1 Jitendra Singh, Mike Useem & Harbir Singh, Corporate Governance
in India: Is an Independent Director a Guardian or a Burden, February, 2007,
available at http://knowledge. Wharton.upenn.edu/India/
article.cfm?articleid=4157 (Last visited on March 19, 2010)
2 N. Venkiteswaran, Independent Directors: Key to Corporate
Governance, Business Line, July 21, 2005, available at
(Last visited on March 16, 2010)
3 SEBI had issued a
notification that failure to comply with the Clause would result in the
companies being delisted. Even individual stock exchanges have been empowered
to take such action against defaulting companies
4 Prime Directors, A Platform for Indian Directors, available at
http://www.primedirectors. com (Last visited on March 16, 2010).
5 Singh, Useem & Singh, supra note 11
6 Report of the Expert Committee on Company Law, available at
http://icai.org/resource_ file/ 10320announ121.pdf (Last visited on March 19, 2010)
7 The Committee has left the task of defining “large” to the
8 The Report of the Kumar Mangalam Birla Committee on Corporate
Governance, available at http://www.sebi.gov.in/commreport/corpgov.html (Last
visited on March 16, 2010).
9 The Report of the Naresh Chandra Committee on Corporate Audit and
Governance, available at http://finmin.nic.in/downloads/reports/chandra.pdf
(Last visited on March 15, 2010).
10 S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89
For instance, in the
Worldcom and Enron settlements, the liabilities extended to the independent
directors to the tune of $18 million by 10 independent directors in Worldcom
and $13 million by 10 independent directors in Enron. However, in the Indian
context it may be argued that liability arises only on account of conduct or
act or omission on part of the director to fulfil certain obligation, and not
be the mere fact of holding an office10.
Apart from the liabilities
that the director may invite as a corporate director, there may be other
liabilities under other laws as well. Any communications addressed to the
directors of the company are understood to address the independent directors as
The Companies Act looks at
all kinds of directors in the same light. While it provides for a few extra
compliances for whole time directors and requires the disclosure by interested
directors, it does not exempt independent directors from any of the duties,
liabilities or responsibilities of the board. Therefore, independent directors
are woven into the corporate governance team (after all that is the very
purpose of their appointment) as any other director and are bestowed with the
same power as the other directors.
The Companies Act and
Even the Naresh Chandra
suggested expanding the companies covered under Cl. 49. Through the course of
all three of the above mentioned reports, the definition of independent
directors in the Indian context has become clearer and the scope of their
Another shortcoming which has not been
sufficiently set-off is the remuneration offered to independent directors. The
Birla Committee was of the view that adequate compensation packages must be
given to independent directors so that their positions become financially
attractive to draw talent and ensure integrity in their working.
The Report of the Kumar
Mangalam Birla Committee (‘the Birla Committee’)8,
1999 on Corporate Governance had criticized the conventional practice of
hand-picking of independent directors because such selection by itself takes
away the independence of the directors. This loophole is yet to be fully
addressed and still presents itself as a paradox- how independent can a
director be if he is dependent on the promoters for his job?
With respect to widening
the ambit of Cl. 49, the Committee suggests an approach which is sensitive to
the specific kinds of companies and disagrees with a “one shoe fits all”
philosophy. Wherever a company involves public interest, at least 1/3rd of the
board must consist of independent directors. On the issue of nominal directors
on the board who are representative of institutions, the Committee in clear
terms recommends that such directors must not be equated with independent
directors since they represent only sectional interests. It also elaborates on
situations where independence may exist and may not exist.
The J.J. Irani Committee,
Committee’) recommended that the provisions of Cl. 49 be extended to apply to
all “large” companies7.
The Committee reaffirms the belief that the issue of corporate governance and
independent directors are closely intertwined and presence of such directors in
adequate numbers would improve governance.
