Industry Body Suggests Limiting Liability on Independent Directors

The government should limit and streamline liability on independent directors, said the Confederation of Indian Industry (CII) in a statement.

In a statement, the industry body said that the liability of an independent director under the Companies Act may be limited to the extent of such contraventions and defaults, which are committed by the company with the knowledge or consent of the said independent director.

"It is necessary to expressly exempt independent directors from vicarious criminal liability since they are not involved in the day-to-day running of the company," it said.

CII added that a non-obstante clause may be incorporated in the Act to exclude independent directors from any vicarious criminal liability for offences committed by the company.

The Centre recently concluded the exercise of decriminalising the Companies Act, 2013. CII recently submitted a paper to the Ministry of Corporate Affairs highlighting matters with respect to framework for settlement of offences, liability of independent directors, vicarious liability, impact of Covid-19 pandemic among others.

Noting that the government has enhanced in-house adjudication of penalties in respect of certain offences, it suggested that the mechanism be extended to additional provisions which involve technical lapses.

The industry body also recommended that the government should consider the decriminalisation of other compoundable offences under the Companies Act.

CII further suggested the government that as a general principle, given the onerous responsibilities and liabilities on directors, including independent directors and company secretaries, penalties ought to be limited to fines instead of imprisonment.

In relation to CSR, the penalty that be imposed for non-compliance should not exceed the unspent CSR amount, it said.

Regarding financial statements and books of accounts, a distinction between fraudulent maintenance and mere faulty maintenance be brought out, recommended the industry body.

Further, there is a need to create legal and procedural safeguards relating to personal liability of independent directors, and initiation of prosecution itself should be an exception rather than the rule, to keep risk and rewards of being an independent director proportionate.

"The whole idea of decriminalising civil duties is essential to conserve faith in the institution of independent directors," it added.