“AN EMPLOYEE CAN NEVER FUNCTION AS AN INDEPENDENT DIRECTOR BECAUSE ECONOMIC DEPENDENCE INEVITABLY DESTROYS INDEPENDENCE.”---WITH REAL CASE STUDIES

 “AN EMPLOYEE CAN NEVER FUNCTION AS AN INDEPENDENT DIRECTOR BECAUSE ECONOMIC DEPENDENCE INEVITABLY DESTROYS INDEPENDENCE.”---WITH REAL CASE STUDIES

REGULATORY OBJECTIVE

The Companies Act, 2013 and SEBI LODR Regulations lay down objective rules for independence and duties as safeguards to protect stakeholders.

WHAT COMPANIES ACT 2013 MEANS BY “INDEPENDENT”

·    Under Section 149(6) of the Companies Act, 2013, an Independent Director must not:

·    Be or have been an employee of the company, its holding, subsidiary or associate within the three financial years before the proposed appointment.

·    Have any pecuniary relationship (other than sitting fees)

·    Have any material business, professional or financial connection with promoters or management

·    Be a person of integrity with relevant expertise and experience.

·    Not be a promoter or related to directors/promoters.

·    Have no material pecuniary relationship with the company, its promoters, or management.

·    Not hold significant shares (threshold defined by regulation).

These thresholds are designed to create structural independence in judgment.

PERMISSIBLE REMUNERATION UNDER THE ACT FOR INDEPENDENT DIRECTORS

The remuneration of an Independent Director (ID) is primarily governed by Section 197 and Section 149(9) of the Companies Act, 2013, along with the SEBI (LODR) Regulations for listed companies.

1. SITTING FEES

Sitting fees are paid for attending meetings of the Board or its Committees (e.g., Audit Committee, NRC).

·    Maximum Limit: Restricted to ₹1 Lakh per meeting.

FLEXIBILITY:

The Board has the discretion to decide the actual amount (e.g., ₹50,000 for a Board meeting and ₹20,000 for a Committee meeting), as long as it doesn't exceed the cap.

PARITY:

The fee for Independent Directors or Women Directors cannot be lower than the fee paid to other directors.

EXCLUSION:

Sitting fees are excluded when calculating the overall ceiling on managerial remuneration (the 1% or 11% limits).

2. COMMISSION (PROFIT-LINKED)

Profit-linked commission is a variable component based on the company's financial performance.

SCENARIO	MAXIMUM COMMISSION LIMIT
If the company has a Managing Director (MD) or Whole-Time Director (WTD)	1% of net profits (for all non-executive directors combined).
If the company has NO MD or WTD	3% of net profits (for all non-executive directors combined).

 

REAL CASE STUDIES ILLUSTRATING INDEPENDENCE ISSUES

CASE  STUDY  —1

SATYAM COMPUTERS SCANDAL (2009)

T.R. Prasad, an ID at Satyam, ultimately resigned amid intense pressure after attempting to stabilize the company in the immediate aftermath, which illustrates the operational and reputational constraints faced by IDs when confronted with major governance crises.

CASE STUDY —2

GENSOL ENGINEERING LTD RESIGNATIONS (2024–25)

In the Gensol (now associated with BluSmart Mobility) governance issues investigated by SEBI revealed share price manipulation and irregular loans.

INDEPENDENT DIRECTOR BEHAVIOUR

Multiple independent directors resigned once regulatory scrutiny intensified, citing concerns about financial sustainability and inability to add shareholder value.

One director cited commitment issues; others exited rather than confront structural governance and promoter control issues.

CASE STUDY- 3

BOARD APPOINTMENT CONTROVERSY (ONGC/POLITICAL APPOINTMENT)

Sambit Patra’s appointment as an independent/non-official director of ONGC was legally challenged on the basis of potential political connection compromising independence.

OUTCOME

The Delhi High Court dismissed the petition, saying mere political association is not sufficient to disqualify an ID.

CASE STUDY -4

THE DR. VIPIN KUMAR CASE (SAHARA GROUP)

Dr. Vipin Kumar was shown as an Independent Director on boards of Sahara Group companies, including Sahara Housing and Sahara India Real Estate.

THE HIDDEN REALITY

SEBI’s investigation revealed that:

·    He was a full-time salaried employee of the Sahara Group

·    He worked as a senior executive

·    He was receiving remuneration, perks and benefits from the promoter-controlled Sahara ecosystem

·    Yet in statutory filings, he was projected as an “Independent Director.”

WHAT SEBI FOUND?

SEBI rejected the legal fiction created by Sahara.

It held:

“A person who is in an employment relationship with the promoter group cannot be considered independent, regardless of the designation given to him.”

