Independent directors (ID) play the role of upholding the interests of
shareholders and ensuring that the company runs lawfully which includes its
equitable functioning. The need for an in-house person/s to monitor various
facets of the company such as financial statement, auditing, interest of
minority shareholders is imperative.
Persons performing this function cannot
have a financial relationship or any other relationship as mentioned (in the
companies Act and its rules & regulations) with the company or its subsidiaries
and any other relationship with the aforementioned should be revealed, for
him/her to act true to such role.
This has been incorporated in the Companies
Act 2013 and the rules and regulations under the Securities and Exchange Board
of India. It cannot go unsaid that a major chunk of legal concepts has been
borrowed from English law and so the article aims at tracing its origins to
establish the functions and objectives of an independent director.
The UK Corporate Governance Code (the Code) first published in 1992, had
provisioned for a system to control and direct companies. The Board of directors
make decisions on behalf of the stakeholders and are thus answerable to them. It
is a pattern that for a board resolution to come into effect, the approval of
shareholders in a general/extraordinary general meeting is mandatory (in most
The Code of 2016 mandates the presence of a senior independent director
in the board committee for clearing the annual report. One may draw a parallel
between the duties and liabilities of an independent director in the Companies
Act 2013 to the role of non-executive director prescribed in the Code.
The Code of 2016 mandates the following:
- The chairman should hold meetings with the non-executive directors
without the executives present.
- Led by the senior independent director, the non-executive directors
should meet without the chairman present at least annually to appraise the
chairman's performance and on such other occasions as
are deemed appropriate.
- Where directors have concerns which cannot be resolved about the running
of the company or a proposed action, they should ensure that their concerns
are recorded in the board minutes.
- On resignation, a non-executive director should provide a written
statement to the chairman, for circulation to the board, if they have any
Companies Act, 2013 and its Rules
The Companies Act 1956 did not entail the role of an independent director but
clause 49 of the SEBI listing agreement first introduced in February, 2000
stated that the number of independent directors would depend whether the
Chairman is executive or non-executive. In case of a non-executive chairman, at
least one-third of board should comprise of independent directors and in case of
an executive chairman, at least half of board should comprise of independent
The amendment to clause 49 was made on September 2000 wherein, any
institutional directors on the boards of companies (other than Govt. companies)
were deemed as independent directors. The latest amendment to the composition of
board via SEBI circular dated April 7, 2014; mandated the quorum of board with
at least one-third being independent directors in the case of a non-executive
chairman of the board; and in case of not having a regular non-executive
chairman at least half the board should consist of independent directors.
The Companies (Appointment and Qualification of Directors) Second Amendment
Rules, 2018 specifies the qualification and responsibilities of an independent
director; which was an amendment to the 2014 rules. The amendment rules have
imposed the additional liability on the ID to be the guarantor or provide
security for the debt of the company to any third person, its holding company,
subsidiary, their promoters and directors. This has led to the triggering of
insolvency proceedings against independent directors as Companies Regulations
have mandated directors to stand as guarantors or provide security to creditors.
The Supreme Court has established that the directors/members of a company are
not subject to the moratorium which is availed by a company. Section 149 of the
Companies Act states that every listed public company shall have at least
one-third of the total number of directors as independent directors and the
Central Government may prescribe the minimum number of independent directors in
case of any class or classes of public companies. A listed company should have
an audit committee with a minimum of three directors of which at least 2 of them
must be independent directors as per section 177 Companies Act.
SEBI Regulations and Circulars
The SEBI Listing Obligation and Disclosure Requirement (LODR) Regulations, 2015
confer responsibility and enable independent directors to carry on their
managerial and supervisory functions. Regulation 4 (3)(14) has the enabling
clause for an independent directors to perform their role as a member of the
board of directors and also as a member of the board of committee of directors.
Regulation 16 defines an independent director who is a non-executive director,
other than a nominee director of a listed entity. He must have relevant
expertise and is a person of integrity in the opinion of the board of directors.
He should not be or have been a promoter (defined in Companies Act) of the
listed entity, its holding company, associate companies or subsidiaries. Nor
should he/she be related to the promoters or directors to the aforementioned
companies or hold/held the position of key managerial personnel (KMP) (including
his relatives as defined in the regulation) in the aforementioned categories of
companies. [Refer to regulation 16 for exhaustive information on qualifications
SEBI circular vide April 08, 2015 has come up with a fine structure for not
having an optimum combination of executive, non-executive and women directors on
the board. This fine is for the violation by listed entities, of Clause 49 II A
(1) of Listing Agreement. There are various timelines provided under which the
type and quantum of fines vary accordingly. But for any non-compliance beyond
September 30, 2015, SEBI may take any other action against defaulters.
The need for absolute adherence to these regulations has been declared by the
Supreme Court in the case of SEBI v Shri Ram Mutual Fund
 where in the words
of the Hon'ble court "once the violation of statutory regulations is
established, imposition of penalty becomes sine qua non of violation and the
intention of parties committing such violation becomes totally irrelevant. Once
the contravention is established, then the penalty is to follow. It is to be
taken in clarity that the courts/tribunals do not intend to interfere with the
decisions of a company and their discretion.
Judicial interference shall be
exercised when a company obviates/subverts law, engages in activities that is
done by people within the company which cannot be done in their individual
positions, violates any constitutional or statutory provision. In the case of
Rustom Cavasjee Cooper v. Union of India
 the court said:
"It is again not for
this Court to consider the relative merits of the different political theories
or economic policies..."
Even in the case of the Government incorporating a company (under the companies
Act), it is not amenable to Judicial interference including through writ
jurisdiction. The decisions taken by the management of a company shall be immune
from judicial interference or else it would lead to micromanagement and
violation of the constitutional provisions under Article 14 and 19.
In the case
of BALCO Employees Union vs. Union of India (UOI) and Ors
 it was ruled that
the Government could have run the industry departmentally or in any other form.
When it chooses to run an industry by forming a company and it becomes its
shareholder then under the provisions of the Companies Act as a shareholder, it
would have a right to transfer its shares.
When persons seek and get employment
with such a company registered under the Companies Act, it must be presumed that
they accept the right of the directors and the shareholders to conduct the
affairs of the company in accordance with law and at the same time they can
exercise the right to sell their shares.In tune to this the Hon'ble SAT had held
Vas Infrastructures Ltd  liable for failing to set up an audit committee as
per clause 49 II A of the Listing Agreement read with section 21 of SCR Act,
Independent directors play a pivotal role in creating a balance in various
departments of the company and act as whistle-blowers in cases of malfunctioning
of the company. This is a statutorily empowered- internal mechanism to ensure
impartial decision making and adherence to law, which aids in timely
adjudication by the National Company law Tribunals and courts of law.
powers parallel to that of veto power where fraudulent decisions that include
financial, managerial and operational can be withheld and brought to notice.
Thus one may see the roles of financial guidance, intellectual and business
advice, playing the Good Samaritan for public investors and other powers enabled
by law being played by an independent director.
Written By: Krishnadas Saiju
- AIR 2006 SC 2287
- AIR 1970 SC 564
- AIR 2002 SC 350
4th year, B.A. LL.B (Hons.), NUALS