The number of independent directors exiting without adequate reasons has been growing year on

year. Photo: iStock

Why independent directors are rushing for

the exit door
2 min read . Updated: 19 Dec 2018, 12:42 PM IST Jayshree P. Upadhyay

Of the 743 independent directors who vacated their positions on boards of listed companies, 561
exited without adequate reasons before the end of their terms

Topics
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Mumbai: Independent directors, the ‘protectors’ of minority shareholders’ rights, have been
quick to jump ship at the slightest sign of trouble. The recent exit of three independent directors
from Yes Bank Ltd—the chairman, and two from JM Financial Asset Reconstruction Company
Ltd—is just the tip of the iceberg. It is not an uncommon practise for independent directors to
quit before the end of their tenure, but what makes the situation interesting is the stark lack of
credible reasons.
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According to data collated by Prime Database, a primary market research tracking firm, out of
743 independent directors who quit the boards of Nifty-listed firms in 2018, 561 stepped down
without adequate reasons before end of their term. While 297 quit without assigning a reason,
264 cited ‘personal reasons and preoccupation’.

The number of independent directors exiting without adequate reasons has been growing year on
year. Out of the 649 independent directors who quit in 2016, 415 did not give adequate reasons.
In fact, 325 of them did not give any reason at all to the bourses. In 2017, 476 of the 730 exits
were without suitable reasons. Out of them 319 did not assign a reason.
“Independent directors resign when they realise that all is not well with the company and, on
continuing to hold on to the position, they are exposing themselves to huge risks," said Gaurav
Dani, founding partner, Indus Law.

Experts feel the decisions may have to do with the fine print of Indian laws. The provisions in
Companies Act, 2013, and Securities and Exchange Board of India (Sebi) listing norms say that
independent directors can be held personally liable for any acts of omission or commission by a
company, with his knowledge, or consent, or connivance, or in cases where he had not acted
diligently.

Therefore, independent directors typically quit and seldom cite the reason or reasons behind their
decisions. However, there are exceptions. For instance, R. Chandrashekhar of Yes Bank and Anil
Khandelwal of JM Financial ARC cited lack of governance as reasons to step down.

While Chandrashekar quit due to governance concerns and management of company affairs,
Khandelwal cited variance in governance principles. But come April, the proposed changes in
Sebi Listing Obligation and Disclosure (LODR) may change all that.

According to the proposal, directors and companies will not only be obliged to declare the
detailed reasons for their resignation, but must also confirm there are no other reasons, barring
whatever has been disclosed. The disclosure must be filed with exchanges. “From a corporate
governance perspective, this is a good change as it brings greater visibility into the affairs of the
company if there is wrong doing.

Also, since independent directors are not only required to give detailed reasons for their
resignation, but also to confirm that other than the reasons disclosed no other material reasons
exists, it puts an obligation on the resigning independent director to disclose all material facts.
However, there is no mechanism or checks in place to verify the reasons stated by the
independent director," said Dani.