SEBI imposed penalties and held that:

·    Dr. Vipin Kumar was not independent in substance

·    Sahara had made false disclosures to investors

·    The so-called independent directors had enabled a ₹24,000 crore illegal fund-raising

·    This was upheld by SAT and later by the Supreme Court while confirming Sahara’s liability.

THE “MASK OF INDEPENDENCE” PROBLEM IN INDIA TODAY

Dr. Vipin Kumar was not an aberration. He was a template.

TECHNIQUE	HOW INDEPENDENCE IS FAKED
Ex-employee	Promoter’s CFO becomes “independent” after resignation
Consultant	Paid via professional contract
Group payroll	Salary paid by a subsidiary
Retainer	Monthly retainership fee
Family firm	Fees routed through relatives’ firms

CASE STUDY -5

 YES BANK — “INDEPENDENT” DIRECTORS WHO APPROVED A ONE-MAN CREDIT EMPIRE

YES Bank collapsed because CEO Rana Kapoor ran a related-party lending machine through shell companies linked to his family.

Large loans were sanctioned to:

·    DHFL

·    Essel Group

·    Reliance ADAG

·    Cox & Kings

·    Indiabulls

All of these later defaulted.

WHERE WERE THE INDEPENDENT DIRECTORS?

YES Bank had 9 Independent Directors.

They:

·    Approved massive loan concentrations

·    Approved repeated restructuring of bad loans

·    Ignored RBI warnings

SEBI’S FINDING (2023)

SEBI held that the Independent Directors:

“Failed to exercise due skill, care and diligence and acted in a manner that facilitated concealment of the true financial position of the bank.”

Several Independent directors were banned and fined.

CASE STUDY -6

 IL&FS — INDIA’S BIGGEST BOARD-LEVEL GOVERNANCE FRAUD

IL&FS had 6 Independent Directors, including:

Former Cabinet Secretary

Former SEBI Chairman

Former SBI Chairman

Yet IL&FS hid ₹91,000 crore of debt through:

·    300+ subsidiaries

·    Evergreen loans

·    Fake asset values

SFIO AND NCLAT FINDINGS

The Government’s investigation concluded:

“The Independent Directors completely abdicated their fiduciary responsibilities and functioned as a rubber stamp for management.”

HOW “INDEPENDENCE” WAS NEUTRALIZED

These directors:

·    Sat on 10–20 IL&FS group boards

·    Earned large sitting fees

·    Were dependent on management for information

·    They had no operational control, only ceremonial authority.

·    This is exactly the Sahara–Vipin Kumar pattern:

CASE STUDY -7

-DHFL — THE BOARD THAT APPROVED ₹34,000 CRORE OF FAKE LOANS

DHFL’s promoters (Wadhawans) created:

·    Shell borrowers

·    Fake project loans

·    Circular money flows

The board approved all of it.

DHFL had:

6 Independent Directors

Big names: ex-bankers, lawyers, regulators

SFIO AND CBI FINDINGS

The board:

·    Approved loans to non-existent entities

·    Approved related-party transactions

·    Approved misleading financial statements

·    SEBI and MCA disqualified several Independent Directors.

Why this is a Dr Vipin Kumar situation?

These directors:

·    Received fees from DHFL

·    Sat on multiple Wadhawan-controlled entities

·    Depended on promoter goodwill for re-appointment

 

·    They were not employees, but they were economically captured.

Law treats that as functional employment.

CASE STUDY 8

ANIL AMBANI GROUP — “INDEPENDENT” DIRECTORS WHO APPROVED VALUE DESTRUCTION

Reliance ADAG companies collapsed after:

·    Money was diverted to promoter-controlled entities

·    Debt was rolled over using fake profits

·    Listed companies were stripped of assets

SEBI’S 2024 ORDER

SEBI held that:

“The Independent Directors failed to protect the interests of public shareholders and permitted diversion of funds.”

Several ID’s were banned and fined.

HOW INDEPENDENCE WAS FAKED

They:

·    Sat across multiple Anil Ambani group boards

·    Earned large retainers fees

·    Approved every related-party transaction

This is the corporate equivalent of being on the promoter’s payroll.

KEY TAKEAWAYS

Mask of independence is now legally pierceable — exactly as it was torn off in the Dr. Vipin Kumar – Sahara case.

·    Legally, independent directors must be free from material relationships that affect judgment.

·    Indian case experiences (e.g., Satyam, ONGC appointment challenges) reveal that formal independence criteria do not always ensure effective or perceived independence.

·    Regulatory and judicial frameworks continue to evolve to strengthen both the structure and the function of independent directorship in corporate governance.

 

R V SECKAR , FCS, LLB 79047 19295