Risky proposition


The role of an independent director is an unenviable one, argues Nitin Mittal

To be, or not to be, that is the dilemma a number of independent directors are grappling with these days. In the Punjab National Bank scam involving Nirav Modi, three independent directors of one of the accused companies saw their assets, including bank accounts, frozen after a National Company Law Tribunal (NCLT) order.

Nitin Mittal

They were also restrained from transferring or disposing funds and properties without NCLT approvals, until they received a temporary reprieve from the Supreme Court six months later. The future is still uncertain for the directors in question as investigations are ongoing. In another case, in the insolvency petition involving Jaiprakash Associates, the Supreme Court issued an order restraining the company’s independent directors from transferring personal assets. This was unprecedented and sent the independent directors scampering for legal advice on their exposure, even though they were not involved in operational decision-making of the company.

Last year, several independent directors, in prominent companies, such as Jet Airways, Yes Bank and DHFL, resigned before their terms ended. More recently, some independent directors were prosecuted for dishonouring cheques even though they were not involved in day-to-day management. All directors are made party to such cases to put pressure on the companies and their boards. Independent directors have always considered their obligations and responsibilities to be different from that of executive or non-executive directors and do not expect to be prosecuted for defaults by the company and its officers in ordinary course of business.

Their defence has been that they are only advising on strategy and are not privy to the day-to-day decisions of the company and, therefore, cannot be held accountable for defaults by the company incurred due to errors, omissions, negligence by other executive directors or officers.

The earlier charm of becoming an independent director has given way to scepticism and has made it an unenviable position to be in. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, has put additional obligations on independent directors.

The law, as it stands today, does not differentiate between executive and independent directors when penal provisions under section 166 are applied in case of default by the board or the company, except in certain cases under section 2(60) and 149(12).

In fact, there is a detailed code of conduct, role and functions, duties for independent directors under schedule IV of the act. Independent directors are expected to bring an objective view in the evaluation of the performance of the board and management, ensure that the management meets goals and objectives and monitor the reporting of performance, ensure the integrity of financial information, financial controls and risk management systems, safeguard the interest of all stakeholders, particularly the minority shareholders, balance the conflicting interests of all stakeholders, and moderate and arbitrate in situations of conflict between the management and shareholders.

An independent director is also an officer in default for any contravention of the act, if they are aware of such contravention by virtue of receipt of any proceedings of the board or participation in such proceedings without objecting to it, or where such contravention had taken place with their consent or connivance.

Section 149(12) limits the liability of an independent director “only in respect of acts of omission or commission by a company that had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently”.

Independent directors are also required to review and approve related-party transactions and ensure that they are in the interests of the company and ensure that the company has an adequate and functional vigil mechanism.

Independent directors are often paid miserly compensation in the form of sitting fees, and in some cases commission from profits. They are paid considerably less than their counterparts in other more developed markets. The law caps sitting fees per board or committee meeting to ₹100,000 (US$1400) and commissions at 1% of its profit for all directors combined. Increasing the limits, some observers say, can be cause for conflict of interest. The question, however, is whether this cap on remuneration is fair given the increase in obligations and expectation from independent directors.

Prospective candidates for independent directors’ roles will need to think hard before considering taking up the onerous task.

Nitin Mittal is the head of legal and company secretary at Signify India. The author’s views are personal.