ABSTRACT

With the forthcoming years there has been evolutionary change in the position and role of
independent directors in India. There are two basic rules which is to direct and control the
company which if observed hasn’t undergone any change however the way Independent
directors perform these roles partakes and has undergone evolutionary change due to
Exogenous (Internal) and Endogenous(External) factors. Factors like Globalization,
Global competitiveness, Technology, Speed of Information flow, Regulatory changes and
Shareholders activism etc, As a result there is Enhancement of shareholders expectations,
Increased responsibilities of the boards and Greater Enhancement of liabilities of directors
however the basic rules are not been altered the structure remains intact and that with the
passing eons there has been drastic impact on the regulatory environment of the companies
and that the Pressure from regulatory changes is one of the strongest pressures on governance
companies and that the companies must realize that the governance must come from within to
companies it’s the necessary condition for the sustainable development. Regulations provide
a framework which changes over the course of time changing the governance of the
companies also. “Governance is not without a cost, but the cost is for the benefit of
companies and shareholders”. Independent directors have an enormous responsibility as well
as liability on them, We must know that being an Independent director is not an ornamental
position anymore they must bring their expertise in board discussions and that Companies
Act requires and has to ensure and to certify that they are working well a strong interface
between the management and the board.

Hence in these coming years with rapid growth in endogenous and exogenous factors the
Independent directors have to ensure the performance evaluations, Internal control, Risk
Management and related party transactions which important of all since foible in this case
had led many failures of corporate affairs as in position of Independent directors. An apt
evaluation of the various sections of the Companies Act 2013 bring to the light the emerging
role of the independent directors and their responsibilities towards the company and the legal
consequences for any wrongdoing by such directors of the company.

INTRODUCTION

Company is known to be a separate legal entity however it acts as a human agency for certain
purposes of the company. Shareholders and Board of directors are the major part of the
company which includes directors who control and direct the functions of the company.
1
Directors include independent directors, executive directors, minority shareholders,
rotational directors etc. if there is any misfortune in the company the liability lies on the
director of the company to the shareholders. There is a strong interface between management
and board of directors and promoters who have special interest in the company. However,
there is no stability of accountability and no effective protection is provided to the
shareholders interest. But in other countries they have better and effective methods to deal
with such problems.

METHODOLOGY

The Researchers have majorly relied upon the Secondary sources of information. We believe
that the information provided on online legal databases, blogs and other abstracts is true, and
have based our observations and conclusions on the same. We have also drawn information
and verbatim from relevant judgements given in the context of developing role of the
independent directors in India, from both the Acts, that is the Companies Act of 1956 and the
Companies Act of 2013.

Major Literature Reliance has been on the following 3 published books: -

1) A. Ramaiya, Guide to Companies Act, 18th Edition, Volume I, II and III.

2) Taxman’s Company Law and Practice, A comprehensive Textbook on Companies
Act 2013, 23rd Edition written by Dr. G.K. Kapoor and Dr. Sanjay Dhamija
3) Company Law by Avtar Singh, 18th Edition, 2018.

OBJECTIVE

This research paper aims to fulfil following objectives:

1.) Role and functions of the Independent directors in the company redoing our steps
back to the past and development of such concept.
2.) Discoursing in brief the landmark cases which acknowledge this very particular topic
in detail.
3.) Concentrating specifically on the Kotak panel and elucidating about the guidelines set
by the SEBI and doing a comparative analysis of the topic hence concluding on an
opinion of its own.
1
A Ramaiya, Guide to Companies Act, 18th Edition, Volume 3, pg. 2833.
THE JOURNEY OF THE INDEPENDENT DIRECTORS AND THEIR
EMERGENCE UNDER COMPANY LAW

When we talk about the concept of Independent directors its meaning is not well defined
anywhere in a very articulate manner there is no common definition for it as there is no
specific way to work in every region it keeps on changing it is not subjected to any kind of
common rule. However there fundamental idea on which they work irrespective of the region
is to direct and control the company and give certain inputs which is required for the Board
of directors so that whomsoever is investing in the company that is investors whose interest is
protected. Earlier in the paramount of the 20th century directors had to work under the
guidance of the CEO such kind of arrangement was inspired by the managerialist model
which is very much accepted in United States.

