminal penalties as an “officer in default” of the company, and fines or other actions by the stock exchange.

Venkatesh Vijayaraghavan is a partner and Akshaya Iyer is an associate at S&R Associates, a law firm with offices in New Delhi and Mumbai.