Why independent directors are rushing for the exit door2 min read . Updated: 19 Dec 2018, 12:42 PM IST
Of the 743 independent directors who vacated their positions on boards of listed companies, 561 exited without adequate reasons before the end of their terms
Mumbai: Independent directors, the ‘protectors’ of minority shareholders’ rights, have been quick to jump ship at the slightest sign of trouble. The recent exit of three independent directors from Yes Bank Ltd—the chairman, and two from JM Financial Asset Reconstruction Company Ltd—is just the tip of the iceberg. It is not an uncommon practise for independent directors to quit before the end of their tenure, but what makes the situation interesting is the stark lack of credible reasons.
According to data collated by Prime Database, a primary market research tracking firm, out of 743 independent directors who quit the boards of Nifty-listed firms in 2018, 561 stepped down without adequate reasons before end of their term. While 297 quit without assigning a reason, 264 cited ‘personal reasons and preoccupation’.
The number of independent directors exiting without adequate reasons has been growing year on year. Out of the 649 independent directors who quit in 2016, 415 did not give adequate reasons. In fact, 325 of them did not give any reason at all to the bourses. In 2017, 476 of the 730 exits were without suitable reasons. Out of them 319 did not assign a reason.
“Independent directors resign when they realise that all is not well with the company and, on continuing to hold on to the position, they are exposing themselves to huge risks," said Gaurav Dani, founding partner, Indus Law.
Experts feel the decisions may have to do with the fine print of Indian laws. The provisions in Companies Act, 2013, and Securities and Exchange Board of India (Sebi) listing norms say that independent directors can be held personally liable for any acts of omission or commission by a company, with his knowledge, or consent, or connivance, or in cases where he had not acted diligently.
Therefore, independent directors typically quit and seldom cite the reason or reasons behind their decisions. However, there are exceptions. For instance, R. Chandrashekhar of Yes Bank and Anil Khandelwal of JM Financial ARC cited lack of governance as reasons to step down.
While Chandrashekar quit due to governance concerns and management of company affairs, Khandelwal cited variance in governance principles. But come April, the proposed changes in Sebi Listing Obligation and Disclosure (LODR) may change all that.
According to the proposal, directors and companies will not only be obliged to declare the detailed reasons for their resignation, but must also confirm there are no other reasons, barring whatever has been disclosed. The disclosure must be filed with exchanges. “From a corporate governance perspective, this is a good change as it brings greater visibility into the affairs of the company if there is wrong doing.
Also, since independent directors are not only required to give detailed reasons for their resignation, but also to confirm that other than the reasons disclosed no other material reasons exists, it puts an obligation on the resigning independent director to disclose all material facts. However, there is no mechanism or checks in place to verify the reasons stated by the independent director," said Dani.