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Importance of Corporate Governance and Independent Directors in India

Corporate governance is the cornerstone of a well-functioning business ecosystem that promotes transparency, accountability, and ethical conduct within companies. In India, with the proliferation of large corporations and the evolving economic landscape, ensuring robust corporate governance practices has become imperative. The governance ensures that a company is directed and controlled in a way that balances the interests of its various stakeholders. One of the pivotal elements of corporate governance is the appointment of independent directors who play a crucial role in ensuring transparency, accountability, and ethical conduct in Indian companies. This article explores the significance of Independent Directors in Indian companies.

The Organizational Framework for Corporate Governance in India

The overall organizational framework for corporate governance initiatives in India, consists of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).The MCA is responsible for regulating corporate affairs in India, while SEBI is responsible for regulating the securities market. The Companies Act, 2013, mandates that certain classes of companies must have at least one-third of their Board as Independent Directors[1]. The SEBI has also issued guidelines on the appointment and role of independent directors[2].

The Concept of Independent Directors Independent directors are non-executive directors who do not have a direct relationship with the company[3]. They are appointed to the board of directors to provide an objective and unbiased perspective on the company's affairs.

The Desirable Corporate Governance Code by CII (1998) introduced, for the first time, the concept of independent directors for listed companies and compensation paid to them[4]. The Kumar MangalamBirla Committee (2000) then suggested, that for a company with an executive Chairman, at least half of the board should be Independent Directors, else, at least one-third of the board should be Independent Directors. The updated Clause 49[5], based on the report by the Narayana Murthy Committee, further elaborates the definition of Independent Directors. However, it was the Companies Act, 2013, that brought a significant change in the corporate governance landscape, by mandating the inclusion of independent directors on the Boards of listed companies and certain other specified entities[6]. We believe this move was aimed at mitigating potential conflicts of interest and enhancing corporate accountability.

The Role of Independent Directors Independent directors act as the custodians of good corporate governance practices, serving as a check on the management's decision-making and ensuring that the company operates in a transparent and ethical manner. We believe some of the key roles of independent directors in Indian companies are:

  1. Providing Independent Oversight

  2. Bringing in Expertise

  3. Protecting Minority Shareholders

  4. Ensuring Ethical Conduct

The Importance of Corporate Governance in India Fast-growing countries like India, have attracted large shareholding by international investors and infused large Indian financialinstitutions with global ambitions. This has resulted in significant progress in the standards of corporate governance in the investee companies. In the current time, the investors lay to the Environmental Social Governance (ESG) guides or reporting standards[7]. Investors in current times are more risk averse and take into consideration the Governance standards within the ESG gambit more seriously. There have been reports which have indicated that companies with good


governance systems have generated high risk-adjusted returns for their shareholders.[8] The Role of Independent Directors in Mitigating CorporateFraud and Misconduct The growing focus on ethics and corporate governance within organizations has increased the importance of the role of an independent director in being an effective deterrent to fraud, mismanagement, and lapses in corporate governance. Against this background, Deloitte Touche Tohmatsu India LLP (DTTILP), in association with the Institute of Directors (IOD), has carried out a survey[9] to understand how independent directors perceive corporate fraud, their preparedness in addressing it, and the adoption of best practices to mitigate fraud and misconduct risks.

The survey found that independent directors play a critical role in mitigating corporate fraud and misconduct. They act as an unbiased guide and remain neutral and focus on ethics within the company. The survey also found that independent directors need to be more proactive and assertive in addressing situations of fraud and misconduct, and helping the company become risk averse and adopt best practices to mitigate such situations.

Guidelines on Corporate Governance Principles for Banks The board has ultimate responsibility for the Bank's business strategy and financial soundness, key personnel decisions, internal organization, and governance. The Guidelines on Corporate Governance Principles for Banks issued by the Basel Committee on Banking Supervision provide a framework for the effective corporate governance of banks. The guidelines emphasize the importance of the board's independence, accountability, and transparency in ensuring good corporate governance. With regards to the same, The Reserve Bank of India (RBI) released a paper on Governance in Commercial Banks in India[10], pursuant to which RBI further clarifiedfew operative aspects and decided to issue instructions regarding the Chair and meetings of the board, composition of certain committees of the board, age, tenure and remuneration of directors, and appointment of the whole-time directors (WTDs)[11].

Conclusion Independent directors play a crucial role in ensuring good corporate governance in Indian companies. They provide independent oversight, bring in expertise, protect minority shareholders, and ensure ethical conduct. The role of independent directors is critical in ensuring that companies operate in a transparent and ethical manner, which is essential for the long-term success of the company and the economy, as a whole. The presence of independent directors on the board of a company improves corporate governance, particularly for public companies or companies with a significant public interest.

 

[1] Section 149 Companies Act, 2013 and Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

[2] SEBI - consultation paperReview of Regulatory provisions related to Independent Directors which came intoeffect from January01, 2022.

[3] Section 149(6) of the Companies Act, 2013.

[4] Desirable Corporate Governance A CodeApril 1998 – BOD – Recommendation 2.

[5] SEBI - Report of the Committeeon Corporate Governance-Page 31 of 40-February 8, 2003.

[6] Section 149 Companies Act, 2013 and Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

[7] SEBI BRSR Core – Framework for assurance and ESG disclosures for value chain; also refer to Master Circular No. SEBI/HO/CFD/PoD2/CIR/P/2023/120dated July 11, 2023.

[8] Report of the Committeeon Corporate Governance dated October05, 2017

[9] Corporate fraudand misconduct: Role of independent directors October 2021.

[10] RBI- Discussion Paper on ‘Governance in Commercial Banks in India’ June 11, 2020.

[11] Mumbai New Delhi Chennai Ahmedabad RBI - Corporate Governance in Banks - Appointment of Directors

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