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Accountability of Independent Directors- Some Court

Rulings to Rescue them From their Prosecution


Delep Goswami, FCS, Advocate ( Supreme Court), New Delhi.

To ensure good corporate governance, the requirement of the appointment of


independent directors cannot be ignored howsoever strong may be the criticism against
such appointments. Till suitable legislative changes are made efforts should be made
to encourage professionals and others to accept such positions and to impart proper
e-mail: training to discharge their functions. They should also be adequately compensated
delepgoswami@ gmail. com commensurate with their expertise and time spent on the role assigned to them.

Thanks to the SEBI mandated stipulation for listed public Section 292A, it can be inferred that no apparent distinction
companies to appoint a specified number of directors to be termed can be made to the non-whole time directors and the independent
and identified as "Independent Directors" (in short "ID") and directors. As to what this Audit Committee is supposed to do,
thanks largely to the euphoria created on the positive side of a look at .... Section 292A(7) of the Companies Act, 1956
corporate governance practices by the Indian corporate sector, makes it clear that "the Audit committee shall have authority
the term "Independent Director" has become fairly well known to investigate into any matter in relation to the items specified
to the Indian corporate houses. Despite the fact that the Companies in this section or referred to it by the Board and for this purpose,
Act has not yet defmed and earmarked the role, responsibilities shall have full access to information contained in the records
and accountability of this new class of company directors termed ofthe company and external professional advice, ifnecessary".
as "independent directors", yet the corporate professionals, general Thus, the legislative intent is quite clear that whenever the
body of public investors as well as the institutional investors have non-whole time directors/IDs feel it necessary, they can get
started paying special attention and notice to the composition of outside professional advice and help, so that appropriate
the corporate boards of directors and as compared to the family corporate decisions could be taken keeping in view the overall
dominated corporate boards, greater preference is given to interests of the company, its shareholders and investors and
companies which have a fairly large size of professional IDs. Of other stakeholders. Therefore, the IDs/outside directors can
late, no discussions in the meetings of the professional bodies be held accountable if they fail to show ... . how, despite
and the chambers of commerce and industry is complete without availability of such specific company law provisions with
stressing the importance of good corporate governance and regard to their functioning why they failed to exercise due
.....invariably in those meetings the issue regarding the role, diligence, care and caution in the functioning of the company
responsibility and accountability of the IDs find special mention. and why the IDs should not be squarely blamed for negligence
Indian corporate professionals are aware that in addition to in duty and be held accountable for allowing the promoter-
the SEBI guidelines for appointment of IDs in listed companies, directors/whole time directors group to perpetrate fraud and
the provisions of Section 292A of the Companies Act, 1956 mismanagement and thereby put the investors and other stake
also mandate specified public companies to constitute an "Audit holders to great loss and damage.
Committee", wherein two-thirds of the total number of It is therefore perfectly justified for the public at large to
members shall be directors, other than the Managing or the question as to what the so-called outside IDs were doing for
Whole-time Directors. The IDs perfectly fit in the category years together and how could the IDs be ignorant of the fraud
"other than the Managing or the whole-time directors." This which was being carried on with impunity by the Promoter-
also recognizes the legislative intent to stress the importance Directors group of one of the top most IT companies of India.
of non-whole time directors in company boards and even The role and responsibility of the IDs become more suspect
though the term ID does not find any specific mention in because they did not discover the corporate fraud, but it came

IOSI CHARTERED SECRETARvJI:= = = = = = 47 =========tl (A- 31) JANUARY 2011