Board Independence in India: From Form to Function?
In Dan W. Puchniak, Harald Baum and Luke Nottage (eds.), Independent Directors in Asia: A Historical, Contextual and Comparative Approach (Cambridge: Cambridge University Press, 2017)
34 Pages Posted: 23 Mar 2016 Last revised: 23 May 2018
Date Written: March 21, 2016
In this paper we explore the application and evolution of board independence in India, where concentration of shareholdings in public companies is the norm, what effects it has had, and how one might make the best use of the board independence concept in the Indian environment. Following India’s liberalization in the early 1990s, the first foray into board independence came in the form of a voluntary code recommended by the Confederation of Indian Industry, which was later on adopted in a revised form by the Securities and Exchange Board of India (SEBI) as a mandatory requirement. This formal phase was influenced by developments around the world, thereby displaying signs of a legal transplant. However, we argue that the formal independence requirements gave rise to considerable doubts as to the functional impact of independent directors.
We also discuss the most recent set of reforms to corporate law in India which are moving away from the earlier conception of board independence imported into India and towards greater functionality by adapting the concept to the environment in India. A new legislation, the Companies Act, 2013, provides extensive powers and responsibilities and imposes significant liabilities on independent directors that transform their role to one that emphasizes monitoring. Interestingly, this transformation in India is not the result of international developments, such as the global financial crisis, that called into question the role of independent directors, but the result of internal systemic shocks due to local corporate governance scandals. Although these steps are positive, much is still required before board independence becomes more effective in India. We conclude with some suggested reforms that may further push the board independence concept towards greater effectiveness in India.
Keywords: Independent director, corporate governance, India
JEL Classification: G38, K22
Suggested Citation: Suggested Citation