Later the concept of independent director came late in 1970’s due to major event which was
cessation of the railway company which was known as Penn central, the concept of ID came
or had an uprising under the imprint of the intensive care board, and event like this made
them question the and re-assess the foreigners addition and that the way they were monitored
by the monitoring board which lead to having the concept of Independent directors.

Also in India the theory of Independent director was first ever brought under Companies Act,
1956 under clause 49 which talks very specifically about the corporate governance (but now
with new companies act)2 there is evolutionary change in the responsibilities and liabilities of
the Independent directors. Also with 2015 new regulation and doctrines or organization for
economic corporation and development of the corporate governance it clearly states when
you are appointing the Independent directors they have to be kept at equal footing with board
of directors and not just merely following rules as per stated by the law.3

2
Section 149 of the Companies Act, 2013.

3
Corporate Governance for changing regulatory scenario’s and the role of independent directors under
companies act 2013 (January 11, 2020 at 6:55pm) available at http://blog.ipleaders.inRole of Independent
directors in corporate governance.
RELATIONSHIP BETWEEN INDEPENDENT DIRECTOR AND
CORPORATE GOVERNANCE

Guaranteeing of a concept like corporate governance in doing any commerce and

trade/business there will be enormous outflow and inflow in terms of capital and when the
shareholders have reasonable and clear transaction in a company and that it interests the
investors to invest in the company with guidance of board of directors. Hence it is very
significant for us to have individuality of the board that is their independence hence
complying with all the aims and objectives and making administration accountable to the
firm.4

By taking example of one of the biggest company Infosys as to how the existence of the
Independent directors and their absolution of duties in individuality will give a clear
picture about it, The structure of Infosys goes like this in ten board members there 8
members are independent directors5

1.) Skill and the criterion of the Independent directors can be interrelated with the act of
the company, with company having directors who are expert will fulfill the aims and
objectives of the company better and deal with the challenges faced by the company
well by restoring faith in investors and protecting and raising funds for the
shareholders for having better persistent business progression.6
2.) Having improved wage can be interrelated with the securities of the directors and
further restoring confidence and enthusiasm to regulate the board, also having
position as chairman in several functions and work of the company and giving them
equal importance in every vital work of the company.
3.) Whereas Directors who have assisted as chairman in the company are more likely to
discover and understand the risk management and factor and other issues policies of

4
International journal of Academic Research in business and social sciences, Vol 2, No.4 April 2012, ( January
11, 2020 at 7:10) available at http://www.ssrn.com.

5
Meenu Gupta, Independency of Directors in Corporate governance ( January 11, 2020 at 7:55pm) available at
http://www.icsi.edu/media/portal/86/Independent%20Directors.pdf .

6
Vijay Batth, Dr Bhagirathi Nayak, Dr. Pratim ( 2016) Role of Independent directors in the changing business
scenarios in India ( January 11, 2020 at 8:00 pm) available at http://www.jisrm.in/v4-i2/2%20jisrmpdf.
 environment, welfare scheme and other human rights policy having good and
respectable corporate governance.
4.) Also it is seen that almost in every Meetings of boards the independent director is
always existent safeguarding better company performance with their skilled and
individual belief and considerations.

INDEPENDENT DIRECTORS IN INDIA

The necessity to outline “ Independent directors was raised in Companies Bill, 2011 and
for the main phase it was defined under Companies Act 2013 7 as providing by SEBI. 8

Who can be an Independent director?

Section 149(6) clearly states as to who can be entitled to be holding the position of the
Independent director:9

1.) Whichever person who is not managing director and not a nominee director.
2.) A person who has skill, knowledge and is an expert as per the opinion and view of the
board of directors.
3.) A person who is not a promoter to the company and have no subsidiary company
holding.
4.) A person who has no monetary relation in company.
5.) Even if the relative of any person holds the monetary or pecuniary relation with the
company and its associates.
6.) Whichever person or his relative is not holding any current position of KMP or was
holding and nor the employee of the company.
7.) Whichever person or relative who has voting power in the company more than 2%.

