Independent Directors | Sebi rules may be loaded against small companies

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The Securities and Exchange Bureau of India (Sebi)’s rules related to appointment and removal of Independent Directors has made the appointment process even more stringent with greater say to minority shareholders in such appointments. Though this move is expected to enhance the corporate governance standards, there are several debatable issues that remain unaddressed.

The Companies Act, 2013, imposes onerous responsibilities on the Independent Directors, and non-compliance could lead to penalties including imprisonment in some cases. Based on discussions this author has had with numerous Independent Directors, an overwhelming majority feel the duties enlisted for them are not feasible in most cases.

The safeguard provided under Section 149(12) of the Companies Act, 2013, to Independent Directors is inadequate, and the action that enforcement agencies take in case of any wrong-doing by the company against the Independent Directors is severe, and disproportionate. Independent Directors also have limitations in their ability to discharge their responsibility as they are dependent on the management and auditors to provide them with relevant information, or highlighting the issues that need their attention.

So, while their responsibilities under the Companies Act, 2013, are possibly more than that of the executive management, and similar to executive directors, their access to information is fairly limited.

Thus, generally Independent Directors do not make many adverse comments or provide only limited qualified views as part of the Directors Responsibility Statement. Professionals are unsure of taking the role of Independent Directors as they believe it is not commensurate to the rewards (or risks). They are willing to take such roles mainly in large companies with a strong reputation for corporate governance, or where they know the promoter group, and have faith in its integrity.

Thus, Sebi’s objective of reducing the role of promoters in appointing Independent Directors may be partially achieved as only those people who have faith in the promoter group will agree to become an Independent Director.

Professionals would prefer to take on an advisory role in smaller companies where they do not run the risks associated with the position of an Independent Director. Therefore, smaller companies can lose out in getting strong and experienced Independent Directors on their Board.

To make Independent Directors truly ‘independent’, it is necessary that they are provided necessary safeguards so that they are able to discharge their responsibilities objectively. While the Companies Act, 2013, states what they are responsible for, it should also state what they are not responsible for. There should be segregation of responsibility between the Key Managerial Personnel (KMP), Executive Directors and Non-Executive Directors. The penal provisions related to non-compliance by Independent Directors should be decriminalised and replaced with civil penalties — at least in cases where there isn’t direct fraudulent involvement by the Independent Directors.

Safeguards under the Companies Act, 2013, for the Independent Directors need to be strengthened, and similar safeguards should be introduced in other Acts such as those related to labour, financial, and environment protection laws. Even in cases where investigation or legal proceedings are launched against an Independent Director, their reputation should not suffer at least until the charges are proven.

Companies, especially loss-making ones, should have greater flexibility in providing reasonable remuneration to Independent Directors, commensurate to the role that they are required to play, and the risks that they undertake.

That said, some of these reforms are needed so that companies are able to attract high quality Independent Directors, and professionals willingly become Independent Directors without fear or bias.

Puneet Gupta is Managing Director, Protiviti Member Firm for India.

Views are personal and do not represent the stand of this publication.