According to new norms announced by the government, independent directors will not be hauled up for acts undertaken by companies without their consent or knowledge.
“We have directed the Registrar of Companies (RoC) not to take any penal action against those independent directors who are not actively involved in the decision-making process of a company,” Corporate Affairs Secretary D K Mittal said.
Under the new norms, no action can be taken against independent directors and nominee directors for acts of companies, undertaken without their “consent or connivance, or where they have acted diligently in the board process”.
Welcoming the decision, Diljeet Titus, senior partner of Titus & Co, said: “The decision would insulate independent directors from unnecessary liabilities and enable them to function as effective watchdog.”
Describing the move as a “fair step”, senior corporate lawyer O P Dua said: “The decision follows a number of petitions filed in the courts against the present provision, which holds independent directors liable for omissions committed by the company.”
Under the existing provisions, penal actions for defaults committed under the Companies Act, 1956, are taken against an “officer in default” or “directors” or “persons” as specified in the Act.
“RoC has been asked to take extra care in examining the cases where directors are identified as officer in default,” Mittal said quoting a circular.
Some protection, Titus said, was necessary as independent directors performed important functions like ensuring corporate governance, conducting audits and fixing executive remuneration.
The role and responsibility of independent directors have been a topic of constant public debate, especially after the move of Satyam Computer Services to buy out Maytas Infra and Maytas Properties, promoted by kin of founder B Ramalinga Raju, was rejected by the shareholders.
Subsequent to the event, Raju confessed to committing a Rs 14,000-crore fraud — the largest in India’s corporate history.
According to Clause 49 of the Listing Agreement, at least 50 per cent of the members of the board of directors should be independent directors. Besides, if the chairman of the board is a non-executive director, at least one-third of the board must comprise independent directors.