Section 149(4)10 talks about the strength of the independent directors where
companies which are listed to appoint one-third of independent directors, while procedure
for the appointment of the independent director is stated by the section 150(1) which says
that appointment of the independent director is done from out of the data bank which is
regulated by the link an association as per notification of the central government however
7
Section 2(47) of the Companies Act, 2013.
8
A Ramaiya, Guide to Companies Act, 18th Edition, Volume 3, pg. 2833.

9
As per the rule 5 of the companies (appointment and qualification of directors) 2014 an Independent director
should have apt skill, knowledge and prone to risk factor and other several issues faced by the company.
10
Section 149(4) of the companies act 2013.
 it is not vital or need of an hour to appoint them out of the data bank 11. Payment of sitting
fee is regulated by the section 149(9) , 12The independent director can hold office up to
five successive years. The act statuses that independent directors have to meet once a year
and that it should be done only with themselves and not in presence of other officers and
to create translucent scenario in the company where there is concept of accountability 13
and have flow of ideas and deliberations in the company and also simultaneously the
board of directors assess the independent directors to restore the balance through concept
of the checks and balance cycle.14

Further the act states and briefs us about the Liability on the independent directors where
they are liable for any act of omission or commission in company which has happened in
the company within his awareness( understanding) a) Through Board Process b) under
his influence /consent c) if he acted negligently and inattentively. 15 In the case there is
fraud of a serious nature and any complaint has been filed before National company law
tribunal or chief metropolitan magistrate by any agency of prosecution to any offence
committed, Under section 149 (12) 16there is protection given to the independent directors
which is deceptive , if the person is accused he has to undergo the trial to prove his
innocence and that he has no knowledge about such act and that accused person are not
authorised to be overheard in the while of issuance of the command ( summons) by the
Metropolitan Magistrate.17 In case of Alpic Finance Ltd v. P Sadasivani18 it has been
stated that in following cases accused won’t be convicted when there is no clear
essential ingredient established or no nexus build on the face of record, and that
accusations are ridiculous and abstruse as such no sufficient ground to prove such
allegations , when magistrate applies discretion which is arbitrary in nature or there is any
defect which is legal in nature. In Criminal Trial there is imprisonment for 5 to 10 years if
convicted.
11
Section 150(1) of the companies act 2013.
12
Appointment of Independent directors ,( January 11, 2020 8:55pm) , available at www.lexology.com

13
Schedule IV code VIII of the Act
14
Section 135 of the Companies Act, 2013
15
Pradeep K. Mittal, Article on Independent Directors ( January 11, 2020 at 9:00 pm ) available at
www.scconline.blog

16
Section 149(120 of the Companies Act, 2013
17
Pradeep K. Mittal, Article on Independent Directors ( January 11, 2020 at 9:00 pm ) available at
www.scconline.blog

18
Alpic Finacne Ltd v. P Sadasivani, AIR (2001) 12 SCC 106.
 In one of the landmark case State of Haryana v. Ch. BhajanLal 19 Court had laid down
the principle that in the initial stage criminal prosecution could be quashed but only in
extreme or rare case.

LANDMARK CASES WHICH CHANGED THE COURSE OF THE

INDEPENDENT DIRECTOR

Union of India v. Satyam Computer Services Ltd.20

It was one of the biggest fraud of the corporate governance ever where auditing
performance was done under fraudulent nature and in involvement with auditors and
chartered where there was clear misrepresentation of the accounts, stock, exchanges and
other things which effected the stakeholders and the investors, It was said to be a
complete deception misrepresentation to the market and deceitful about the monetary
wellbeing of the company and especially in this case the fault was completely of the
promoters and that independent directors were kept in the black when they approved the
attainment of the Maytas Infra and it’s properties without even taking deliberations of the
stakeholders and there was carelessness and non-application of mind through this case
the grey shade of the governance was revealed in the India about it where lot of
appointment of independent director was done simply by taking close friends or relatives
who on the paper were holding position but in practical and reality weren’t really doing
anything and this gave impetus to question that if independent directors role and their
individuality was actually established in the company or not or it was just a mere theory
on the paper.21

