Legal Issues in Derisking the Board of Directors of a Company in India

Posted On - 22 June, 2024 • By - King Stubb & Kasiva

Derisking the board of directors is crucial for ensuring the company operates within legal frameworks and minimizes potential liabilities. In India, this involves adhering to provisions of the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) regulations, and other relevant laws. Here are detailed steps to derisk the board, considering various legal provisions, potential criminal law exposure, and strategies to decriminalize and mitigate risks.

  •  Regular Compliance Audits

Action: Conduct regular audits to ensure compliance with the Companies Act, 2013, SEBI regulations, and other relevant laws.

Details: This includes filing necessary returns, maintaining statutory registers, and adhering to corporate governance norms. Compliance audits help in identifying and rectifying non-compliance issues before they become significant problems.

  • Board Composition

Action: Ensure the board is properly constituted as per the Companies Act, 2013.

Details: This includes having the requisite number of independent directors, women directors, and complying with other composition norms. Section 149(4) of the Companies Act mandates that every listed public company shall have at least one-third of the total number of directors as independent directors.

  • Appointment Procedures

Action: Follow proper procedures for the appointment of directors.

Details: Ensure the appointment process is transparent and compliant with statutory requirements, including obtaining necessary approvals and filing requisite forms with the Registrar of Companies (ROC).

Effective Risk Management Policies

  • Risk Management Framework

Action: Establish a robust risk management framework.

Details: This framework should identify, assess, and mitigate potential risks, including financial, operational, compliance, and strategic risks. The framework should be regularly reviewed and updated to address new and emerging risks.

  •  Risk Committee

Action: Form a dedicated risk management committee comprising board members and senior executives.

Details: The committee should meet regularly to review risk reports and ensure that appropriate risk mitigation strategies are in place.

  • Risk Assessment Tools

Action: Utilize advanced risk assessment tools and techniques.

Details: This includes conducting scenario analysis, stress testing, and using risk matrices to prioritize and address the most significant risks.

  •   Board Training and Education

 # Director Training Programs

Action: Conduct regular training programs for board members on their roles, responsibilities, and liabilities.

Details: Training ensures that directors are well-informed and capable of fulfilling their duties effectively. This includes updates on changes in laws and regulations.

  •  Awareness Sessions

Action: Organize awareness sessions on emerging risks, industry trends, and best practices in corporate governance.

Details: These sessions can be conducted by experts and industry leaders to provide valuable insights.

  •  Continuing Education

Action: Encourage board members to participate in continuing education programs.

Details: Continuous learning helps directors stay updated with the latest developments in corporate governance and risk management.

Strengthening Internal Controls

  • Internal Audit

Action: Implement a robust internal audit system.

Details: This system should monitor and evaluate the effectiveness of internal controls and processes. Regular internal audits help in identifying weaknesses and ensuring that corrective actions are taken promptly.

  •  Whistleblower Policy

Action: Establish a strong whistleblower policy.

Details: This policy should encourage reporting of unethical practices and ensure protection for whistleblowers. The Companies Act, 2013 under Section 177(9) mandates a vigil mechanism for directors and employees to report concerns.

  • Internal Control Systems

Action: Develop and maintain strong internal control systems.

Details: These systems should safeguard assets, ensure accuracy of financial reporting, and comply with laws and regulations. Internal controls should be regularly reviewed and updated to address evolving risks.

Transparent Disclosure and Reporting

  •  Regular Reporting

Action: Ensure timely and accurate disclosure of financial and operational performance to stakeholders.

Details: This includes compliance with SEBI guidelines on disclosures. Transparency builds trust with stakeholders and helps in maintaining the company’s reputation.

  •  Conflict of Interest Policy

Action: Develop and enforce a conflict of interest policy.

Details: This policy should ensure board members disclose any potential conflicts and abstain from decision-making where conflicts exist.

  • Annual Reports

Action: Ensure that the annual reports are comprehensive.

Details: Annual reports should provide detailed information on the company’s performance, governance practices, and risk management initiatives. This promotes accountability and transparency.

Insurance and Indemnity

  • Directors and Officers (D&O) Insurance

Action: Obtain D&O insurance.

Details: This insurance protects board members from personal losses due to legal actions brought against them in their capacity as directors.

  •  Indemnity Agreements

Action: Enter into indemnity agreements with directors.

Details: These agreements provide legal protection for actions taken in good faith while performing their duties.

Regular Board Evaluations

  • Performance Evaluations

Action: Conduct regular performance evaluations of the board and its committees.

Details: Evaluations should be objective and based on predefined criteria.

  • Feedback Mechanism

Action: Establish a feedback mechanism for board members.

Details: This mechanism allows board members to express concerns and suggest improvements.

  • Peer Reviews

Action: Implement peer review processes.

Details: Peer reviews encourage accountability and provide valuable insights.

