Resignation Surge

Introduction

In recent times, India’s Startup Ecosystem has witnessed a growing trend of Independent Directors resigning abruptly from boards, citing personal reasons or pre-occupation, around the same time when serious concerns around Corporate Governance, Lack of Transparency, and Ethical Discrepancies arose in such companies.

Some of the Independent Directors have even called out being unheard by the management, when they had flagged issues in the past. These developments not only raise red flags about governance structures in startups, but also erode investor confidence and market sentiment at large, which is critical to preserve in the current size and stage of India’s economic growth.

It is time to bring to the forefront, the legal and procedural frameworks around role and resignation of Independent Directors under Indian corporate law.

Role and Responsibilities of Independent Directors

Under the Companies Act, 2013, Independent Directors play a critical role in enhancing corporate credibility, improving governance standards, and ensuring that the interests of minority shareholders and other stakeholders are safeguarded. The institution of Independent Directors has been mandated for not only equity and high value debt listed entities, but also to public companies having paid up capital, turnover or outstanding loans, debentures or deposits above certain thresholds, i.e., companies where stakes are high or public money is involved.

Further, Schedule IV of the Act lays down the Code for Independent Directors, emphasizing their duty to uphold integrity, exercise objective judgment, and maintain independence in decision-making. The Code also prescribes for separate meeting of Independent Directors, which is a powerful tool given by the law to channelize the collective voice of Independent Directors in a company.

For listed companies, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) impose further obligations, such as meaningful participation in board meetings, mandatory roles in various committees, overseeing related-party transactions, and ensuring compliance with applicable laws.

Corporate Governance Challenges at Startups

Speed of scaling is the ‘pro’ as well as ‘con’ of a startup, as attention to detail on matters of policy and internal controls could be missed when chasing 10Xing the revenues in a short span of time. While startups are often exempt from stringent regulatory requirements in their early stages, especially if unlisted, many venture-backed startups have complex shareholding structures, aggressive growth models, and significant investor involvement. Without robust governance, startups may face risks related to ethical lapses, compliance issues, and strategic misalignment. These dynamics sometimes create a governance vacuum, leading to:

1. Lack of awareness and inadequate brainstorming on governance norms
2. Information asymmetry or deficiency, especially for IDs
3. Conflicts between founders and investors
4. Suppression of dissent or minority opinions
5. Lack of financial discipline and opaque disclosures
6. Inadequate knowledge updation, leading to non-compliances

Key reasons for such governance vacuum are:

1. Focus on Speed & Growth over Structure
2. Limited Resources in Corporate Defence*
3. Founder Centric Culture
4. Investor Influence & Misalignment
5. Evolving Needs & Unclear Roles

* Corporate Defence includes functions like Compliance, Company Secretarial, Internal Audit, Risk Management, Ethics, Policy & Governance etc. Established companies generally invest more in these functions

Recent Trends in Resignations

Several high-profile resignations from well-known startups have made headlines, with Independent Directors citing issues such as lack of access to board materials, being sidelined from key decisions, or ethical discomfort with company operations. In some cases, Independent Directors have resigned just ahead of major funding rounds or audits, under the guise of ‘personal reasons’, signaling deeper concerns.

Let’s delve into a few recent landmark cases, which emphasize the need for robust governance frameworks to support independent directors in fulfilling their roles effectively:

Above examples throw light on some of the tricky situations that Independent Directors could be in. ID’s are professionals who bring their skills, experience and expertise to the table, lending an objective third-eye to sound-board the strategic decision making in a company. When they are present in the boardroom attending a meeting, they represent all those stakeholders who are not present in the boardroom but whose interests could be affected by the decisions of the company. Their remuneration as Independent Directors, in the form of sitting fee or commission, is not comparable with the majority share-stakes or handsome compensation packages of promoters and senior management. The fact that some of them observed governance issues in the companies they were in, tried to question the management, but their concerns were overlooked and they had to eventually resign, is a cause of concern on an ecosystem level.

Procedure for Resignation of Independent Directors

In case of resignation of Independent Directors from a listed company, it is also required that within 7 days from the date of resignation, the resignation letter is be disclosed along with detailed reasons for the resignation given by the said director, and a confirmation by such director that there is no other material reason for resignation.

Other Legal Requirements for IDs of Listed Entities

The law has crafted a framework to empower the Independent Directors in their role, and also made it obligatory on listed entities to comply with various ID related norms, some of which are as under:

*High value debt listed entity

It is pertinent to mention that the Companies Act, 2013 provides under Section 149(12) that inter-alia, an Independent Director, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. The same is reiterated under SEBI LODR Regulations as well.

Implications and the Way Forward

The wave of resignations of IDs raises serious questions about the maturity and governance preparedness of startups, especially as many look to go public or raise large institutional funds. Founders, Investors, Board members, and Regulators must push for:

• Strengthening board processes and transparency
• Intensifying the internal reporting that happens from management to board
• Focus on compliance reviews and regular governance audits
• Building an atmosphere of trust in ID inductions, trainings and meetings
• Legal protection and indemnities for independent directors

Besides just having suitably qualified independent directors on their Board, startups must also provide their independent directors the “comfort of conversation”, which could serve as a mechanism to foresee early warnings and rectify them. Governance runs on clear policies, spelled out roles, collective decision making and internal controls which are thoroughly reviewed.

At the same time, Independent Directors must insist on more open communication with the boards they are on and carefully consider the documentation that flows to them from the company, which includes:

1. Appointment letter, which sets out the expectations on both sides
2. Board agenda, structure and quality of the notes provided on various agenda items
3. Timeliness of sending agenda, tabled items should not force decisions without due diligence
4. Disclosures and signoffs on agenda of related party transactions
5. Agenda and the underlying process of compliance of applicable laws
6. Minutes and the capturing of deliberations therein, particularly dissent if any
7. Status of items arising out of separate meeting of Independent Directors.

For startups, the message is clear: sustainable growth must be underpinned by sound governance, or the risk of reputational and legal fallout becomes inevitable. IDs can provide the required grounding.

Conclusion

As startups transition from founder-driven models to institutionally-backed enterprises, fostering a culture of transparency, accountability, and board independence is not just good practice; it is an imperative for both the companies and the IDs.

The role of an independent director in the startup ecosystem is all the more crucial than in established corporates. It is more than a statutory requirement – it is a cornerstone of ethical business conduct. IDs could see themselves donning various hats at a startup – friend, philosopher or guide, to even a whistle blower in the worst case. The key is to track the ‘comfort of conversation’ and the ‘documentation’ with the company every quarter, and speak up for gaining clarity, so that a required course-correction can be done well in time.

Swati Patil Lahiri

FCS, ACMA, LL.B

Swati Patil Lahiri (FCS, ACMA, LL.B) is a seasoned Company Secretary with over two decades of experience in renowned and well-governed listed companies of India including DCM Shriram, REC and HT Media. She has trained with industry stalwarts, observed Boardroom dynamics up & close and mastered the drafting of corporate policies, disclosures and perpetual records.

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.