Press Information Bureau

Government of India

Ministry of Corporate Affairs

29-August-2011 15:39 IST

Functioning of Independent Directors

The concept of Independent Director has been proposed in the Companies Bill, 2009. Clause 147 of the Bill, provides for duties of directors which include the duty to act in good faith in best interest of company, to act with due and reasonable care, skill and diligence, to avoid any conflict of interest, to desist from achieving any undue gain or advantage. These duties would also be applicable for independent directors. The liability for penal action (including for frauds) under the Companies Act, 1956 as well as Companies Bill, 2009 lies on the concerned company and its officer who is in default. In many circumstances, the term ‘Officer in default’ includes directors.

The recommendations made by Hon’ble Parliamentary Standing Committee which examined the Companies Bill, 2009 regarding specific tenure for independent directors are proposed to be included in the revised Companies Bill also.

This information was given by the Minister of State in the Ministry of Corporate Affairs Shri R.P.N. Singh today in the Rajya Sabha in reply to a written question whether the provisions of the Companies Bill introduced in August, 2009 in the Parliament, and later on referred to the Department related Standing Committee on Finance would enable the responsibility to be fixed on independent directors, in the backdrop of multicrore accounting fraud as such recent fraud cases have exposed gaping holes in our existing corporate governance norms; and if so, whether the companies would be allowed to have the option to continue a particular independent director for any duration or Government would fix a maximum period for keeping independent directors on the Board of the Company?

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Independent director duties under Companies Bill: liability exposure and tenure proposals reshape board governance oversight. The Companies Bill, 2009 subjects independent directors to the same duties as other directors-good faith, due care, avoidance of conflicts and abstention from undue gains-under Clause 147, and provides that penal liability for offences under the Companies Act and the Bill rests with the company and its officer in default, a category that can include directors.