  •  Regular Updates

Action: Keep the board informed of the latest legal and regulatory developments.

Details: Regular updates help ensure compliance and proactive risk management.

  • Legal Advisors

Action: Engage legal advisors to provide ongoing counsel.

Details: Legal advisors can help interpret complex regulations and ensure that the company adheres to all legal requirements.

  • Regulatory Compliance Calendar

Action: Maintain a regulatory compliance calendar.

Details: This calendar tracks important deadlines and ensures timely compliance with statutory requirements.

Corporate Governance Best Practices

  • Code of Conduct

Action: Develop and enforce a code of conduct for board members.

Details: The code should outline expected ethical standards and behaviors.

  • Independent Directors

Action: Ensure independent directors are truly independent.

Details: Independent directors should not be influenced by management, providing unbiased oversight.

  • Board Diversity

Action: Promote diversity in the board.

Details: Diverse boards bring varied perspectives and enhance decision-making processes.

Crisis Management Planning

  • Crisis Management Plan

Action: Develop a comprehensive crisis management plan.

Details: The plan should address potential crises and ensure continuity of operations.

  • Regular Drills

Action: Conduct regular drills and simulations.

Details: Drills help in identifying gaps in the crisis management plan and improving preparedness.

  •  Communication Strategy

Action: Develop a robust communication strategy for crisis situations.

Details: Effective communication ensures timely and accurate information is conveyed to stakeholders.

Effects of Criminal Law Exposure

  • Legal Provisions

Action: Understand the legal provisions that could expose directors to criminal liability.

Details: Sections of the Companies Act, 2013, such as Section 447 (fraud), Section 448 (false statements), and Section 449 (false evidence), can lead to criminal charges. Additionally, SEBI regulations and other laws can impose criminal liabilities on directors for violations.

  •   Consequences

Action: Be aware of the potential consequences of criminal liability.

Details: Consequences can include imprisonment, fines, and disqualification from holding directorships. For example, under Section 447 of the Companies Act, fraud can result in imprisonment for a term ranging from six months to ten years, and fines of up to three times the amount involved in the fraud.

Defining Punishment

  • Imprisonment

Action: Understand the specific provisions related to imprisonment.

Details: Various sections of the Companies Act and other laws prescribe imprisonment for directors found guilty of offenses. For instance, under Section 450 of the Companies Act, 2013, if a company or any officer of a company contravenes any provisions of this Act, and no specific punishment is provided elsewhere, the company and every officer shall be punishable with a fine, and where the contravention is a continuing one, with a further fine for every day after the first during which the contravention continues.

Strategies to Decriminalize and Mitigate Risks

  •  Legal Reforms

Action: Advocate for legal reforms to decriminalize minor offenses.

Details: Engage with industry bodies and regulators to push for amendments that reduce criminal penalties for minor non-compliance issues, replacing them with civil penalties.

  •  Compliance Programs

Action: Implement comprehensive compliance programs.

Details: These programs should include regular training, internal audits, and a strong ethical culture. Compliance programs can help prevent violations and demonstrate a commitment to lawful conduct.

  •  Whistleblower Protections

Action: Strengthen whistleblower protections.

Details: Ensure that whistleblowers are protected from retaliation, encouraging the reporting of potential violations before they escalate into criminal issues.

  •  Legal Advice and Representation

Action: Ensure access to legal advice and representation.

Details: Engage experienced legal counsel to advise on compliance issues and represent the company and its directors in legal proceedings. Early legal intervention can prevent minor issues from becoming major legal problems.

  •  Indemnification and Insurance

Action: Strengthen indemnification and insurance policies.

Details: Ensure that directors are indemnified for actions taken in good faith and that the company has robust Directors and Officers (D&O) insurance coverage. These measures provide financial protection for directors and can help cover legal expenses in the event of litigation or regulatory actions.

Role of Independent Directors

  •  Definition and Role

Action: Clearly define the role and responsibilities of independent directors.

Details: Independent directors should provide unbiased oversight and ensure that the board’s decisions are in the best interest of all stakeholders. Section 149(6) of the Companies Act, 2013 defines the criteria for an independent director.

  •  Empowerment and Support

Action: Empower independent directors with the necessary information and support.

Details: Ensure they have access to all relevant information and the ability to seek external advice. This enhances their ability to perform their duties effectively.

Enhancing Board Functioning

  • Meeting Frequency and Attendance

Action: Ensure regular board meetings with mandatory attendance.

Details: Regular meetings promote active participation and timely decision-making. Section 173 of the Companies Act, 2013 mandates that the board of directors of every company must meet at least four times a year, with a maximum gap of 120 days between any two meetings.

  • Detailed Agendas and Minutes

Action: Prepare detailed agendas and minutes for board meetings.

Details: Agendas should cover all significant issues, and minutes should accurately reflect the discussions and decisions taken. This provides a clear record of board activities and helps in accountability.

