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Independent directors occupy a rather paradoxical position in Indian corporate governance landscape. They are expected to act as neutral arbiters within boards often dominated by promoters or controlling shareholders, safeguard minority and stakeholder interests and ensure compliance with law and ethical standards yet they operate with limited executive authority, constrained access to information and reliance on management for disclosures. Over the last decade, regulatory and judicial developments have significantly expanded expectations from independent directors particularly in respect of corporate misconduct, governance failures and/or regulatory breaches.
Recent enforcement actions, show-cause notices and judicial observations have intensified scrutiny on independent directors raising a fundamental question: has Indian corporate law placed unrealistic expectations on independent directors transforming them from oversight professionals into quasi-regulators without corresponding powers? This dilemma has practical consequences including rising reluctance among qualified professionals to accept board positions and a growing perception of disproportionate liability risk.
Statutory Design
The Companies Act, 2013 ("Act") established the role of independent directors as a core component of board governance. Section 149 of the Act mandates the appointment of independent directors on boards of listed companies prescribing eligibility criteria aimed at ensuring independence from management and promoters. Schedule IV of the Act sets out the Code for Independent Directors articulating their role in scrutinising management performance and safeguarding stakeholder interests.
In parallel, securities regulation has reinforced this framework. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations") assign independent directors a central role in audit committees, nomination and remuneration committees and stakeholder relationship committees. Independent directors are expected to oversee financial reporting, related party transactions, internal controls and risk management systems.
At a conceptual level, this design reflects a clear governance objective to mitigate agency problems in promoter-driven companies by introducing impartial oversight at the board level. Independent directors are not intended to manage day-to-day operations, rather they are expected to supervise, question, and where necessary dissent. However, the statutory design also embeds a structural limitation. Independent directors are non-executive part-time participants in corporate decision-making. They depend almost entirely on information placed before the board by management and auditors. This asymmetry between responsibility and control lies at the heart of the governance dilemma.
Liability Framework
Recognising the risk of excessive liability the Act incorporates safeguards for independent directors. Section 149(12) limits their liability to acts of omission or commission occurring with their knowledge, attributable through board processes and where they have not acted diligently. This provision was intended to reassure independent directors that they would not be held liable for every corporate infraction.
Judicial interpretation has largely reinforced protective intent. In Sunil Bharti Mittal v. CBI1, the Supreme Court held that vicarious liability cannot be fastened on directors merely by virtue of their position in absence of material demonstrating active knowledge. Similarly, in Madhumilan Syntex Ltd. v. Union of India2, the Court underscored that director liability must flow from clear statutory attribution and cannot be presumed based on designation alone. These principles align closely with the legislative intent underlying Section 149(12).
Information Asymmetry and Practical Constraints
One of the most significant practical challenges faced by independent directors is information asymmetry. Independent directors do not have independent access to company records or operational data. They rely on materials provided by management. While they may seek clarifications or additional information, their ability to independently verify facts is inherently limited.
Judicial precedents have acknowledged these functional limits. In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla3, the Supreme Court held that liability of non-executive directors requires specific averments demonstrating responsibility and knowledge recognising that mere presence on the board does not imply operational control. This reasoning was reaffirmed in National Small Industries Corp. Ltd. v. Harmeet Singh Paintal4, where the Court cautioned against indiscriminate prosecution of directors without clear material establishing their role in the alleged misconduct. These decisions underscore that the law recognises the asymmetry between executive authority and non-executive oversight. However, enforcement practice does not always reflect this doctrinal clarity.
There are indications that courts and appellate bodies are increasingly sensitive to the risk of overextension of independent director liability. In Chintalapati Srinivasa Raju v. SEBI5, the Securities Appellate Tribunal emphasised that the liability of independent directors must be assessed in light of their actual role, access to information, and conduct, rather than through retrospective expectations of omniscience. These decisions suggest a gradual judicial recalibration reaffirming that independent directors are oversight professionals not executive managers. However, regulatory practice remains uneven and the absence of clear ex ante guidance continues to generate uncertainty.
Board Committees and Concentration of Responsibility
The governance framework places particular emphasis on board committees chaired or dominated by independent directors like audit committees. These committees are entrusted with oversight of financial reporting, internal controls and auditor independence. Regulatory actions frequently focus on committee proceedings, scrutinising minutes and decisions to assess whether independent directors exercised adequate oversight. While committee structures are designed to enhance governance, they also concentrate responsibility. Independent directors serving on audit committees may face heightened exposure even though their role remains supervisory rather than executive. Courts have cautioned against equating committee membership with automatic liability. In SEBI v. Gaurav Varshney6, the Supreme Court emphasised that regulatory action must be founded on material evidence of involvement and cannot rest solely on positional authority.
Conclusion
Independent directors remain indispensable to India's corporate governance framework. Yet the current trajectory risks overburdening them with expectations that exceed their structural role and practical capacity. Judicial doctrine has consistently recognised that accountability must be calibrated to role, knowledge and access not imposed through hindsight-driven standards. The challenge lies in restoring equilibrium preserving accountability without deterring participation, and enforcing diligence without converting independent directors into de facto guarantors of corporate conduct. Aligning legal expectations with governance reality is essential if independent directors are to remain effective guardians rather than reluctant participants.
Footnotes
1. (2015) 4 SCC 609
2. (1988) 3 SCC 348
3. (2005) 8 SCC 89
4. (2010) 3 SCC 330
5. Appeal No. 99 of 2017, order dated July 5, 2018 (SAT)
6. (2016) 14 SCC 430
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