Independent Director – Why Speaking Up Matters – 5 Stories of Penalties to Jail

Independent Director

Being on the board isn’t enough — Independent Directors must challenge, question, and refuse to be a yes-man.

Table of Contents

Who Is An Independent Director?

A Quiet Responsibility

Behind every balance sheet is a story — of a father saving for his daughter’s education, of a retired couple investing their life’s earnings, of a young professional placing faith in a company’s future. These people don’t sit in boardrooms. They don’t understand quarterly reports. But they trust — trust that someone is watching, someone is guarding the gate.

That someone is the Independent Director.

They aren’t in the spotlight. They don’t chase headlines. But when they speak up, a company steers clear of scandal.

But speaking up is never easy. Often, the boardroom is a room full of smiles hiding silence — where most others may be insiders, tied by loyalty, fear, or personal gain. To stand alone and call out what’s wrong — when the majority chooses to look away — takes more than knowledge. It takes moral courage.

Yet, that one voice of truth can stop a fraud before it starts.
That one uncomfortable question can protect millions of rupees and countless lives.
That one refusal to sign blindly can uphold the trust of an entire nation.

This isn’t just about law. It’s about conscience.

🧑‍⚖️ Why Do We Need Independent Directors?

Lets understand with the help of a simple story.

🪶 Story:

Ravi and his cousins started a family business selling organic snacks. As the business grew, they brought in outside investors. But soon, problems began — Ravi’s brother gave contracts to his friend’s company without telling others. Another cousin borrowed company money for personal use. The investors got worried.

That’s when someone said,

“We need someone neutral — someone who’s not family, not emotionally involved — just someone to watch, question, and guide.”

So they brought in Ms. Shah, a seasoned businesswoman with no ties to the family. She wasn’t there to run the business but to make sure it ran right — fairly, transparently, and in everyone’s interest.

💡 Moral:

That’s exactly what Independent Directors do — they act as neutral outsiders on the board to protect investors, ensure ethics, and stop conflicts of interest before they harm the company.

🧠 The Role They Play:

An Independent Director is like the umpire or referee in a business. They:

  • Don’t work for either team (promoters or management),
  • Have no hidden interest in the outcome,
  • Follow the rulebook (law, ethics, good governance),
  • Protect the game — not just the players.

They make sure:

  • Money isn’t being misused,
  • Minority shareholders aren’t ignored,
  • Decisions are fair, ethical, and transparent.

✅ Why It Matters:

Just like a referee protects the spirit of the game, an Independent Director protects the spirit of business — ensuring that no one cheats, everyone plays fair, and the audience (investors, public) trusts the match.

Definition of Independent Director (India – Companies Act, 2013)

According to Section 149(6) of the Companies Act, 2013, an Independent Director is a director other than a managing director or whole-time director or a nominee director, who:

  • Does not have any material or pecuniary relationship with the company, its promoters, directors, or holding/subsidiary/associate companies;
  • Is not a promoter or related to promoters or directors;
  • Has not been an employee or key managerial personnel in the company or related companies in recent years;
  • Is qualified and experienced, and meets other prescribed criteria.

Independent Directors are usually not involved in day-to-day management. They are appointed to ensure objectivity, accountability, and transparency in the board’s functioning.

🌍 Need for Diversity in the Boardroom

A diverse board is not just a checkbox — it’s a strength. Different perspectives bring richer discussions, better decisions, and greater sensitivity to risks, ethics, and stakeholder needs. Whether it’s gender, experience, background, or thought, diversity helps a company see beyond narrow interests and echo chambers. Independent Directors play a crucial role in bringing this diversity — they come from outside the company, often with varied professional and sectoral experience. Unlike promoters or executives, they offer fresh, unbiased viewpoints, ask uncomfortable questions, and represent voices that are often unheard in tightly controlled boards. In doing so, they help ensure that decisions aren’t just legal, but fair, inclusive, and future-ready.

Role of Independent Directors:

  1. Corporate Governance Watchdogs:
    They safeguard the interests of all stakeholders, especially minority shareholders.
  2. Oversight & Risk Management:
    Monitor the performance of executive directors and the management; identify and flag risks.
  3. Board Committees:
    Required to be part of Audit Committee, Nomination & Remuneration Committee, etc., bringing independent judgment.
  4. Conflict Resolution:
    Help resolve conflicts between stakeholders, including promoters and minority shareholders.
  5. Compliance Oversight:
    Ensure that the company adheres to the laws, ethical standards, and corporate governance principles.
  6. Transparency & Accountability:
    Promote transparency in financial reporting, internal controls, and disclosures.
  7. Prevent Oppression and Mismanagement:
    Their presence acts as a check against arbitrary or unjust actions by management or majority shareholders.

