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The Role of Independent Directors in Controlled Firms in India: Preliminary Interview Evidence

National Law School of India Review, Vol. 22, p. 35, 2010

U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-025

33 Pages Posted: 12 Oct 2010  

Vikramaditya S. Khanna

University of Michigan Law School

Shaun J. Mathew

Vinson & Elkins LLP

Date Written: October 11, 2010

Abstract

In 2009, India witnessed the unprecedented exodus of over 500 independent directors from its corporate boards. These mass resignations, triggered in large part by events at Satyam Computer Services and Nagarjuna Finance, focused the spotlight on the role and responsibilities of India’s independent directors, particularly those who sit on boards of controlled or promoter-dominated companies. But what is the appropriate role of an independent director in a controlled Indian company?

Indian law and regulations do not provide clear guidance on how the somewhat conflicting roles of India’s independent directors (e.g., “watchdog” for public shareholders vs. strategic advisor to the controlling shareholder) are to be addressed, nor do they provide much precision on director duties or liability. In light of this uncertainty, we decided to examine the role of independent directors in Indian companies firsthand. Through interviews with independent directors, at both controlled and dispersely held firms in India, Indian promoters, and some of India’s leading corporate lawyers and board advisors, our project explores firsthand what the role of independent directors in India is today and what these groups think it should be going forward.

Although our findings are preliminary (and form part of a larger project ), they already suggest that directors view their primary role as being strategic advisors and that imposing a serious monitoring duty on them would be almost unequivocally opposed and perceived as impractical, detrimental to board functioning, and, perhaps most importantly, contrary to the realities of modern board service. Our findings also highlight the very strong and universal desire of independent directors to have relatively clear guidance on their duties together with some constraints on liability (especially the power to arrest and criminal liability). We hope these findings - supplemented by the more detailed and rigorous findings we expect will accompany our larger project - will help directors, regulators, promoters and investors in better understanding the institution of independent directors in the context of controlled firms and in crafting regulations, board governance policies and norms that better serve the interests of both promoters and public shareholders in controlled Indian firms.

Keywords: Indian Independent Directors, Controlled Companies

JEL Classification: G30

Suggested Citation

Khanna, Vikramaditya S. and Mathew, Shaun J., The Role of Independent Directors in Controlled Firms in India: Preliminary Interview Evidence (October 11, 2010). National Law School of India Review, Vol. 22, p. 35, 2010; U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-025. Available at SSRN: https://ssrn.com/abstract=1690581

Vikramaditya S. Khanna (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-615-6959 (Phone)

Shaun J. Mathew

Vinson & Elkins LLP ( email )

2801 Via Fortuna, Suite 100
Austin, TX 78746
United States

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