Introduction:
Can you imagine a private entity without corporate governance? NO, which brings out our focus tothe importance of corporate governance.Corporate Governance is the backbone of a healthy and transparent ecosystem in India. Directors play a crucial role in corporate governance and are entrusted with significant powers. However, these powers also come up with some liabilities and responsibilities that need to be fulfilled by the directorand for which the directors can be held liable.
The corporate scandals like Satyam Computers (2009), IL&FS (2018),and Yes Bank have increased the need for good corporate governance inIndia. SEBI also increased the chances of holding the directors accountable for the acts of the firms.
Keywords associated with the Blog:
- Corporate Governance
- Director Liability
- SEBI reforms
- Indian Corporate Law
- Independent directors’ accountability
- Corporate Fraud
- SEBI regulations
Directors Legal Duties and Liabilities:
Liability of a director towards the company:
The directors of a company have some fiduciary duties towardsthe company. They are expected to act as the best towards the company and its stakeholders.
- Breaching Fiduciary Duties:
The Directors of the companyshould act with honestyand in the good faith and interest of the company.
- Acting beyond the legal power (Ultra Vires Acts):
If the directors actbeyond the powersgranted in the company’s memorandum or the powers provided in the Articles of Association, then the directors of the company can be held liable for those acts.
- Negligence:
The directors of companies are expected to perform their duties with due diligence and care for the profitability of the company.
- Malafied Acts:
If found in any type of dishonest or fraudactivity, the directors are liable for loss incurred by the company.
Liabilities to the Third Parties:
The directors of a company also have some liabilities towards third parties such as:
- Issuingthe prospectus:Misrepresentation or hiding anything from the prospectus can lead to the liability of directors.
- Allotting the Shares: Directors of the companies should always stick tolegal compliance while allotting the shares to the parties. Their non-compliance can make the directors liable.
- Fraud Trade: Directors who are involved in fraudulent trading can be held personally liable.
Breaching the Warranty and Statutory Duties:
Directors must always act within the powers vested in them by the memorandum and Articles of Association under the Companies Act.
- Breaching Warranty: Directors face personal liability forentering into transactions beyond their powers thatcauseloss to the third party.
- Statutory Duties:(filing financial statements, maintaining records)The directors have various statutory duties vested by the act for non-compliance with the rules.
Liability for the acts of other director:
Directors may also be held liable for the acts of their co-directors if they were aware of the acts of the co-directors and did not act to prevent them.
Criminal Liability of Directors:
- Cheque Dishonor: Directors can be held criminally liable for issuing cheques that get dishonored.
- Violation of other laws: Directors must ensure that the company complies withall applicable laws.
- Offences under the Income Tax Act:Violation of tax laws can also result in criminal liability of directors.
SEBI’s role in Corporate Governance:
SEBI (Securities Exchange Board of India) was started in 1992 under the SEBI Act,1992.SEBI works in favour of investors and shareholders to protect their rights and ensure transparency, alongside regulating the country’s securities.
- Legal Framework by SEBI:
SEBI regulates the corporate governance through SEBI norms laid by itselves:
The norms include:
- The Board Composition
- Disclosure of the financial and non-financial information
- Audit mechanisms
- Shareholder rights
- Related party transactions
The compliance with the Listing obligation and disclosure requirements (LODR)is necessary for all companies in India, which makes it a very important document for corporate governance.
- The Board Composition and Independence:
The Securities Exchange Board of India (SEBI) makesit necessary the presence of the independent directors that are listed on the board of companies for ensuring objectivity in decision-making of the company.
- It also says that at least 1% of the board should be independent if the chairperson of the company is non-executive.
- And if the Chairperson of the company is executive, then half of the board should be independent.
- Oversight Committees:
SEBI has also made it important and necessary for the companies to form an independent board committee to oversee the different functions.
- Audit Committee: The Audit Committee includes mainly independentdirectors, and it monitors the audits, financial reporting, and risk management.
- Nomination and Remuneration Committee: This committee is responsible foridentifying suitable candidates for directors and senior roles, setting criteria for their appointment.
- Stakeholders’ Relationship Committee: This committee looks after the grievances of the shareholders, investors and sorts them out.
- Disclosure and transparency:
The SEBI’s primary contribution is to work for the betterment of the rules and standards that mandate companies to reveal important information:
- Publishing the financial reports every quarter
- Patterned Shareholding
- The results of the voting caused by the general meetings
- Certification of statements of the CEO and CFO
These disclosures ensure that the shareholders of the company are well informed, and the company remains accountable for any mismanagement.
- Shareholder protection:
SEBI plays a very important and crucial role in safeguarding the rights of minority shareholders.
- SEBI ensure E-voting in AMG for the vast participation
- SEBI makes the poster ballot mandatory for some decisions
- It helps to prevent unfair advantages to the promoters by regulating related party transactions.
- Delisting codes more transparent by making takeover codes.
These reforms certainly improved the governance standards in India’s corporate sector
Convergence of directors’ liability and SEBI’s reforms:
Directors under SEBI’s spotlight
Enforcement actions increasingly name individual directors, including independent directors and non-executive directors, when listed companies violate governance or disclosure norms. Tribunals have upheld SEBI orders that penaliseindependent directors for failing to exercise diligence on audit committees or to detect obvious red flags in financial and related party dealings.
How are reforms tightening liability?
Recent SEBI mainly focuses on stronger audit oversight, tighter related party rules, richer disclosure of financial and ESG matters, and higher expectations from independent directors.
The reforms specify in detail how the boards and committees should function. On the other hand,if the standards are not met, it becomes very easy for SEBI to say and prove that the director of the company has acted negligentlybecause of which the reforms become necessary, thereby converging the soft governance code with hard personal liability.
Case laws:
Sahara Real Estate Corporation Limited V. SEBI (2012) 10 SCC 603
- The Apex Court justified the SEBI’s order against Sahara for raising the funds without getting the proper disclosure, and ruled the directors will be liable for non-compliance with the laws laid down in the reforms.
- This case also established the precedent for holding the directors liable for the non-compliance with the SEBI norms.
SEBI V. Shriram mutual fund &ors (2009) 5 SCC 361
- Directors were penalized by SEBI not maintaining proper disclosures and due diligence in Mutual Fund operations.
- This case also highlighted that the independent directors, as well as the directors of the company, can be held liable for non-compliance with laws and for not maintaining adequate oversight on financial reporting.
IL&FS Group Crisis Case Study(2018-2019)
- The case of IL&FS led the SEBI to initiate the proceedings against the directors for non-compliance with laws, governance failure, failure to act on auditand the lack of transparency in the company.
- The investigation of SEBI in this matter also highlighted the convergence of SEBI governance standards with the Companies Act making the directors of the company liable.
Conclusion:
The intersection of directors’ liability and SEBI reforms is a transformativeshift in Indian business practices. Directors are no longer mere figures but are held to higher standards of accountability, diligence, and ethical conduct, thanks to SEBI’s evolvingframework. Landmark cases and recent enforcement actions have shown that governance failure can lead to both regulatory penalties and personal liabilities, making it imperative for directors to stay vigilant and proactive.Ultimately, this convergence is not just about compliance;it is about building a culture of responsibility and integrity that strengthens the foundation of Indian corporate governance.
Author Name- Chaitanya Mishra student of Bharati University, Pune, pursuing BBA LLB, currently in 3rd year.
