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Reorienting Governance Focus - Operational Versus External

Impact of poor jurisprudence and corruption on the institution of Independent Directors

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There is a pressing need for the Union government to enact a law to restrain investigating agencies from arresting accused unnecessarily. Indiscriminate arrests are indicative of a colonial mindset and create an impression of a police state.

These are the words of the Supreme Court of India in 2022 – the 75th year of our independence and in an era where we, as a country, seem to revel in the fantasy of being a pre-eminent economic superpower and a world leader in the democratic modern order. However, no evolved democracy in the world is quite the police state that India is. In most developed countries – and in those developing countries such as ours that aspire to lead – investigative agencies, while entrusted with substantive, and at times even draconian powers, are subject to intense scrutiny. Careers are instantly and almost certainly terminated where overzealous or corrupt officers of the law overstep their boundaries and curtail personal liberty or pursue unnecessary prosecution. And this is not restricted to just malicious acts but even inadvertent errors committed. In India, of course, we live in exactly the opposite of such a world – a government official by the very fact of being one is bridled with undue powers using which on a daily and widespread basis they pursue indiscriminate criminal acts to harass and torture the common citizen. The curtailment of personal liberty and pursuit of (in almost all cases) malicious prosecution of citizens is their daily routine. Whether it is the ruthless nature of the police or the incessant harassment in the name of bribery – from traffic signals to government offices, or the leveraging of – deliberately – complicated and poorly worded laws to create untold difficulties in managing the business, the bureaucracy, police & judiciary horrifyingly wear their ability to destroy the common citizen’s life and livelihood as a badge of honour. 

In the business domain, among the many burning issues arising out of this apathetic and cruel system, is the malicious investigation and prosecution of independent directors. Sample the excerpt below from the website of the Ministry of Corporate Affairs: 

Liabilities Of Independent And Non-Executive Directors

 22. A non-executive/independent director should be held liable only in respect of any contravention of any provisions of the Act which had taken place with his knowledge (attributable through Board processes) and where he has not acted diligently, or with his consent or connivance. 

Knowledge Test 

22.1 If the independent director does not initiate any action upon knowledge of any wrong, such director should be held liable. 

22.2 Knowledge should flow from the processes of the Board. Additionally, upon knowledge of any wrong, follow-up action/dissent of such independent directors from the commission of the wrong should be recorded in the minutes of the board meeting.

The wording is unequivocal: 

* Liability occurs only and only if a contravention of the Companies Act, 2013 took place with the Independent Director’s knowledge; and

* Knowledge should be attributable through board processes – i.e. even if the Director were likely to be aware of such contravention through any other means, liability cannot be pinned; and

* Where the Director has either not acted diligently or such contravention has been with their consent or connivance

One would assume that the above must be put to the clear test in every case. However, India’s power-drunk and criminal-minded government mandarins see every instance as an opportunity to bring the full force of their malice on the entire board irrespective of whether the Director is a full-time or Independent representative. While the focus of this piece is on Independent Directors, it is important to note that the primary condition for liability to be pinned on any Director is that there must have been a contravention in the first place – a concept that is hard-wired out of our Sarkari babus colonially conditioned minds. 

In due process, once the fact that contravention took place has been established, the next step would be to test whether actions to the effect of such contravention were actually carried out or intimated to the Independent Director through a board process. And even if this did happen, did the Independent Director agree to or approve such actions? These are all factually verifiable points. The only point open to interpretation is whether the Independent Director acted diligently. Harking back to the point of evolved economies & democracies – an investigative officer in such a framework would know that the burden of proof lies on him to prove the lack of diligence and not vice versa. However, the unfortunate truth remains that in India, any engagement with the government requires the fundamental tenets of jurisprudence to be torn to tatters - and this has even been done legislatively! The judiciary which with such alacrity questions the constitutionality of any action taken to rein in their own wayward shenanigans seems to be restricted to taking suggestive and observatory views to the legislative high-handedness in placing the burden of proving innocence on the accused. Government officials – invariably corrupt – have used this mix of legislative overreach and judicial lethargy to wreak havoc upon our system. And it is the common man – whether personally or in the pursuit of business – who suffers incessantly and perpetually at their hands. 

It is now beyond high time that the government wakes up from its persistent slumber and reins in the bureaucracy. Liability must be placed upon Independent Directors only after following the clearly laid down due process by the Ministry of Corporate Affairs. Independent Directors are the cornerstone of the process of ensuring balanced decision-making in companies. More importantly, as our economy scales up and modern businesses led by young and relatively inexperienced entrepreneurs become widespread, they bring in expertise and knowledge that can help these companies make smarter decisions and avoid risks and mistakes. The concept of Independent Directors is an institutionally important one and it must not be sacrificed at the altar of corrupt and overzealous officers of investigative agencies. 

Postscript: Readers may be interested in studying the fate of 3 critical initiatives that have been stonewalled by the government and the bureaucracy for the past few years now. They impact not just the overall legal process but also are extremely important to bring comfort to entrepreneurs and business professionals. We must make ourselves aware of the apathy regarding reform that successive governments have displayed – not just this one – and this information should agitate us, both individually and collectively. : 

* Supreme Court mandated 24x7 CCTV (audio, video & night vision) coverage of all premises of any agency with the power of arrest – the order is so comprehensive that its implementation can bring down harassment & torture at police stations & investigative agencies to near zero, if not eliminate it completely.

* Criminal Law Reform Committee, after multiple extensions, submitted a report earlier this year, which is now doing the rounds of the political ecosystem and bureaucracy, no doubt for dilution & complication. One of the rumoured suggestions is the right of an accused to have their lawyer present while being questioned by the police or any other investigative agency. 

* On 23rd May 2017 – over 5 years ago – the Law Commission submitted its comprehensive report, including a draft bill, to overhaul bail procedures with an emphasis on the presumption of innocence. Needless to say - it remains confined to the backburner ever since. The government did pontificate that they were working on overhauling the entire criminal law framework – but then it has “only” been 5 and something years.

Tags assigned to this article:
corruption governance independent directors