Powers of an Independent Director (India – Companies Act, 2013)

While Independent Directors do not hold executive authority or management roles, the law gives them significant powers and responsibilities to safeguard governance and stakeholder interest.

Here are their key powers:

1. Right to Access Information

  • They have full access to books of accounts, records, and information necessary for informed decisions.
  • They can seek independent professional advice at the company’s expense.

2. Power to Attend and Vote in Board Meetings

  • Independent Directors have equal voting power as any other director in Board decisions.
  • Their voice carries special weight in matters like:
    • Related party transactions
    • Managerial appointments
    • Audit and financial oversight

3. Power in Committees

  • They must chair or be part of key committees:
    • Audit Committee: Reviews financials, internal audit, and risk management.
    • Nomination & Remuneration Committee: Selects top executives, decides their pay.
    • Stakeholders Relationship Committee: Addresses grievances and rights of shareholders.

4. Power to Report & Recommend

  • Can raise red flags on unethical practices, mismanagement, or governance issues.
  • Can recommend actions such as internal audits, investigations, or disciplinary steps.

5. Power to Demand Clarifications

  • Can ask tough questions and demand explanations from management or promoters.

6. Protection Against Retaliation

  • They are protected by law from being removed without proper procedure (Section 169) and can act fearlessly in the company’s best interests.

7. Influence, Not Executive Control

  • While they cannot issue binding orders, their power lies in independent judgment, influencing decisions, and ensuring compliance.
  • If ignored, they can record dissent in board minutes — which can be used in regulatory scrutiny.

Real Power = Oversight + Integrity

Their real power lies not in authority but in influence: ensuring checks and balances, preventing fraud, and protecting small shareholders.

Here’s a real-world case study from India where Independent Directors played a key role in protecting the company and its shareholders:

✅ Case Study: Infosys – Independent Directors vs CEO (2017)

📌 Background:

In 2017, India’s tech giant Infosys went through a major governance crisis. The company’s founder Narayana Murthy raised concerns over:

  • Excessive severance pay to ex-CFO
  • Lack of transparency in CEO compensation
  • Acquisition decisions (e.g., Israeli company Panaya)

These concerns triggered an alleged conflict between the board and founders.

🎯 Role of Independent Directors:

Infosys had a strong board with Independent Directors, including Prof. Jeffrey Lehman, Roopa Kudva, and others.

Here’s how they acted:

1. Independent Review of Allegations

The board ordered a detailed independent investigation by legal and forensic firms into Murthy’s allegations — particularly around:

  • Acquisition of Panaya
  • Severance pay to ex-CFO
  • CEO Vishal Sikka’s conduct

📝 Result: No wrongdoing was found, but the board acknowledged “process lapses” and improved disclosure norms.

2. Backing CEO, Yet Ensuring Accountability

  • Independent Directors initially backed CEO Vishal Sikka, citing business growth and innovation.
  • But when shareholder trust eroded and conflict escalated, they persuaded Sikka to step down, to restore investor confidence.

3. Restoring Governance & Founder Trust

  • After Sikka’s exit, the board appointed Nandan Nilekani (co-founder) as Non-Executive Chairman.
  • Independent Directors helped realign the board, pacified public concerns, and stabilized the company.

📊 Impact:

  • Investor confidence returned.
  • Share price stabilized.
  • Governance standards were revised.
  • Infosys restructured board processes and disclosures.

💡 Key Takeaways:

ActionHow It Helped
Independent probeBuilt trust with shareholders
Defending and questioning the CEOBalanced growth with accountability
Transparent communicationReassured markets and employees
Dissent handlingPrevented reputational damage

✅ Lesson:

Independent Directors don’t run the company, but they protect it. In the Infosys case, they acted as a bridge between promoters, management, and shareholders, ensuring no party dominated unfairly.

Let’s do a comparison between Infosys (2017) and the Satyam scandal (2009) to understand the role of Independent Directors — how they worked well in one case and failed in the other.

🆚 Infosys vs Satyam: Role of Independent Directors

AspectInfosys Case (2017)Satyam Case (2009)
🏢 Company TypeStrong corporate governance, tech giantFamily-controlled, tech company
⚠️ IssueDisputes over governance: CEO pay, acquisitions, transparencyMassive financial fraud: ₹7,000+ crore scam (fake profits, fake assets)
🧑‍⚖️ Independent DirectorsActive, informed, questioned CEO and managementPassive, unaware or negligent of fraud
🛠️ Action TakenOrdered independent investigation, stabilized board, protected stakeholder trustFailed to detect fraud; resigned after scandal broke
📉 ResultGovernance restored, investor confidence backStock crashed 90%, company nearly collapsed
🧠 Board CultureTransparent, diverse, open to criticismDominated by promoter (Ramalinga Raju); weak board controls
🛡️ Protection for ShareholdersPrevented long-term damageMassive shareholder wealth destroyed

✅ Infosys: Independent Directors Worked

  • They acted like guardians, questioned even the CEO.
  • Handled founder pressure professionally.
  • Protected small investors through transparency.

