What’s happening to Independent Directors (IDs) has been succinctly explained by Keki Mistry, Former VC & Executive Officer of HDFC Limited, in Board Stewardship. Overarching compliance measures are deterring well-qualified IDs from taking up board positions. What is worrisome is the extent of liability on an Independent Director—
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Unreasonable expectations have been placed on IDs by all stakeholders
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IDs have been held responsible for activities of which they have little or no knowledge
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IDs have been prohibited from transferring any of their personal assets
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IDs have been held responsible for downstream subsidiaries that have their own boards
Under the Companies Act, 2013, Section 149(12) provides that IDs shall not be held liable for any acts of omission or commission by the company, except in cases where they fail to act in good faith or breach their statutory duties. The Ministry of Corporate Affairs (MCA) Circular of 2020 (copy enclosed) elaborates on this protection, particularly:
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From any liability for actions taken in good faith. They will not be held liable for company actions unless they are directly involved in breaches such as fraud or mismanagement.
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Clarifies that no action can be taken against IDs for any actions or omissions of the company, provided they have fulfilled their duties in accordance with the statutory requirements.
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In case of doubts with regards to liability of any ID, the Registrar before taking any action is required to seek guidance from the MCA.
In summary, Section 149(12) & MCA Circular of 2020 provide a strong protective framework for IDs, shielding them from undue liability. However, despite these provisions, the practical impact seems minimal, with little evident change in the real-world application.
It would be insightful if the MCA conducted a survey of cases filed against IDs since the 2020 Circular to assess the current situation. Alternatively, it may be time to amend Section 149(12) to better reflect the essence of the MCA Circular and integrate some of the Supreme Court’s decisions on IDs to provide clearer guidance and stronger protection.