CII Bats For Putting In Place Safeguards For Independent Directors

Following the decriminalisation of the Company Law, industry representatives have pitched for clear legal and procedural safeguards for personal liability of independent directors to keep the risks and rewards of such posts proportionate.

Batting for clear safe harbours for independent directors, the Confederation of Indian Industry (CII) said, “Initiation of prosecution itself should be an exception rather than the rule... Proceedings against independent directors may be initiated only once there is prima facie evidence of their possible involvement in the matter, rather than as a matter of course.”

“While wrongdoers must be prosecuted, there need to be procedural guidelines and safeguards across laws to restrict and minimize proceedings against individuals who are not actually and demonstrably in charge of the management,” CII said.

The industry body said that the increasing liability of independent directors was a worrying trend, which has led to increasing resignations of independent directors and paucity of availability of talented independent directors for board-level positions.

CII’s suggestions to the government come in the context of the certain provisions under the Companies Act which penalise not only the company concerned for a non-compliance, but also “officers in default” or specified officer.

CII has suggested that “a non-obstante clause may be incorporated in the Act to exclude independent directors from any vicarious criminal liability for offences committed by the company.”

CII said that the whole idea of decriminalising civil duties is essential to conserve faith in the institution of independent directors and that providing them some protection would go a long way towards addressing concerns of talented individuals wishing to join company boards as independent directors. “It is necessary to expressly exempt independent directors from vicarious criminal liability since they are not involved in the day-to-day running of the company.”

Against the backdrop of Covid-19, CII has said that bona fide decisions taken during such exceptional times even if they do not turn out as anticipated may not be unduly challenged with the benefit of hindsight. For instance, due to the uncertain external environment and the focus on survival, directors may find it challenging to draw the right balance between company’s interest as against interest of other stakeholders.

“Options like reorganization, restructuring, rightsizing and asset disposals are becoming common to enable companies to survive and grow stronger.”

With respect to other provisions which have been decriminalised under the Companies Act such as corporate social responsibility (CSR) CII has recommended that the penalty imposed for non-compliance should not exceed the unspent CSR amount.

It has also said that a distinction should be drawn between fraudulent and mere faulty maintenance of financial statements and books of accounts, through amendments.

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