  •   Board Committees

Action: Establish key board committees like Audit, Nomination, Remuneration, and Risk Management.

Details: Committees allow for focused oversight on critical areas. Section 177 and Section 178 of the Companies Act, 2013 provide guidelines on the constitution and responsibilities of these committees.

Enhancing Ethical Standards

  •  Code of Ethics

Action: Develop a comprehensive code of ethics for the company.

Details: This code should outline acceptable behaviors and practices, guiding directors and employees in their professional conduct.

  •   Ethical Leadership

Action: Promote ethical leadership at the board level.

Details: Board members should lead by example, demonstrating a commitment to ethical practices and encouraging the same throughout the organization.

Managing External Relationships

  •  Stakeholder Engagement

Action: Develop a stakeholder engagement plan.

Details: Engage with shareholders, employees, customers, and regulators to understand their concerns and expectations. This promotes transparency and trust.

  •  Media and Public Relations

Action: Establish a robust media and public relations strategy.

Details: Effective communication with the media and public can help manage the company’s reputation, especially during crises.

Crisis Management

  •  Crisis Response Team

Action: Form a crisis response team including key board members and executives.

Details: The team should be responsible for managing and coordinating responses to crises, ensuring swift and effective action.

  •   Post-Crisis Analysis

Action: Conduct a thorough post-crisis analysis.

Details: Review the crisis management efforts to identify strengths and weaknesses, and update the crisis management plan accordingly.

  •  Advocacy for Legal Changes

Action: Advocate for reforms that decriminalize certain corporate offenses.

Details: Work with industry associations and policymakers to push for changes in laws that impose criminal penalties for minor non-compliance issues, advocating for more civil or administrative penalties.

  •   Compliance Culture

Action: Foster a culture of compliance within the organization.

Details: Promote the importance of legal and regulatory compliance at all levels of the company. Regular training and a clear message from leadership about the importance of compliance can reinforce this culture.

Protecting Against Litigation

  •  Legal Risk Assessment

Action: Conduct regular legal risk assessments.

Details: Identify potential legal risks and take proactive measures to mitigate them. This can include reviewing contracts, policies, and business practices for compliance with current laws.

  •   Litigation Management

Action: Develop a litigation management strategy.

Details: This strategy should outline how the company will handle potential litigation, including steps to minimize legal exposure and manage ongoing legal cases efficiently.

Practical Steps for Directors

  •  Understanding Duties and Liabilities

Action: Ensure directors understand their duties and liabilities under Indian laws.

Details: Directors should be well-versed in their legal obligations under the Companies Act, 2013, SEBI regulations, and other relevant laws. This includes fiduciary duties, duties of care and diligence, and responsibilities towards shareholders and other stakeholders.

  •  Staying Informed

Action: Directors should stay informed about the company’s operations and external environment.

Details: Regular updates from management, industry reports, and legal briefings can help directors stay current with developments that might affect the company.

  •  Active Participation

Action: Encourage active participation in board meetings and discussions.

Details: Directors should actively participate in board meetings, ask pertinent questions, and provide valuable insights based on their expertise and experience.

Enhancing Board-Management Relationships

  •  Clear Role Definitions

Action: Define the roles and responsibilities of the board and management clearly.

Details: A clear distinction between governance and management roles helps avoid conflicts and ensures that both the board and management work effectively towards the company’s goals.

  •  Effective Communication

Action: Foster effective communication between the board and management.

Details: Regular, transparent communication ensures that the board is well-informed about the company’s performance and strategic direction.

Monitoring and Reviewing Risk Management

  •  Continuous Monitoring

Action: Implement continuous monitoring of the risk management process.

Details: Use tools and technologies to track and report on risk management activities, ensuring that risks are identified and addressed promptly.

  •  Regular Reviews

Action: Conduct regular reviews of the risk management framework.

Details: Periodic reviews help ensure that the risk management framework remains effective and aligned with the company’s strategic objectives.

Conclusion

Derisking the board of directors is a multifaceted process that requires adherence to legal requirements, effective risk management policies, regular training, and a strong ethical culture. By implementing these measures, companies can ensure compliance with Indian laws, minimize potential liabilities, and safeguard the interests of the company and its stakeholders.

Furthermore, understanding the effects of criminal law exposure and defining punishment including imprisonment is crucial. Directors must be aware of the specific legal provisions that could lead to criminal charges and the potential consequences, such as imprisonment and fines. Strategies to decriminalize minor offenses and mitigate risks, such as advocating for legal reforms, implementing comprehensive compliance programs, and strengthening whistleblower protections, can significantly reduce the risk of criminal liability.

By fostering a culture of compliance, enhancing board functioning, managing external relationships effectively, and being proactive in risk management and crisis preparedness, companies can create a resilient governance framework. This not only protects the board and the company but also promotes long-term sustainable growth and trust among stakeholders.

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Mangalore | Pune | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com