Independent directors in India are governed by the Companies Act, 2013 ("Act"). Every listed public company is required to have at least one-third of the total number of directors as independent directors1 in the board of directors of the company. Every unlisted public company fulfilling the following criteria is required to appoint a minimum of 2 (two) independent directors:
(a) a public company having a paid up share capital of ten crore rupees or more;
(b) a public company having a turnover of one hundred crore rupees or more; or
(c) a public company which has, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.2
The Act provides a criterion applicable to independent directors appointed in accordance with the Act3. The Act further provides the following roles and responsibilities of an independent director:
(a) An independent director is required to attend the first board meeting of the company and every first meeting of the board thereafter for each financial year;
(b) An independent director is required to attend board meeting called at shorter notice4 and in the event, the independent director is not able to attend the board meeting called at a shorter notice, the decision taken at such meetings shall be final only on ratification by an independent director5.
(c) An independent director is required to provide a declaration confirming his/ her independence at the first board meeting, after his/ her appointment, in which he/she participates as a director. Thereafter, such declaration is required to be provided by the independent director in every financial year or as and when changes occur which affects his/her status as an independent director.
In addition to the provisions of the Act, the independent directors are required to abide by the Code of Independent Directors6. The Code of Independent Directors sets out the basic guidelines which the independent directors are required to adhere to during their appointment. While the aforesaid code is directive in nature, it provides the following duties of an independent director:
(a) To undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
(b) To strive to attend all meetings of the Board of Directors and of the Board Committees of which he/ she is a member;
(c) To keep themselves well informed about the company and the external environment under which it operates;
(d) To ensure adequate deliberations are held before approving related party transactions and assure that the same is in the interest of the company;
(e) To report concerns about unethical behavior, actual or suspected fraud of the company's code of conduct or ethics policy;
(f) Not to disclose confidential information including commercial secrets, technologies, advertising and sales promotion plans etc. unless such disclosure is approved by Board or by law;
(g) seek appropriate clarification or amplification of information and, where necessary, take and allow appropriate professional advice and opinion of outside experts at the expense of the company;
(h) participate constructively and actively in the committees of the Board in which they are chairpersons or members;
(i) where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
(j) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(k) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
(l) acting within his/ her authority, assist in protecting the legitimate interests of the company, shareholders and its employees.
Liability of an Independent Director
The liability of an independent director can be ascertained through the roles and responsibilities undertaken by such director during the course of his/ her appointment. The liability of a director depends upon the circumstances in which the director undertakes any action. In a case wherein the court interpreted the meaning of an 'officer in default', the court held that the process of determining the liability cannot be done mechanically without applying mind to the facts of the case and the provision of the law7.
The court has also held on various cases8 that unless a complaint discloses a prima facie case against the accused of their liability and obligation as principal officers in the day to day affairs of the company as directors, the accused cannot be prosecuted for the offences committed by the company unless it can be proved that specific matters were brought to the attention of such director.
In a case wherein the disbursement of the loan was made without obtaining a sanction, the court had to determine whether a director who has signed the balance sheet of the company can be said to have knowledge with respect to disbursement of the loans and that the disbursement was without sanction. The court opined that the aforesaid director was a practicing advocate and solicitor and therefore, could only act as a non-executive director. Therefore, the liability of a principal or active director cannot be fixed on him.
Effect of Companies (Amendment) Act, 2019 on Independent Directors
The Companies (Amendment) Act, 2019 ("Amendment Act") came into effect on July 31, 2019. It considered the changes brought to the Act by the Companies (Amendment) Ordinance, 2018, the Companies (Amendment) Ordinance, 2019 and the Companies (Amendment) Second Ordinance, 2019.
Section 212 has been amended by the Amendment Act. It deals with the investigation into the affairs of the Company by serious fraud investigation office. The Amendment Act provides that in case of an investigation under this provision, any director, key managerial personnel, other officer of the company or any other person or entity who has taken an undue advantage, whether in form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal or appropriate orders with regard to disgorgement of such asset, property or cash and also for holding such director, key managerial personnel, other officer or any other person liable personally without any limitation of liability.
This insertion has broadened the scope of Section 212 and has attempted to include any person (including an independent director) under the purview of this provision.
Footnotes
1. Section 149(4) of the Act.
2. Rule 4 of The Companies (Appointment and Qualification of Directors) Rules, 2014.
3. Section 149(6) of the Act.
4. First Proviso to Section 173(3).
5. Second Proviso to Section 173(3).
6. Schedule IV of the Act.
7. Atul B. Munim v. Registrar of Companies & Ors, 2000(102(2))BomLR288
8. Homi Phiroz Ranina & Ors. v. State of Maharashtra & Ors. 2003BomCR(Cri)793; Rajendra Shah v. State of Maharashtra Writ Petition 1528 of 2016.
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