1 Jitendra Singh, Mike Useem & Harbir Singh, Corporate Governancein 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 CorporateGovernance, Business Line, July 21, 2005, available athttp://www.thehindubusinessline.
com/2005/07/21/stories/2005072100831000.htm(Last visited on March 16, 2010)3 SEBI had issued anotification that failure to comply with the Clause would result in thecompanies being delisted. Even individual stock exchanges have been empoweredto take such action against defaulting companies4 Prime Directors, A Platform for Indian Directors, available athttp://www.primedirectors. com (Last visited on March 16, 2010).5 Singh, Useem & Singh, supra note 116 Report of the Expert Committee on Company Law, available athttp://icai.org/resource_ file/ 10320announ121.
pdf (Last visited on March 19, 2010)7 The Committee has left the task of defining “large” to theGovernment.8 The Report of the Kumar Mangalam Birla Committee on CorporateGovernance, available at http://www.sebi.
gov.in/commreport/corpgov.html (Lastvisited on March 16, 2010).
9 The Report of the Naresh Chandra Committee on Corporate Audit andGovernance, 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 89For instance, in theWorldcom and Enron settlements, the liabilities extended to the independentdirectors to the tune of $18 million by 10 independent directors in Worldcomand $13 million by 10 independent directors in Enron. However, in the Indiancontext it may be argued that liability arises only on account of conduct oract or omission on part of the director to fulfil certain obligation, and notbe the mere fact of holding an office10. Apart from the liabilitiesthat the director may invite as a corporate director, there may be otherliabilities under other laws as well.
Any communications addressed to thedirectors of the company are understood to address the independent directors aswell. The Companies Act looks atall kinds of directors in the same light. While it provides for a few extracompliances for whole time directors and requires the disclosure by interesteddirectors, it does not exempt independent directors from any of the duties,liabilities or responsibilities of the board.
Therefore, independent directorsare woven into the corporate governance team (after all that is the verypurpose of their appointment) as any other director and are bestowed with thesame power as the other directors.5. The Companies Act andIndependent Directors Even the Naresh ChandraCommittee, 20029suggested expanding the companies covered under Cl. 49. Through the course ofall three of the above mentioned reports, the definition of independentdirectors in the Indian context has become clearer and the scope of theirapplication widened. Another shortcoming which has not beensufficiently set-off is the remuneration offered to independent directors. TheBirla Committee was of the view that adequate compensation packages must begiven to independent directors so that their positions become financiallyattractive to draw talent and ensure integrity in their working. The Report of the KumarMangalam Birla Committee (‘the Birla Committee’)8,1999 on Corporate Governance had criticized the conventional practice ofhand-picking of independent directors because such selection by itself takesaway the independence of the directors.
This loophole is yet to be fullyaddressed and still presents itself as a paradox- how independent can adirector be if he is dependent on the promoters for his job? With respect to wideningthe ambit of Cl. 49, the Committee suggests an approach which is sensitive tothe specific kinds of companies and disagrees with a “one shoe fits all”philosophy. Wherever a company involves public interest, at least 1/3rd of theboard must consist of independent directors. On the issue of nominal directorson the board who are representative of institutions, the Committee in clearterms recommends that such directors must not be equated with independentdirectors since they represent only sectional interests.
It also elaborates onsituations where independence may exist and may not exist. The J.J. Irani Committee,20046(‘theCommittee’) recommended that the provisions of Cl. 49 be extended to apply toall “large” companies7.The Committee reaffirms the belief that the issue of corporate governance andindependent directors are closely intertwined and presence of such directors inadequate numbers would improve governance.
