The institution of independent directors is comparatively of recent origin, evolved over the last decade. However, their role has been continuously stressed to be of paramount nature in the corporate governance of company.
Cadbury committee report in 1992 mentioned that calibre of the nonexecutive members of the board is of special importance in setting and maintaining standards of corporate governance.
Cadbury committee report in 1992 mentioned that calibre of the nonexecutive members of the board is of special importance in setting and maintaining standards of corporate governance.
In India, various committees have time and again emphasised on the role of IDs and their role in various committees, including audit committee.
The SEBI-appointed Corporate Governance Committee, chaired by Kumar Mangalam Birla, affirmed that independent directors are crucial to corporate governance, ensuring board independence, accountability, oversight and management's responsibility to shareholders. Following the committee's recommendations, Clause 49 of the Listing Agreement was introduced to define the role of IDs in the board of directors and audit committee.
The Expert Committee on Company Law, chaired by JJ Irani, emphasised that IDs enhance corporate governance. The report recommended that the law should, therefore, recognise the principle of independent directors and spell out their role, qualifications and liability. It further addressed the need to establish knowledge or intent before holding an ID liable for wrongdoing.
After extensive deliberations, the roles and responsibilities of IDs were formalised in the Companies Act, 2013 through the introduction of Section 149 and Schedule IV.
Schedule IV of the Companies Act, 2013, outlines the Code for IDs, providing guidance on professional conduct. Adherence to these standards fosters confidence among investors, particularly minority shareholders, regulators and companies in the role of IDs. The schedule covers:
Guidelines of professional conduct.
Role and functions and
Duties.
With the changing regulatory regime, the role of IDs has become central to corporate governance. Their multifaceted role ensures checks and balances within the company. In meetings, they represent stakeholders and must remain vigilant to ensure compliance with applicable laws and regulations.
The Supreme Court, in the matter of Neera Saggi v Union of India & Ors, observed that "Undoubtedly, Independent Directors have a vital role, as is indicated by the provisions of the Companies Act 2013. While Independent Directors are intended to be independent, they cannot remain indifferent to the position of the company".
IDs, as part of the Audit Committee, must oversee the company's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 specifically outline the role and responsibilities of the Audit Committee in this regard.
The Companies Act, 2013 and SEBI (LODR) Regulations, 2015 define the liability of IDs. Under Section 149(12) of the Companies Act, 2013, IDs may be held liable if certain criteria are met:
Omission or commission by a company, which had occurred with his knowledge.
Attributable through board process.
With his consent.
Where he had not acted diligently.
Regulation 4(2)(f) of the 2015 Regulations outlines the responsibilities of the BODs, including IDs. Regulation 18 mandates the audit committee to review the company's financial condition, operational results and significant related-party transactions. As guardians of corporate governance, IDs are obligated to ensure a true and fair representation of the company's financials, enabling informed decisions by investors and shareholders.
IDs must act in good faith and with due diligence, prioritising the company's interests while considering all stakeholders. If the company engages in illegal activities, it is the ID's duty to report this to the relevant authorities, free from external influence. Failure to report such acts renders the ID liable, as the illegal actions occurred with their knowledge.
In a recent order of Prashant P Gadkari v SEBI, the Supreme Court upheld the penalty imposed by SEBI, which was previously affirmed by the Securities Appellate Tribunal. The penalty was directed at the ID and audit committee member, whose tenure saw the misrepresentation of the company's financials, misleading investors and shareholders.
Such action/omission in fulfilling their duties harms investor interests and is wholly unbecoming of an independent director and audit committee member. Their primary responsibility was to oversee the financial reporting process, ensuring the accuracy, sufficiency and credibility of financial statements, reviewing annual financials and auditor's reports with management, and verifying compliance with legal requirements, including related-party transactions and major accounting entries.
The shift in the regulatory regime, reinforced by SEBI's recent action and its affirmation by higher authorities, serves as a clear warning and guidance for independent directors and audit committee members to remain vigilant and accountable in corporate governance. This will promote the smooth functioning of the securities market and uphold the highest standards of governance.
Abhishek Baid is a partner and Ravinder Kumar is a senior associate at Expletus Legal.
Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team.
As a Subscriber you get
Stories
RECOMMENDED FOR YOU
Air India Faces Rigorous Safety Checks As 10-Member DGCA Team Kicks Off Annual Audit
Jun 24, 2025
DGCA Starts Detailed Audit At Air India's Main Base In Gurugram
Jun 23, 2025
Air India Crash Fallout: DGCA Enforces Rigorous Safety Audit To Uncover Systemic Flaws
Jun 23, 2025
IndusInd Bank Finds More Discrepancies In Internal Audits, Reveals Whistleblower Complaint
May 15, 2025
POPULAR