The Committee Reports and
As far as the second
argument is concerned, the argument may be turned around on itself. India must
continue to strengthen the institutional support towards independent directors
to safeguard the interests of its industry. Independent directors must be
allowed to be more involved with the board of directors and more vocal with
their contributions to play an effective role. Our experience has shown that
thus far, the only reason why independent directors have successfully averted
potential fiascos and promoted accountability towards shareholders has been on
account of their presence in considerably large numbers.17 This support must
continue. Therefore, while it may be open to debate as to what percentage of the
board must be constituted by such independent directors, the importance of
having a sufficiently large number is not.
The first argument may be
outright dismissed. It is unimaginable to think that in a country as populous
as ours, finding qualified personnel could prove to be too onerous. Even if so,
there is no reason to suggest that there is sufficient talent to appoint
directors but not independent directors or that those with materially
significant dealing with the company are likely to be any more qualified than
those independent of such dealings. With the appropriate training, this paucity
could very easily be overcome and pave the way for a more promising corporate
governance regime. It has been pointed out that this, in fact, is a legitimate
concern and it would perhaps take some time before the demand-supply gap could
be effectively bridged, it is nonetheless a necessary move5.
Moreover, it was argued
that such directors who would attend very few board meetings (a minimum of four
a year) and may tend to be obtrusive to the functioning of the board by
professing their expertise without fully appreciating the conduct of the
affairs. Besides, in the context of family-dominated Indian companies, where
the promoters’ interests often over-shadow those of the share-holders, the
independent directors may not be in a position to exert sufficient influence.
The introduction of the
new guidelines faced stiff resistance. The foremost argument against its
implementation was that there was a paucity of qualified personnel2.
Most of the listed companies, out of 9000, were required to comply with Cl. 49
of the Listing Agreement by December 31, 2005 mandates that independent
directors should constitute 50 percent of their Boards; else the defaulting
companies will have to face severe penalties3.
The requirement of independent directors, according to an estimate, is at over
Resistance to the Change: Do we
really need Independent Directors?
As already discussed, Cl. The clause lays down
an inclusive definition according to which independent directors are those who
do not have any pecuniary relationship with the company, management, its
promoters or its subsidiaries, which may affect the independence of their
judgment. This is in contrast with the British definition based on the Higgs
report, which is an exclusive definition specifying who cannot be appointed as
an independent director. The latter appears to be more appropriate as it
clearly provides who is not acceptable as an independent director while the
Indian definition seems too restrictive.
The new Cl. 49 lays down a
more stringent qualification for independent directors than the old clause and
took away the discretionary power conferred upon the board to decide whether
the independent director’s material relationship with the company had affected
his independence apart from increasing the number of mandatory board meetings
from 3 to 4. The minimum number of audit committee meetings was also increased
from 3 to 4.
In India, the SEBI
monitors and regulates corporate governance of listed companies through Cl. 49
of the Listing Agreement. Influenced by the Sarbanes-Oxley Act of 2002 in the
United States of America and the New York Stock Exchange regulations in 2003,
SEBI launched a landmark initiative towards achieving higher corporate
governance standards. SEBI issued Cl. 49 of the Listing Agreement which was to
apply to companies in a phased manner. It applied first to all Group-A
companies and then to other listed companies with a minimum paid-up capital of Rs.
10 crore / net worth of Rs. 25 crore and finally to companies with paid up
capital of Rs. 3 crore / net worth of Rs. 25 crore. Later, SEBI amended the
original clause and issued a new Cl. 49 with several changes.
The New Clause 49: Independent
Directors Get a Boost
In the past, the Indian corporate sector has faced major
criticism for its poor corporate governance compliance record, as the presence
of large family-dominated businesses has posed serious threats to transparency
and accountability. Traditionally, the major stakeholders in most of these
enterprises have been family members who did not find it compelling to reveal
sufficient information to the independent directors. It became an arduous task
for the independent directors, to check
on accountability and transparency, as only a few meetings, which in fact were
ceremonious in nature, were attended by them per year. This did not make it
possible for independent directors to fully comprehend the issues before the
board and to be accountable in large business structures which were often
conglomerates having diverse interests and investments. This may be contrasted
with the more efficient western enterprises where independent directors are
viewed as partners of management and as “outside guardians1”,
whose job is to make sure that the management stays focused on delivering
Conventionally Wrong: The Past Record