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November 26, 2020
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What is the issue?

  • A major theme in corporate governance that has emerged worldwide is the institution of independent directors (IDs).
  • This article deals with the roadmap for its institution.

Why was this institution created?

  • The institution of IDs was created to prevent the growing incidence of promoters or management who enrich themselves at the expense of the minority shareholders.
  • Therefore, if IDs were to perform their role, they were to be independent of the promoters.

What is the problem in India?

  • The key problem in India has been who gets appointed as an ID.
  • The regulations specify who cannot be an ID, but they don’t speak about the qualifications or experience of the IDs.
  • The field is wide open to the appointment of anyone - friends, relatives (not covered by definition), neighbours, etc.
  • IDs are appointed and paid by the very person whose excesses they are supposed to guard against.
  • Most companies have misused the requirement of women directors or performance evaluation of directors.
  • But, there is no solution if our expectations from IDs continue to be misplaced.

What is needed?

  • There is a need in the change of mindset so that the focus can shift to the perpetrators of fraud. Not the IDs, who are bystanders.
  • Multi-pronged and harsh measures are the only ways to improve corporate governance.
  • The following are some suggestions that deserve serious consideration.

What are some suggestions?

  • Individuals commit frauds; companies are only vehicles.
  • So, individuals, not companies, should be punished for fraud/non-compliance.
  • Severe punishments for malpractices are the best deterrents and inducers of governance.
  • Comprehensive databases need to build for each company of all promoters, directors and key management persons (KMPs).
  • These databases should be interlinked, along with databasing all their relatives.
  • There is a need to enhance surveillance and software-driven Early Warning Systems in the context of both the companies and individuals.
  • The investigation function needs to be better skilled.
  • Separate securities-market courts should be established, dedicated to faster pronouncements; cases cannot linger on for years.
  • But, it would also be politically controversial to abandon the IDs institution, as it is now a universally adopted concept.

 

Source: Financial Express

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