❌ Satyam: Independent Directors Failed

  • Did not uncover or question fake bank balances, inflated profits.
  • Approved a dubious deal to buy Maytas (promoter’s firm) — conflict of interest.
  • Entire board resigned only after the fraud was admitted by the promoter.

🧠 Final Insight:

Independent Directors are only effective when they are:

  • Truly independent (no ties to promoters)
  • Active (attending meetings, asking questions)
  • Experienced and ethical
  • Supported by good internal systems (audit, disclosures)

Satyam failed because the directors were rubber stamps. Infosys survived because they were watchdogs.

❌ Case: IL&FS Financial Collapse (2018)

A classic case of board failure and compromised independence of Independent Directors.

🏢 Background:

IL&FS (Infrastructure Leasing & Financial Services) was a major infrastructure financing company. It defaulted on ₹90,000+ crore debt, triggering a systemic financial crisis.

🔍 What Went Wrong with Independent Directors:

  1. Ignored red flags:
    • Repeatedly signed off on high debt levels, inter-company transactions, and non-transparent funding practices.
    • Never raised concerns about over-leveraging or asset-liability mismatch.
  2. Failed oversight:
    • Sat in audit, risk and finance committees — but failed to act or warn investors.
    • Did not flag internal audit findings or questionable accounting.
  3. Too cozy with management:
    • Most Independent Directors had long tenures or affiliations.
    • The board, including IDs, approved questionable transactions without due diligence.
  4. No whistleblowing:
    • Even as employees were aware of mismanagement, no ID came forward until after the defaults became public.

🔥 Aftermath:

  • Government stepped in and replaced the entire board, including all Independent Directors.
  • NCLT (Tribunal) criticized the board’s failure of fiduciary duty.
  • Serious questions were raised: Were they truly independent, or rubber stamps?

📢 Quote from the crisis:

“The so-called Independent Directors failed to ask hard questions and did not fulfill their role as fiduciaries of public interest.”
— NCLT Order, 2018

🧠 Key Lesson:

An Independent Director loses independence when:

  • They are beholden to promoters or management.
  • They fail to question or investigate management decisions.
  • They prioritize relationships over responsibilities.

⚖️ Liability of an Independent Director

An Independent Director is generally not held liable for company wrongdoings unless it can be proven that they were involved through knowledge, consent, or negligence. As per Section 149(12) of the Companies Act, 2013, they are only responsible for acts of the company where they had direct involvement, failed to act despite knowing, or did not exercise due diligence. This means if an Independent Director ignores red flags, rubber-stamps decisions, or fails to question management, they can face legal action, penalties, or even imprisonment—especially in cases involving fraud, mismanagement, or financial irregularities. Simply put, while they’re not liable for everything, they can’t turn a blind eye either.

There are several real-life cases in India where Independent Directors (IDs) have faced penalties, prosecution, or even jail when they failed in their duties or were found complicit in fraud or negligence.

Here are notable examples:

⚖️ 1. Nirav Modi / PNB Scam – Gitanjali Gems Case (2018)

🏢 Company: Gitanjali Gems (Mehul Choksi group)

  • This ₹13,000 crore banking scam involved fraudulent LoUs issued by Punjab National Bank.
  • Several Independent Directors of Gitanjali Gems were booked by SFIO (Serious Fraud Investigation Office).

❗What happened:

  • IDs signed off on false financial statements and related party transactions.
  • They failed to detect or report fraud, even when red flags were visible.

🔨 Outcome:

  • SFIO filed criminal charges against the entire board.
  • IDs were named in FIRs and subjected to investigation under Companies Act and IPC.
  • While no ID was jailed immediately, prosecution is ongoing.

⚖️ 2. Satyam Scam (2009)

🏢 Company: Satyam Computer Services

₹7,000+ crore accounting fraud.

❗What happened:

  • The Independent Directors approved a shady acquisition of Maytas Infra & Maytas Properties (owned by the promoter’s family).
  • Ignored financial inconsistencies and fake bank balances.

🔨 Outcome:

  • Several IDs resigned after the fraud was exposed.
  • Some were named in CBI chargesheets.
  • Dr. (Mrs.) Rama Raju, an Independent Director, was arrested and later granted bail.
  • All faced SEBI and SFIO scrutiny.

