The government reportedly wants to introduce a qualification exam for independent directors on company boards. The idea is to improve corporate governance amid a slew of frauds over the past few years. Corporate affairs secretary Injeti Srinivas told Bloomberg that the online assessment will cover basics of Indian company law, ethics and capital market rules, among others, and will have to be taken by aspiring directors, although experienced directors will be exempt. The objective: “To demolish the myth that independent directors don’t have any fiduciary duty" and propagate corporate literacy. This is a positive step towards spreading awareness about the duties of independent directors, who are appointed to boards to act as outside voices capable of taking an impartial view of the operations. They should have domain expertise and act as trustees of minority shareholders, who usually have little say in the management of big businesses.
Unfortunately in India, being named an independent director is mostly perceived as a plum appointment that is accompanied by little responsibility. Often such positions are offered to cohorts of promoters. The problem is more acute in the case of state-run companies, where the government is the biggest shareholder and gets bureaucrats appointed, regardless of their professional suitability. The last few years, however, have seen a big change in the regulatory landscape in the wake of a series of frauds and loan defaults that rocked the corporate world. Oversight of independent directors has intensified, especially after the Securities and Exchange Board of India (Sebi) last year implemented recommendations of the Uday Kotak committee on corporate governance. Granted, independent directors can’t be expected to be the sole watchdogs for identifying frauds. But the alarming regularity with which these have unravelled raise questions over whether they could have been prevented had outside nominees and agencies, such as independent directors and auditors, done a better job. To that extent, the government’s move brings more professionalism to boards, and it should be appreciated. Companies need more independent voices that can put forth an impartial and professional view even if it falls foul of the promoters or other powerful management groups.
But there is a fallout that policymakers need to be mindful of. The tightening scrutiny of independent directors has spooked many professionals who are refusing to take up such roles. Many of those already serving are either leaving earlier than scheduled or are rejecting extensions. In fact, corporate India has been witnessing an exodus of independent directors as responsibilities have become more onerous and penalties harsher. Under the provisions of the Companies Act and the listing rules of Sebi, independent directors can be held personally liable for any acts of the company carried out with their knowledge, or where it is determined that such a director did not act diligently. In 2017, for instance, the Supreme Court restrained independent directors of Jaiprakash Associates from transferring their personal assets over a group company’s insolvency matter. All this has created fear of prosecution and, as a result, led to a shortage of capable candidates. The government, therefore, needs to tread cautiously. Nobody can argue against bringing professionalism and accountability, but it should not end up fanning fear. Such an outcome would be antithetical to what it is trying to achieve.