Tata-Mistry fallout: Independence of independent directors

The Tata-Mistry melee prompts a reassessment of the institution of independent directors and the role they play in ensuring effective corporate governance in India. Though independent directors are often expected to protect the interests of minority shareholders, their foremost duty is to act for the benefit of the company as a whole.

The independent director holds a special place in terms of the governance of a company, its board and its management. He is required to exercise judgment on corporate affairs objectively. This role is especially critical when there is a divergence of opinion between shareholders, the company and its management. The 2013 Companies Act sought to bring about better corporate governance through provisions that facilitated increased transparency, accountability and an independent board of directors.

Section 149 (6) of the Companies Act, 2013 provides for the election of an independent director to the board of directors of a company. It provides that an independent director must be a person of integrity and possess relevant expertise and experience. He/she must not be related or affiliated with the company or any of its affiliates in any way. Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 further supplements this provision by prescribing a number of general qualifications requisite of an independent director.

The JJ Irani Committee, an expert committee constituted by the ministry of corporate affairs to advise the government on company law reform, was of the opinion that since the board of a company was required to balance a number of interests, the presence of a neutral entity on the board would facilitate better corporate governance. An independent director lends a note of objectivity to the board, bringing an unbiased and fresh perspective on corporate affairs. This impartiality goes a long way in protecting the company’s general interests as well as the interests…

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