Need to limit, streamline independent directors' liability: CII to govt

Indian industry has sought streamlining of the liability of independent directors (IDs), provisions of safe-harbour clauses and exclusion from vicarious criminal liability for IDs in the Companies Act.

Increasing liability has led to increasing resignations of IDs and affected the availability of talented IDs for board-level positions, the Confederation of Indian Industry (CII) said in a statement on Sunday.

“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,” the CII said.


In case a firm is found to have committed fraud, section 212(14A) of the Companies Act allows the Centre to file for disgorgement of assets of directors and to hold them personally liable without any limitations on liability.

“Section 212(14A) creates substantial risks for independent directors, whose involvement in day-to-day management (and hence extent of knowledge of any issue/concern/wrongdoing) is usually quite limited,” the statement said.

According to the industry body, the excessive ability to penalise independent directors could deter high-quality professionals from joining boards. This could lead to firms in need of improving corporate governance not receiving the professional help they need. The pandemic has increased the risk associated with the decision-making responsibilities of directors as options like reorganisation, restructuring, right-sizing and asset disposals are becoming common to enable companies to survive, the statement said.

Further, the CII recommended increasing the threshold of a fine for disqualification from being appointed as a managing or wholetime director under schedule 5 of the Companies Act, to Rs 1 lakh from Rs 1,000.