Corporate governance is based on the principles of conducting business lawfully with high integrity and transparency. It includes addressing related party conflicts, building efficient risk management systems, respect for independence of the board, compliance of laws in letter and spirit, respect for international laws, building a no tolerance zone for corruption including anti-bribery policies, prevention of sexual harassment at the workplace, appropriate policies for safety and environmental control, having a succession planning in place and most importantly, accountability to stake holders.

Several factors may be responsible, individually or collectively, for the failure in corporate governance including.

In modern times, when trade and commerce are being controlled by corporates, there is a huge expectation that these corporates will adhere to the high standards of corporate governance. Under the corporate veil, it is the management team which runs the show. In most cases, companies are run by the promoter family. The companies which are not run by the family as promoters are far and few. It is critical that governance structures are in place for the companies so that the success or failure of the company is not dependent upon the whims and fancies of any individual family member. Key management persons also need to be subjected to regulatory and proper corporate governance structures.

Corporate governance is a global issue and is not restricted to India. There have been several reported cases of corporate fraud worldwide where the lack of sound corporate governance guidelines has led to financial disaster.

In spite of the global awareness and measures taken from time to time to improve the corporate governance framework, the monster continues to grow, and the surprises keep on coming.

Several large companies and their promoters have cases pending before the NCLT filed under the Insolvency and Bankruptcy Code, and /or are being investigated by several investigative agencies like Serious Fraud Investigation Office (SFIO); Central Bureau of Investigations (CBI); Income Tax Investigation office; Enforcement Directorate; Economic Offences Wing (EOW); Securities and Exchange Board of India (SEBI) which has a bearing on the subject.

The most talked about cases in India in the recent past which show a clear and flagrant disregard for corporate governance guidelines include, the Satyam episode; the ILFS case; the MD and CEO of a leading private bank being investigated by CBI; the Nirav Modi and Mehul Choksi scandal which lead to a massive banking scam and the matter of Vijay Mallya.

Corporate governance is required not only in the private sector but also public sector. It is unfortunate that in a welfare state like India, despite over seven decades of independence, the Government of India is the biggest litigator before judicial and quasi-judicial fora. It is high time that even the government introspects how the governance and accountability standards can be improved.

Today, there is a serious reluctance on the part of eminent and experienced persons to join the board of any company. Unfortunately, there are several cases where investigating agencies implicate the independent directors for any wrong committed by the company or the management of the company. Further, there are several cases where any person aggrieved by the company’s acts implicates the independent directors in the judicial proceedings or criminal proceedings, based on which courts and investigating agencies issue show cause notices to the independent directors. There is also a trend in the banking industry, where without any application of mind and without describing the role of the independent director, in cases where the borrower defaults, the lender implicates the independent directors for fraud and wilful default.

Section 149(12) of the Companies Act provides that an independent director or non-executive director shall be held liable, only in respect of such omission or commission by a company which had occurred with his knowledge, attributable through Board process and with his consent, connivance or where he had not acted diligently. Similar provisions are contained in Section 27(2) of the SEBI Act.

In the matter of V Selvaraj Vs. The Reserve Bank of India, High Court of Madras, it is clearly held that an independent director shall be held responsible only in respect of such acts of commission or omission by a company which occurred with his knowledge, consent or connivance.

In the matter of Sunil Bharti Mittal v. CBI, the Supreme Court held that an individual can be held liable for an offence by the company (i) if there is sufficient evidence of the individual’s active role coupled with criminal intent; or (ii) where the statute itself stipulates the liability of directors and other officials.

Further, the classification of fraud is now guided by ‘Reserve Bank of India (Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions) Directions, 2024 as issued on July 15, 2024 (“RBI Master Directions 2024”) which clarifies that independent directors are not usually in charge of, or responsible to the company for the conduct of business of the company. Therefore, banks should consider this before taking any action against such directors.

Therefore, it is critical that before any show cause notice is issued to any independent director, it is ascertained whether he had any role to play in the allegation so that the judicial or investigation process is not abused, nor any harassment is caused in the process.

Corporate governance is not an attitude, but a philosophy of the company based on the ethics of the promoters or persons running the business. It’s not transactional, but a way of life. It’s like following a daily routine by the company. It’s a very serious matter and cannot be taken lightly.

On one hand, the lack of corporate governance can bring any company to its knees. On the other hand, sound corporate governance can provide wings to a company towards its unprecedented success.

About the author: Rajesh Narain Gupta is the Founder and Chairman of SNG & Partners.