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

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