C- 62 B, SUPERMART- 1, DLF PHASE- IV,

GURGAON- 122009, HARYANA, INDIA

TEL NO: +91 -124 - 4042521 FAX: +91- 124 - 4042522
E mail : mail@nsouthlaw.com
Independent Directors: Role, Risk and
Ruination
Ranjeev C Dubey
Managing Partner
ADVOCATES
Independent Director: Directors In Comp Act 56.

Individual directors have no general powers. Sec 292(1): BOD shall
exercise powers on behalf of the company and only by Board
resolution at meeting limited to powers in MOA/AOA.

BOD role includes duties to act: honestly and in good faith, not
misuse position or information received, for proper and legitimate
purpose, with reasonable skill and care, act in best interests of
company (and to shareholders colly), avoid conflicts of interest +
disclose all material personal interests to the company.

BODs third party duties - not to permit company to trade when
insolvent, delegate powers responsibly, notified Stock exchanges
and government of all relevant info, maintain company registers,
pay dividends only out of profits, etc.
Learning: Role lay in BOD, not Individuals, permitting
disclaiming.
Independent Directors: Definition of IDs in Comp Act 56.
Comp Act 56 did not define ID. SEBIs Clause 49 of Listing
Agment: whoapartfrom directors remuneration, do not have
any other material pecuniary relationship.with company, its
promoters, management or subsidiaries, which in the judgement of
the board may affect independence of judgement of the directors.

Listing Agment also sets disqualifications to becoming ID: (a)
Related to promoters, management at BOD/BOD-1 level; company
executive in last 3 years; (b) Partner or executive of internal audit
firm or legal or consultancy firm, during the last three years; (c)
Company Suppliers, service provider or customer NOT extending to
FII or lender nominee; (d) holds below 2% Comp shares, etc., etc.

Main role of ID re Clause 49 is being Chairman of Audit Committee.
Learning: An Undefined director can have no defined role!
Independent Directors: Duties and Risk of IDs in
Comp Act 56.
Comp Act 56 did not distinguish between director categories
regarding liability.

Sec 21 SCRA 56 binds listed company to Listing Agment
contravention of which attracts 10 yrs and 25 Cr.
Sec 21 SCRA: Director liable where offence has been committed
by the connivance or is attributable to any gross negligence of the
officer.

Except as part of Audit Committee, IDs had no special duties
either so presumably liability flows from Sec 21.
Learning: IDs are celebrity endorsements, lifetime
achievement awardees, high end vendors or wall flowers!
Independent Directors: All Directors in Comp Bill
Section 166 now comprehensively defines duties of directors thus:

Act in accordance with AOA, in good faith to promote objects of
Company for benefit of all members, company, employees,
shareholder, community and protection of environment !!

Exercise duties with due care, skill, diligence + independent
judgment.

Abstain from conflicts of Interest.

Gain no undue advantage for self or relatives or associates. To
breach is to pay penalty = gain.

Learning: Naturally, this also extends to IDs.
Independent Directors: Definition of IDs in the Comp Bill
Sec 149(6): now (highly simplified and inaccurate!) defines ID as:
Person of integrity with expertise and experience who is not
promoter of company, related to promoter or director or their mom
or daughter;

No pecuniary relationship with, Comp, mom or daughter, promoters
or director in last 2 yrs NOR relative has such relationship or
employed by any of them for last 3 years. Shareholding of 2% or
more.

Not partner in auditor, Co Secy, Cost Accountant for last 3 yrs of
Comp, mom, daughter or associate; or legal/consultant with
transaction = 10% of gross turnover of Comp.
Lesson: Comprehensive Criterion has been created.
Independent Director: Role of IDs in the Companies Bill
Sec 149(8) and Schedule IV create new role:
Corporate Governance: IDs are now broadly seen as GRC drivers.
Minorities: safeguard interest of...minority shareholders.
Resolve conflicts of interest with Promoters.
Board Role: Independent voice, scrutinise the performance of
management in meeting agreed goals andmonitor the
reporting of performance. Determine remuneration levels of
executive directors and senior management.
Policing Co-Directors: In separate meetings w/o non-IDs or
management, review performance of non-ID and Board,
Chairperson and assess the quality, quantity and timeliness of
flow of information to Board.
Learning: Stake-less external director now moral force
opposing promoter.

Independent Directors: Liability
Sec 149(12): Independent Director shall beliable only in
respect of acts of omission or commission by a company
which had occurred with his knowledge, attributable through
board processes, and with his consent or connivance or
where he had not acted diligently.

Sec 166(7): Director who does not perform his duties
pursuant Section 166 risks Rs. 1 to 5 Lakh penalty.

Sec 23M of SCRA default penalty for all contravention and
offenses is 10 yrs and 25 Cr.

Axiom: Enlarged role is always = enlarged liability.
Independent Directors: Illustrative Fall Guy Clauses
Taking examples from Schedule IV:

I. Guidelines of professional conduct:
(1) uphold ethical standards of integrity and probity;
(9) assist the company in implementing the best corporate
governance practices.
II. Role and functions:
(4) satisfy themselves on the integrity of financial information.
Whither Satyam?
(5) safe guard the interests of all stakeholders, particularly the
minority shareholders;
(7) determine appropriate levels of remuneration of executive
directors, key managerial personnel and senior management.
Learning: IDs personally charged with securing the
impossible: clean Accounts!

Independent Directors: Structure of Indian society
A multi-tribal society, based on caste, not guild or economic
interest.
Marriage, social security, economic viability and political
power flow from caste.
Scarce resources mean a continual political struggle for
leverage, again based on caste/community. Inter-caste
relationships are hostile. Khap Panchayat Mentality.
No concept of universal morality: concept of Dharma.
Nascent concept of nation with India gone from feudal back
to tribal masquerading as modern democracy.
Lesson: Comp Bill imposing modern norms on pre-feudal
society.
Independent Directors: Structure of Indian Politics
Politics is a war for control of resources. Caste and class coalitions
collaborate to seize power promising booty to participants. Victors
then share booty by:
Establishing nakedly partisan laws benefiting followers,
excluding rest;
Selling state assets for kick-backs, job sales, seat auctions;
Appropriating state assets viz Roshni Act and VadraGate; and
Extorting money from citizens through irrational regulation.

Party structure and election funding not organized along
transparent legit lines.
Corporate sector is nothing if not pragmatic.
Question: How do you act diligently given the structure of
our democracy?
Independent Directors: Conclusion
Anna rang in inflection point heralding end of Robber Barron
period;
Signs are: Raju, Raja, Hassan Ali, Kanimozi, Unitech, Kalmadi,
Chautala;
Comp Bill is initiative to change corporate GRC paradigm;
Asymmetrical impact has and must result for a period; and
Meanwhile, IDs have un-performable role making them fall
guys.

Learning: Those who are thus exposed live in extraordinarily
interesting times!

Thank You!