The importance of independent directors, especially in the context of closely controlled public companies, has been acknowledged worldwide. In India, independent directors constitute a class of non-executive directors who cannot have any material pecuniary relationships with the company (besides remuneration) which might affect their independence, and whose functions include balancing conflicts of interest, protecting the interests of minority shareholders and exercising independent judgment. In the aftermath of recent corporate scams, the enforcement intensity against directors has increased significantly. While such intensity is necessary for discouraging wrongful conduct, caution must be exercised to ensure that it does not have unintended consequences. Recent data indicates that the rate of resignation of independent directors from the boards of listed companies has increased significantly in comparison to previous years. Given the importance of qualified and upright independent directors for the development of our capital markets, this seems alarming. Independent directors perform functions that are critical to good corporate governance, but the liability-related risks that such directors are faced with seem disproportionate to their role. Some of these issues are relevant for other categories of non-executive directors too.
Even though the Companies Act seeks to limit the liability of independent and non-executive directors by providing for certain safe harbours designed specifically for them, it does not provide any safeguards at the summoning stage. In other words, the safe harbours kick-in very late. Further, many other statutes that provide for offences attributable to companies and directors have no specific safe harbours for independent and non-executive directors. As a result, independent and non-executive directors face significant risks not just in terms of liability but also reputational harm, even for acts that are completely beyond their control.
In making a case for reforming the liability framework for independent and non-executive directors, this report examines director liability frameworks in other jurisdictions such as the U.S. and the U.K., discusses case law and examines the manner in which Indian courts deal with the issue of director liability. Further, it also analyzes the challenges attributable to the current regulatory regime in India and makes certain recommendations aimed at addressing such challenges for strengthening corporate governance standards in India. While most of the analysis in the report is focused on independent directors, to the extent that the Companies Act and even Indian courts treat independent directors and non-executive directors similarly when it comes to attributing liability, the discussion in general, and the recommendations, are relevant for non-executive directors as well.
We hope that our report will contribute to the discussion on re-evaluating the liability framework for independent and non-executive directors in India and provide a roadmap for designing appropriate safeguards in the interest of promoting better corporate governance in India.