Independent Directors: Reward vs Liability and Accountability
The newspapers have reported that Confederation of Indian Industry (CII) has approached the Union government with a request to exempt independent directors from criminal liability under various laws. It is not the first time this issue has engaged the attention of business chambers. However, there has been no well-articulated effort on the part of the government to look at this issue in totality. 
 
Recently, the ministry of corporate affairs (MCA) took some initiative to decriminalise some of the offences under the company law. This was certainly a good beginning. 
 
However, it is quite essential to pick up this subject at a more holistic level to attempt a complete codification of the law and procedures so that the issue of accountability and liability is captured in a manner that due proportionality and sufficient deterrence is built into the law; and to have a salutary balance between punishment for culpability and eliminating witch hunt or using the law as an instrument of harassment for collateral objectives.
 
Independent directors should be clearly differentiated from non-independent directors and senior officers and executives in terms of role expectation and fixation of responsibility. The company law and more so other Central and local laws do not differentiate between directors. Notices as a routine are issued to all directors in the event of any alleged default. 
 
For example, it is seen that for non-deduction of taxes the recovery notices and prosecution initiation routinely cover independent directors. So, do notices under pollution control or many other state laws. 
 
It will be a Herculean task to get each of the states to amend the different laws in this regard. Hence there is a need to have an out-of-the-box approach to deal with this. 
 
CII and other chambers should put their minds together and see if legally a solution is possible such that independent directors are brought under a distinct dispensation that gives them the necessary locus to play the oversight role expected of them but technically do not fall in the category of directors, the term, which becomes the reason for issuance of notices by various enforcement agencies.
 
Having made this point, it will be a travesty of fairness if independent directors, who occupy their position with a created expectation that they will ensure good governance and a fair treatment to all stake holders, do not hold any accountability at all. 
 
This needs to be juxtaposed with the fact that independent directors in many companies draw an attractive remuneration beyond the statutory sitting fees. 
 
Hence, there has to be a rational way to list out specific defaults that would cause an independent director to be indicted and rendered liable to punishment. It may be a contentious issue to have a finite list of defaults that would expose independent directors to punishment. 
 
Nevertheless, the collective wisdom of legal experts and corporate secretaries should help attempt this. 
 
While the punishment by argument will exclude a jail sentence as independent directors are entirely excluded from the ambit of criminal proceedings, the imposition of cost should have due proportionality to the remuneration earned. In a manner of stating this is like a disgorgement provision.
 
While codifying the law afresh, the balancing should be achieved with more clarity on the responsibility of the non-independent directors and senior executives, which term includes key management personnel as per the law. 
 
It is worth considering if all fines and penalties paid by a company under any situation be mandatorily recovered from the concerned persons who failed to ensure proper adherence to the law. 
 
Recently, a leading non-life insurance company was slapped with a significant fine by Insurance Regulatory and Development Authority of India (IRDAI). 
 
Non-banking finance companies (NBFCs) are exposed to payment of fines under the Reserve Bank of India (RBI) Act if there is a failure to adhere to the relevant regulations. 
 
These are just limited examples and the list can be much longer. The justification to have this is to bring about greater accountability among top executives for due adherence to law which is a greater responsibility they carry even over business management. 
 
The payment of fines and penalties should not be seen as just a cost of doing business that is factored in the way the enterprise prices its output. 
 
For example, a regulated entity like an NBFC can routinely violate norms to achieve greater returns on its portfolio and view the fine as another debit item in the expenditure statement. 
 
It is necessary to make the senior management accountable and the recovery of fines should ideally be more at higher levels like the managing director and other executive directors and it should not be thrust on the lower-level officers who normally execute instructions from the bosses. 
 
To conclude, the system of making people accountable is very critical for a more ethical conduct of business and at the same time the responsibility should be fixed where it belongs.
 
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)
 
Comments
tillan2k
6 months ago
independence of independent director is easily vitiated by dominant share holders / promoters
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