The recent > Ratan Tata-Cyrus Mistry imbroglio brings into sharp focus the role and position of independent directors. Under Section 149 of the Companies Act, at least one-third of the directors of a listed company must be independent. That means that the person so appointed must not be a promoter of the company or its holding subsidiary or associate company nor should he/she be related to the promoters of the company. In addition, neither the individual nor his/her relatives should have a pecuniary relationship with the company. They are also, under Section 149(6), to be persons of integrity and possessing the relevant skills and experience.
Independent directors, though they may in the initial stage be invited by the controlling shareholders of a company or its incumbent managing director, are appointed by the shareholders at a General Meeting; they are so appointed to safeguard not only the best interests of all shareholders but also of all stakeholders.
Raghu Palat Role of the independent director Prior to the enactment of the Companies Act, 2013, the independent director had only civil liability. And to a great extent he/she was part of a “hail fellow” network where controlling shareholders invited their friends to sit on their boards confident of their support. In many other instances, retiring senior executives eagerly sought seats on the board as a way to supplement their pension. They were often grateful for being given a berth and remained loyal to the management that invited them. The only time I can recall when there was consternation, fear, outrage and indignation was when an arrest warrant was issued on Nimesh Kampani in 2009 as he was an independent director in Nagarjuna Finance. The company had defaulted on repaying deposits. Many felt this was unfair as an independent director had no executive duty and should not be held responsible.
Section 149(12) provides that an independent director shall be liable only in respect of omission or commission by a company that had occurred with his/her knowledge, attributable through board processes, and with his consent or connivance, or where he had not acted diligently. I am uncertain whether independent directors appreciate this, but this provision is all-encompassing as it suggests that if a company has made a decision which is not in its better interest (taking into account all stakeholders) at a board meeting and the independent director was aware or party to the decision, he is liable both in civil and criminal terms. Many senior proponents of the law have opined that this means that even if the director has not attended a meeting but the item was mentioned on the agenda and the independent director had not objected to it, he/she would be liable. Furthermore, if the independent director attends a meeting where the matter is discussed and he/she keeps quiet even though not in agreement, he/she could be held both criminally and civilly liable. The independent director, if he/she is not in agreement with a proposal, must, if he/she wants to be in the clear, state his/her disagreement and have it recorded in the minutes.
Owning up responsibility In many companies which are majority-owned by a family or a few individuals, the persons controlling the company tend to treat it as their own fiefdom and utilise company funds and resources for personal enjoyment. Company planes (which the company may not need) are used for trips to resorts abroad to hold a board meeting. Paintings by reputed artists purchased at astronomical prices adorn private homes. Homes are lavishly decorated at company expense. The independent director in many cases may not be aware or be a party to this. However, can it be said in these cases that the independent director acted diligently and as was expected of him/her? Shouldn’t the independent director question and seek answers?
United Breweries was a very profitable company till it floated Kingfisher Airlines. Did the independent directors act diligently while approving this disastrous foray? Indian corporate lore is littered with many such examples. How is it that fingers are not being pointed at independent directors?
I believe the time has now come for independent directors to demonstrate, if they are to do what is expected of them and to avoid liability, that they will take care and be diligent and not be mere rubber stamps. In addition, no one must be an independent director if he/she has the slightest concern about the bona fides of the controlling shareholders. If one still does, it is at one’s own peril.
Raghu Palat is the Managing Director of Cortlandt Rand Consultancy and an independent director in a few companies.