4. The Committee Reports andSuggestionsAs far as the secondargument is concerned, the argument may be turned around on itself. India mustcontinue to strengthen the institutional support towards independent directorsto safeguard the interests of its industry. Independent directors must beallowed to be more involved with the board of directors and more vocal withtheir contributions to play an effective role. Our experience has shown thatthus far, the only reason why independent directors have successfully avertedpotential fiascos and promoted accountability towards shareholders has been onaccount of their presence in considerably large numbers.17 This support mustcontinue. Therefore, while it may be open to debate as to what percentage of theboard must be constituted by such independent directors, the importance ofhaving a sufficiently large number is not. The first argument may beoutright dismissed.
It is unimaginable to think that in a country as populousas 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 appointdirectors but not independent directors or that those with materiallysignificant dealing with the company are likely to be any more qualified thanthose independent of such dealings. With the appropriate training, this paucitycould very easily be overcome and pave the way for a more promising corporategovernance regime. It has been pointed out that this, in fact, is a legitimateconcern and it would perhaps take some time before the demand-supply gap couldbe effectively bridged, it is nonetheless a necessary move5. Moreover, it was arguedthat such directors who would attend very few board meetings (a minimum of foura year) and may tend to be obtrusive to the functioning of the board byprofessing their expertise without fully appreciating the conduct of theaffairs.
Besides, in the context of family-dominated Indian companies, wherethe promoters’ interests often over-shadow those of the share-holders, theindependent directors may not be in a position to exert sufficient influence. The introduction of thenew guidelines faced stiff resistance. The foremost argument against itsimplementation was that there was a paucity of qualified personnel2.
Most of the listed companies, out of 9000, were required to comply with Cl. 49of the Listing Agreement by December 31, 2005 mandates that independentdirectors should constitute 50 percent of their Boards; else the defaultingcompanies will have to face severe penalties3.The requirement of independent directors, according to an estimate, is at over30,0004. 3. Resistance to the Change: Do wereally need Independent Directors? As already discussed, Cl. The clause lays downan inclusive definition according to which independent directors are those whodo not have any pecuniary relationship with the company, management, itspromoters or its subsidiaries, which may affect the independence of theirjudgment. This is in contrast with the British definition based on the Higgsreport, which is an exclusive definition specifying who cannot be appointed asan independent director.
The latter appears to be more appropriate as itclearly provides who is not acceptable as an independent director while theIndian definition seems too restrictive. The new Cl. 49 lays down amore stringent qualification for independent directors than the old clause andtook away the discretionary power conferred upon the board to decide whetherthe independent director’s material relationship with the company had affectedhis independence apart from increasing the number of mandatory board meetingsfrom 3 to 4. The minimum number of audit committee meetings was also increasedfrom 3 to 4.
In India, the SEBImonitors and regulates corporate governance of listed companies through Cl. 49of the Listing Agreement. Influenced by the Sarbanes-Oxley Act of 2002 in theUnited States of America and the New York Stock Exchange regulations in 2003,SEBI launched a landmark initiative towards achieving higher corporategovernance standards. SEBI issued Cl. 49 of the Listing Agreement which was toapply to companies in a phased manner. It applied first to all Group-Acompanies 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 upcapital of Rs.
3 crore / net worth of Rs. 25 crore. Later, SEBI amended theoriginal clause and issued a new Cl. 49 with several changes. 2. The New Clause 49: IndependentDirectors Get a BoostIn the past, the Indian corporate sector has faced majorcriticism for its poor corporate governance compliance record, as the presenceof large family-dominated businesses has posed serious threats to transparencyand accountability. Traditionally, the major stakeholders in most of theseenterprises have been family members who did not find it compelling to revealsufficient information to the independent directors.
It became an arduous taskfor the independent directors, to checkon accountability and transparency, as only a few meetings, which in fact wereceremonious in nature, were attended by them per year. This did not make itpossible for independent directors to fully comprehend the issues before theboard and to be accountable in large business structures which were oftenconglomerates having diverse interests and investments. This may be contrastedwith the more efficient western enterprises where independent directors areviewed as partners of management and as “outside guardians1”,whose job is to make sure that the management stays focused on deliveringshareholder value. 1.Conventionally Wrong: The Past Record