An independent director is expected to act as a “conscience keeper" for a company, bringing unbiased perspectives to critical boardroom discussions and safeguarding the stakeholder interests. With increasing emphasis on corporate governance, the role of an independent director is evolving, and so are the limits of criminal liability to which an independent director may be exposed.
The Companies Act, 2013, draws a clear line by defining independent directors to be non-executive board members, free from day-to-day management control. The law also limits their liability to acts of the company that occur with their knowledge or consent, or where they fail to act diligently. As independent directors do not run the business, liability is fault-based and fact-specific, not vicarious. Read with the “officer in default” construct, it is clear that the law is designed to avoid shotgun prosecutions merely because someone sits on the board. The statute promises insulation, but only if the facts support it.
Practice, however, is less tidy. Matters like the IL&FS crisis show how quickly independent directors can be drawn into proceedings when serious governance failures surface. In the aftermath of the Satyam fraud, independent directors faced sustained scrutiny over whether they had meaningfully interrogated the fictitious cash balances that auditors had signed off on. More recently, the Securities and Exchange Board of India’s (SEBI) enforcement actions in the Zee Entertainment and Fortis Healthcare matters demonstrated a willingness to hold independent directors accountable for serious lapses in related-party transaction oversight and disclosure failures, even where the principal wrongdoing was attributed to promoters. In parallel, the Serious Fraud Investigation Office’s (SFIO) use of fraud provisions and National Financial Reporting Authority’s (NFRA) active oversight have widened the scope of scrutiny.
The sharpest edge in liability determination lies in the phrase “did not act diligently”. Courts and regulators increasingly scrutinise agenda notes, board minutes, committee records, and dissent (or the lack of it). Silence is rarely neutral, and the absence of dissent can be read as acquiescence. The inquiry is no longer limited to ‘what the director did’ but extends to ‘what the director should have caught’. That shift from conduct to expectation is where exposure begins.
Criminal exposure typically arises where records show that an independent director knew of an offence at the time and did not resist. A complaint which includes evidence of misconduct or a case where a director was entrusted with compliance oversight, bringing them into the ‘officer in default’ framework may also result in exposure. The common thread is not status but traceable involvement or inaction.
This risk is amplified in listed entities and regulated sectors such as financial services where fit-and-proper norms, fiduciary duty of care and other obligations converge, rendering passive independence untenable. Across sectors, the regulatory message is consistent. Independence is not passive; it requires active oversight.
The independent director’s role in India has shifted from symbolic to evidence driven. Safeguards exist, such as contractual indemnities, Directors & Officers (D&O) insurance (though typically subject to exclusions for fraud and wilful misconduct), well-documented dissent, reasoned reliance on experts, and timely action by an independent director if there is a resistance change, but these are only as strong as the underlying record. The Supreme Court's approach to proceedings against non-executive directors, including in cases under the Negotiable Instruments Act, 1881 and economic offence statutes, has relied on the prosecution’s ability to demonstrate a genuine case not resting solely on suspicion. A specific nexus or attribution between the director and the impugned conduct must be shown, rather than merely relying on board membership. The apex court observed that when the material before the court, taken at face value, does not disclose ingredients of an offence, the law expects the court to have the clarity and courage to say so. To allow a matter to proceed despite the absence of a prima facie case is to expose a person to the strain, stigma and uncertainty of criminal proceedings without legal necessity.
Risk is contextual and depends on sector, promoter culture, and regulatory intensity, but defence is built contemporaneously. India does not grant independent directors blanket immunity, but it does offer conditional insulation calibrated to their role and governance intervention. When duties of oversight, scepticism, and diligence are performed and documented, criminal law does not reach them merely on the occurrence of a misdeed. However, where inaction is documented, the law is increasingly willing to follow the paper trail for culpable inaction and fiduciary failure.
(Sharad Abhyankar is Partner and Saranya Mishra is Principal Associate at Khaitan & Co. The views expressed are personal.)
First Published: Apr 03, 2026, 14:40
Subscribe Now