Independent directors feel the heat as frauds take centre stage
Over 1,000 independent directors have quit since January 2017; many could be on their way out
Auditors are not the only ones calling it quits. With increasing instances of high profile corporate frauds, accounting discrepancies and application of global anti-corruption laws, independent directors are finding the going tough, too.
More than 1,000 independent directors (IDs) have quit since January last year, data from Prime Database show. That number is likely to go up substantially in 2019 when a number of IDs’ terms come up for renewal. More than 1,400 IDs had signed up for fiveyear terms in FY15 after the Companies Act, 2013, came into existence from April 1, 2014. “Many of these IDs may opt not to extend their tenure given the increase in compliance requirements and greater accountability,” said Shriram Subramanian, founder and managing director, InGovern Research Services.
IDs carry both legal and regulatory obligations to raise red flags and record their dissent on board matters. The role of IDs in fraud detection has come under scrutiny by the regulators as they, along with the auditors, are the first line independent authorities obliged to question any wrongdoing early in the day.
While the enhanced duties, role and responsibilities have been in force for a few years, the role of IDs has gained prominence with the implementation of the Companies Act, 2013, and the Securities and Exchange Board of India’s LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015.
The recent recommendations of Uday Kotak-led Sebi panel on corporate governance have also expanded the eligibility criteria for independent directors, disallowing companies from appointing individuals related to the promoter group.
“The new Companies Act, 2013, puts a lot more onus on independent directors. We have had the best of laws in the past but the level of enforcement has become a lot more stringent in the last year or two,” said Subramanian.
There could also be scenarios where an independent director on the board of a wilful defaulter — in absence of showing dissent or failure to act — may get tagged as a defaulter in his personal capacity as a director, said experts. This could result in him/her being declared not fit and proper to hold any significant positions in any financial intermediary or carry out any financial regulatory activity.
The National Company Law Appellate Tribunal (NCLT) has reportedly ordered the freezing of the personal assets of some independent directors who served on the board of companies of Nirav Modi, who is accused of defrauding state-run Punjab National Bank of over ~130 billion.
“The once famed position is now finding cautious takers and a significant number of independent directors are seeking advice from lawyers before assuming such a position,” said Tejesh Chitlangi, senior partner, IC Universal Legal.
To be sure, IDs are protected under the Companies Act and are liable only in respect of such acts by a company which had occurred with their knowledge and with their consent or connivance or where they had not acted diligently. That said, when something goes wrong, the IDs are amongst the first to come under scrutiny and have to demonstrate that they have acted in good faith to get any protection under the law.
“Independent directors are more conscious of the need to not only be adequately involved and diligent in discharging their functions, but also demonstrating that they have acted accordingly,” said Sai Venkateshwaran, partner and head - accounting advisory services, KPMG India.
Not surprisingly, IDs are not only asking tough questions to promoters and management but also documenting their consent or dissent as appropriate on various decisions subject to board processes. Some are even seeking outside counsel and engaging with experts that include lawyers, accounting experts, forensic specialists, and technology specialists to help them deal with complex issues in these areas.
“Companies are taking adequate cover under the directors and officers (D&O) insurance policies to provide necessary protection to their independent directors. Directors, on their part, are taking steps to ensure that their personal assets are ring-fenced and not at risk,” said Venkateshwaran.
According to Chitlangi, the level of due diligence being carried out on the financials and governance standards of a listed company before assuming the position has never been seen before. “The safeguards in form of D&O insurances and indemnifications are becoming the basic asks by the independent directors alongside their demands for putting higher than prescribed governance and fraud detection policies in the system,” said Chitlangi.