Tata Sons v. Cyrus Mistry22

19
State of Haryana v. Ch. Bhajan Lal , AIR( 1992 )8 SCC 0115.
20
(Union of India v. Satyam Computer Services Ltd, AIR (2008) 4 SCC 190
21
Satyam scam: All you need to know about India’s biggest accounting fraud-buisness-hindustan times
( January 11 2020 10:53 pm) available at http://www.hindustantimes.com/business/satyam-scam-all-you-
need-to-know-about-india-s-biggest-accounting-fraud/story-YTfHTZy9k6NvsW8PxIEEYL.HTML

22
 This case analyses the locus and role of the Independent directors in big corporation
where promoters are the majority stakeholders and brings into doubt the very
individuality which is independence of the independent directors and giving us a
chronicle as to how chairman Cyrus Mistry removal and later removing the independent
director who assisted Mistry, where the independent directors under continuous risk
however with recent changes in law it can be guaranteed that they won’t be accountable
until individually neglectful to their liabilities.23

KOTAK PANEL ON CORPORATE GOVERNANCE

As per the sanctions of the Kotak committee under chairmanship of the Uday Kotak gave
some salient amendments in regard to corporate governance in SEBI regulations which
was accepted in October 201724 hence some of the accepted recommendations were The
eligibility criteria for independent directors to be expanded and that there should be
complete exposé of expertise and knowledge of the directors and to have decrease in
maximum number of director's post from 10 to 7 by 2020 and there has to be full expose
as in disclosure of the funds , Improving roles of committee of audit , risk management
committee and remuneration committee and disclosure of funds clearly, Improved
responsibilities with orientation to firms and compulsory exposé of amalgamated three-
monthly outcomes commencing 2019-2020 and Improved expose of connected revelry
dealings and linked revelries to be approved to poll counter to such transactions.25

COMPARATIVE ANAYLSIS WITH UNITED STATES

23
How Independent directors are independent ( January 12,2020 4:55pm) available at
http://bloncampus.thehindubusinessline.com/case-studies/case-files/how-independent-are-independent-
directors/article23254089.ece

24
SEBI Partially accepts kotak committee’s recommendation on corporate governance-corporate/commercial
law-India ( January 12,2020 at 6:00pm) available at
http://www.modaq.com/india/x/705630/Corporate+govrnance/SEBI+Partially+accepts=KOTAK=committees+r
ecommendations+on=corporate+governance

25
Kotak Committee Recommendations on corporate governance get SEBI sanction ( January 12,2020 at
6:46pm) available at http://www.moneycontrol.com/news/business/economy/kotak-committee-
recommendations-on-corporate-governance-get-sebi-sanction-2540971.html
 The past of Independent directors can be outlined from 1950 towards 2002 which talked
about the role of independent directors in corporate governance. U.S. is one of those
countries which brought thus concept first ever in their companies , the position of
Independent directors are esteemed as they believe it acts a catalyst for good governance
in their company. They are tremendously active and take part in consistent discussions
with the stockholder for generating consummation with the verdict of the board. And that
straight communiqué with the stockholders helps in construction extensive long-lasting
stakeholder kindred for guaranteeing that shareholders know movements being occupied
by board deprived of unwarranted delay and evaluate the superiority of independence
directors by them. 26

And that it is more advanced and purposes better compared to UK and India and their
ways should be taken into considerations and implemented as well.

CONCLUSION

As a consequence it could be supposed that Company law just hasn’t simply absorbed the
concept in theory and in practical of independent directors in its daily corporate
governance nevertheless has also very precisely and explicitly consigned responsibilities
and work silhouette to all of them. It’s not an amplification to round about that current
Companies Act is much reformist in obliging and interpreting more than a few
commendations of posts Satyam committees. The way current act directives companies to
function, it unequivocally identifies that the part of independent director is much more
advanced and further than simply determining management-shareholders organization
issues.

Therefore A position like Independent director is considered to be very significant for the
working of corporate governance smooth and well and to restore the faith of the investors
in the company while protect their rights. And that the appointment procedure shouldn’t
be purely a conventionalism but also more than that and instigated in a system which is of
checks and balances in the company which connects the very two organs of the company
i.e. investors and the board of directors.

26
Kamal Kishore, A comparative study of independent directors in India and USA ( January 12, 2020 7:45 pm)
available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=3275905