Independent directors play a crucial role in enhancing corporate governance and protecting the interests of stakeholders. The Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) have laid down specific provisions regarding the liabilities of independent directors to ensure accountability while safeguarding their independence.
Companies Act, 2013
Under the Companies Act, 2013, independent directors are expected to act with due diligence and in the best interest of the company and its stakeholders. Their liabilities are outlined as follows:
- General Responsibilities and Duties:
- Section 149(8): Independent directors are required to adhere to the Code for Independent Directors specified in Schedule IV of the Companies Act, 2013. This code lays down guidelines for professional conduct, roles, functions, and duties of independent directors.
- Section 166: This section outlines the general duties of directors, including acting in good faith, promoting the objects of the company, and exercising due and reasonable care.
- Liability Provisions:
- Section 149(12): This section specifically addresses the liability of independent directors. It states that independent directors (and non-executive directors not being promoters or key managerial personnel) are held liable only for acts of omission or commission by a company that had occurred with their knowledge, attributable through board processes, and with their consent or connivance, or where they have not acted diligently.
- Section 212: This section pertains to investigation into affairs of the company by Serious Fraud Investigation Office (SFIO). It provides that independent directors shall not be held liable unless there is evidence of their involvement.
SEBI Regulations
SEBI regulations further complement the Companies Act, 2013, by providing additional guidelines and safeguards for independent directors:
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
- Regulation 25(5): It mandates that independent directors should not be held liable for any act of the company unless it has been established that the independent director was involved in the fraudulent or unlawful acts of the company.
- Regulation 25(7): It requires listed entities to facilitate induction of independent directors and provide them adequate training to understand the business model, regulatory framework, and their role in governance.
- SEBI (Prohibition of Insider Trading) Regulations, 2015:
- Independent directors are expected to comply with the code of conduct for prevention of insider trading and are held accountable for violations related to trading based on unpublished price-sensitive information.
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:
- Ensures that independent directors are involved in due diligence processes and are liable to ensure that disclosures made by the company are accurate and not misleading.
The liability of independent directors under the Companies Act, 2013, and SEBI regulations is carefully balanced to ensure they can perform their oversight function without undue fear of litigation. While they are protected from liabilities arising from routine operational failures of the company, they are held accountable for negligence, fraud, and lack of diligence in their duties. This framework aims to promote a culture of responsible governance while attracting skilled professionals to serve as independent directors.
