A recent order by SEBI has revealed a bitter truth that should be taken note of by independent directors and even executives of listed companies. This order has come at a time when hundreds perhaps thousands of directors will have to leave their posts this year. The reason for this is a law that allows limited tenure. Many directors will have to resign in 2024 due to the completion of their tenure. Then there will be a need to fill these posts.

Independent directors do not know their responsibilities

It is surprising to see how a large number of people join the boards of listed companies, especially small and mid-sized companies, without knowing what their responsibilities are. What kind of role do they have to play and how much penalty can be imposed on them or their name can be tarnished if their name appears in any fraud? Due to a large number of directors resigning this year, companies will approach a large number of people for the appointment of independent directors. Some of these may be people who have been independent directors in a company, while some may be those who will become independent directors for the first time.

Directors are also responsible if the company is found guilty

For first-time independent directors, it is important to know what their responsibilities will be in their new role. In this regard, SEBI will also have to understand the ground reality of how highly educated people become independent directors but they are not aware of their role. They don't even know what the consequences will be for them if the company is found guilty of any wrongdoing.

Directors do not pay attention to the corruption taking place in the company

Now let us talk about the SEBI order. In this case, financial or accounting fraud was committed in the company. Fake accounting entries were made. Due to this, the company suffered huge loss. The company went bankrupt. The entire structure of corporate governance failed because no one came forward to stop the wrongdoings or raise a a voice against them. Needless to say, the shareholders' shares were left with no value.

A person from some field becomes a director

First of all, we have to understand the role of independent directors in such cases. When answers were sought from the independent directors, one of them said that he is a physiotherapist and has no knowledge of the rules and regulations in this regard. She became an independent director only because a promoter she knew requested her to do so.

The director should not be close to the promoter

Now you see the irony. Independent directors should not have any kind of relationship with the promoters. But, the ground reality is that promoters often look for people from among their acquaintances who can become independent directors in their company. In this way, the rule is fulfilled but the purpose of being independent is not fulfilled if a person who knows the promoters becomes an independent director.

The director is not aware of the promoters' decisions

The company secretary of that company was also accused of not fulfilling his responsibilities. Even the minutes of the meeting were not recorded. It is often seen that people holding high positions are not involved in the decision-making process. They have to sign the transaction or they will lose their job. Often promoters make decisions and people holding high positions, no matter how qualified they are, have no other option but to accept everything the promoters say.

These steps can be taken to solve the problem

These are just a few issues. There are many issues that never come up. Some steps can be taken to deal with this problem. The person who is going to become an independent director should be aware of what his responsibilities will be. Also, due to good relations with the promoters, they will not be able to perform their responsibilities independently.

Second, SEBI should publish a handbook for independent directors. This should be required reading for independent directors. They may also be asked to take some courses and earn a certificate.

Third, SEBI needs to understand that a weak corporate governance structure imported from the West cannot be effective in India. Law and corporate governance standards should be as per India. The good thing is that SEBI has imposed a huge penalty in this case. However, it is not fair to impose fine on a person who is not aware of the law relating to the matter. Still, this will send a message to others.