Liability Regime For Non-Executive and Independent Directors in India: A Case for Reform

1. Vidhi, Centre for Legal Policy published has a report on the subject “The Liability Regime For Non-Executive and Independent Directors in India: A Case for Reform” through the Author(s) Mr. Debanshu Mukherjee and Ms. Astha Pandey.
2. The report focuses on the need for Independent Directors on the corporate boards, in order to protect the interests of the public. Independent Directors constitute a class of non-executive directors with no pecuniary relationships with the company. The functions of Independent Directors include bringing an independent judgment to bear on the Board’s deliberations, scrutinize the performance of management, satisfy themselves on the integrity of financial information and that financial controls, protecting the interests of all stakeholders, particularly the minority shareholders and balancing the conflict of interest of the stakeholders.
3. The importance of the Institution of Independent Directors has been aptly captured by the SEBI report on corporate governance chaired by Mr. Uday Kotak (2017) as follows: “The institution of independent directors forms the backbone of the corporate governance framework worldwide and in India. Independent directors are expected to bring objectivity into the functioning of the board and improve its effectiveness. Independent directors are required to safeguard the interests of all stakeholders, particularly minority shareholders, balance the conflicting interest of the stakeholders and bring an objective view to the evaluation of the performance of the board and management.”
4. The report analyses the regulatory framework, governing the liability of Independent Directors in India. It highlights the issue of the great difference between the duties placed on Independent Directors and their liability as penalty/prosecution risk. The report also examines director liability frameworks in other jurisdictions such as the U.S. and the U.K. and discusses case laws in which Indian courts deal with the issue of director liability.
5. 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.
6. The key recommendations discussed in the report are set out as mentioned below:
   • Enabling a more ‘independent’ outside director model;
   • The liability framework for directors across all statues recognizing corporate offenses should be harmonized with the Companies Act by providing for the concept of ‘officer who is in default’ and enabling non-executive and independent directors to claim the protections designed specifically for them under section 149(12) of the Companies Act;
   • The procedures followed by investigating agencies/authorities for conducting investigations in relation to offenses by companies must recognize the importance of creating safeguards for independent and non-executive directors.
   • Where civil liability is concerned, the government should examine the viability of introducing shareholder sanctioned safe harbors such as exculpatory clauses and statutorily recognize the business judgment rule as a defense, at least for independent directors.