⚖️ 3. Bhushan Steel Case (2018)

🏢 Company: Bhushan Steel

Corporate fraud + default on ₹40,000 crore loans.

❗What happened:

  • The SFIO charged Independent Directors for failing to prevent fraudulent accounting and diversion of funds.

🔨 Outcome:

  • IDs were prosecuted under Section 447 (fraud) of Companies Act.
  • They faced penalties and potential imprisonment up to 10 years, if found guilty.

⚖️ 4. National Spot Exchange Ltd (NSEL) Scam (₹5,600 crore)

🏢 Company: National Spot Exchange Ltd (NSEL)

Subsidiary of Financial Technologies India Ltd (FTIL), now known as 63 Moons Technologies.

❗What Happened:

  • NSEL was supposed to offer spot commodity trading, but in reality, it ran an unregulated paired contracts scheme, which functioned like a Ponzi scheme.
  • Around 13,000 investors lost money when NSEL abruptly shut down in 2013, defaulting on payouts worth ₹5,600 crore.
  • The scam involved fake warehouse receipts, non-existent commodities, and false promises of returns.

🔍 Role of Independent Directors:

  • Independent Directors of FTIL (the parent company) were accused of failing to supervise the operations of its subsidiary, NSEL.
  • They did not question or investigate the financial health of NSEL, despite being aware of rising investor complaints.
  • Regulatory bodies observed that the IDs blindly approved decisions, failing to exercise due diligence, especially given the scale of transactions.

🔨 Action Taken:

  • Ministry of Corporate Affairs (MCA) and SEBI initiated action under the Companies Act.
  • MCA moved to declare Independent Directors of FTIL “not fit and proper” to hold board positions in any public company.
  • Enforcement Directorate (ED) and Economic Offences Wing (EOW) called Independent Directors for questioning; some were named in charge sheets.
  • SEBI barred 63 Moons and its directors from accessing capital markets, with Independent Directors included in this restriction.

🧠 Why This Matters:

This case set a precedent that Independent Directors of holding companies can be held liable for wrongdoings in their subsidiaries, especially when they sit on the boards of both entities. It reinforced the principle that ignorance is not a defense — IDs must actively question, verify, and act when something appears wrong.

⚖️ 5. Ricoh India Fraud Case (2016)

🏢 Company: Ricoh India Ltd. (subsidiary of Ricoh Japan)

🧾 Issue: ₹1,123 crore accounting fraud — financial statements were manipulated to show inflated revenues and profits.

❗What Happened:

  • Ricoh India’s top management (MD, CFO, etc.) were involved in massive accounting irregularities, including fake sales and false reporting to impress shareholders.
  • The Independent Directors, who were part of the Audit Committee, failed to detect or prevent these misstatements — despite multiple signs, like internal auditor warnings and delayed filings.
  • They signed off on financial reports that were later found to be false.

🔨 Action Taken:

  • In 2019, SEBI (Securities and Exchange Board of India) imposed penalties and barred the Independent Directors (along with other board members) from:
    • Holding directorships in listed companies for up to 5 years.
    • Accessing securities markets during the period.
  • SEBI held them accountable for failing in their fiduciary duties and not exercising due care as board members.

🧠 Why This Matters:

Even though the IDs were not directly involved in committing the fraud, SEBI ruled that their inaction and silence contributed to it — reinforcing the idea that “negligence is liability” when you’re in a position of trust.

🧠 Key Takeaway:

“Independence is not immunity.”
If Independent Directors fail to perform their duties diligently, especially in fraud, mismanagement, or non-compliance, they can be criminally liable — even if they were not directly involved.

🕊️ Call to Action:

In a world where trust is fragile and corporate greed can quietly destroy lives, Independent Directors are the last line of defense — not just for investors, but for the soul of a company. Their silence can cost thousands their savings. Their indifference can turn fraud into tragedy. But their courage — to ask, to doubt, to dissent — can protect the dreams of countless families who invest with hope. If you are an Independent Director, or aspire to be one, remember: you are not just signing papers — you are signing your name to the truth. Stand up. Speak up. Because when watchdogs sleep, the wolves take over.

Read blogs on Corporate Governance here.

  • Section 149(4) to 149(13) deals with appointment and qualifications of Independent Directors.
  • Schedule IV of the Act outlines the Code for Independent Directors, detailing their role, duties, and professional conduct.
  1. 📘 Section 149 – Appointment of Directors
    👉 https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
    (Refer to pages 102–106 of the PDF for Section 149)
  2. 📘 Schedule IV – Code for Independent Directors
    👉 https://www.mca.gov.in/Ministry/pdf/TableFtoScheduleV_Chapter12toScheduleVII.pdf
    (Refer to pages 33–36 of this PDF)