Accountability Of Independent Directors

Better governance is the responsibility of Independent Directors who do this by actively participating in the committees that the company has established

Introduction

Independent Directors play a key role in protecting the interests of a company’s members. Their primary duty is to oversee the company’s operations and minimize fraud. They are expected to independently make decisions in the shareholders’ best interests and evaluate the Board performance.

Role of Independent Directors

The role of Independent Directors involves raising business credibility and governance requirements. Better governance is the responsibility of Independent Directors, who do this by actively participating in the committees that the company has established. The Independent Directors are required to follow the code of conduct, as stipulated in the terms of Schedule IV of the Companies Act, 2013 and carry out their duties in a trustworthy and diligent manner. SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 read along with Schedule IV provide Independent Directors enormous authority and responsibility. SEBI regulation has put humungous responsibility on the Independent Directors. Independent Directors not only review the performance of other directors, but also review the performance of listed entity considering the views of the executive director and non-executive directors. Independent Directors are required to attend the board and general meetings of the company and need to be well informed of the events taking place in the company. Independent Directors are also accountable to report the suspected fraud, and the concern related to the infringement of the company’s code of conduct.

Liability of Independent Directors

Earlier under the Companies Act of 1956, Independent Directors were not considered to be “officers in default” and consequently were not held liable for the actions of the board whereas after the enactment of the Companies Act, 2013, in accordance with Section 149 (12) of the Companies Act, 2013, the liability of Independent Directors is limited to such acts of omission or commission by a company which had occurred with their knowledge, attributable through board processes, and with their consent or connivance or where they had not acted diligently. However, the regulatory authorities also agree with limitations and difficulties related to fiduciary duties of Independent Directors. In this regard, the Ministry of Corporate Affairs (MCA) on March 2, 2020, issued a clarification stating that prosecutions against Independent and Non-Executive Directors will not be brought unless there is adequate proof to demonstrate that the default or violation was committed with their knowledge or consent, or that they were guilty of fraud or gross and deliberate negligence. The strict adherence to the liability mentioned in Section 149(12) of the Companies Act, 2013 was seen in the case of Deloitte Haskins & Sells LLP and Ors. v. Union of India (2020)1 where Independent Directors were made to resign from their position as they failed to fulfil their statutory duty, which was to report concerns about unethical behavior, actual or suspected fraud, or violation of the company’s code of conduct or ethics policy. However, there was no monetary penalty imposed on the Independent Directors. The Companies Act, 2013 and the revised corporate governance norms of the Securities Exchange Board of India (SEBI) for listed companies, have placed significant accountability for fraud risk management on Independent Directors and the audit committee.

Independent Directors as a part of Audit Committee

In the case of LEEL Electricals Ltd.2, Surjit Krishan Sharma (retired Air Vice Marshal) and Ms. Geeta Tekchand (physical therapist) were approached by former promoter Late Brij Raj Punj to join the board of the company. The Independent Directors were informed that they ‘would not require any specialized knowledge of law and finance and their role would be limited to advising on policy issues and providing strategic guidance’. Further, they were also informed that the ‘Audit Committee (AC) meetings are normal statutory requirements, AC meetings would be a routine affair and actual decisions etc. would be taken by the whole board in board meetings’. Surjit Krishan Sharma and Geeta Tekchand were chairman and member of the audit committee of the company respectively.

Given that Independent Directors comprise two-thirds of a board’s audit committee and hold the chairmanship as per Rule 18 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Independent Directors are held accountable for financial concerns to a greater extent. Independent Directors are also in charge of risk management, the company’s vigilance process, and the integrity of financial data, especially as it relates to preventing and detecting fraud. In light of various corporate frauds, the regulatory authorities have significantly raised the bar for Independent Directors accountability.

In the matter of Leel Electricals Ltd., SEBI passed an order on April 18, 2024, penalizing the Independent Directors for their failure to discharge their statutory responsibility as a member of the audit committee in the protecting interests of ordinary shareholders of the company. They have been charged for their failure to discharge their statutory responsibility as members of the audit committee in protecting the interest of the ordinary shareholders of the company. They are restrained from being associated with any listed company or a SEBI registered intermediary, in any capacity including as a director or a key managerial person, directly or indirectly, for a period of three (3) years from the date of this order.

This order signifies that regardless of assurances from promoters or other board members, the Independent Directors should understand and take their duties seriously. A certain degree of expertise and dedication is necessary to be on an audit committee, especially when it comes to financial and legal problems. Relying only on the decisions made by the larger board is insufficient. Independent Directors are required to actively participate in audit committee meetings and pose insightful questions and safeguard the interests of shareholders, serve as a check on executive management to ensure compliance with corporate governance. The ruling by SEBI makes a clear statement regarding the responsibility of Independent Directors. Independent Directors by claiming ignorance or putting their faith in the promoters’ claims, cannot escape accountability.

Independent Directors usually are not liable for a company’s actions unless they are directly involved in wrongdoing, like fraud or negligence, and it’s proven that they were aware, consented to, connived in such acts, or if they failed to act with due diligence.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.