‘Overzealous interpretation of law poses risk to independent directors’

Penalising them for a company’s action would be counter-productive: Sinha

Overzealous interpretation of the law regarding the duties and responsibilities of independent directors will make such directors risk- averse and the companies will suffer in the process, said former SEBI chairman U.K. Sinha.

‘Problem area’

“This is a problematic area... I think the balance in law is there... Unfortunately, we had some examples in the last three years where there have been overzealous interpretations. And that has led to a problem,” Mr. Sinha said on the sidelines of the CII Corporate Governance Summit.

The former SEBI chief further said that the rules clearly stated what the liabilities of an independent director were and action should be taken only if it was proved that there was an act of omission.

Penalising independent directors for the company’s action about which the director had no knowledge would be counter-productive, he said. This assumes significance as there had been a few instances wherein even warrants had been issued against independent directors for decisions taken by the board at a time when the director was not even on the board of the company.

HDFC chief executive officer Keki Mistry, while speaking at the event, said that independent directors needed some amount of immunity and should not be held accountable for the company’s actions that are beyond the control of such directors.

“Some immunity and protection should be given to independent directors,” Mr. Mistry said.

Further, he spoke about the increasing influence of shareholder activism, which at times, he said, even tried to influence board decisions.

He highlighted a few instances wherein such activists objected to the directorship of long-serving individuals, including founders, on the board of the company.

Whistle-blowers

While stressing that genuine whistle-blowers needed to be rewarded and protected, he said that those who tried to misuse the system should be “penalised”.

Mr. Mistry also highlighted the role of proxy advisory firms, which, according to him, would become more ‘pronounced’ in the coming days making companies more careful in terms of corporate governance.