Corporate Governance Under Scrutiny: Why SEBI Wants Real Independence in Boards

Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey delivered a strong message to corporate India while addressing the 2025 Annual Directors’ Conclave. He emphasized that independent directors cannot afford to be treated merely as “honorary appointees or friendly critics”. Instead, they must act as vigilant guardians of shareholder interest and ensure corporate boards adhere to the highest standards of governance.

In the first week of August 2025, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey delivered a strong message to corporate India while addressing the 2025 Annual Directors’ Conclave. He called for greater accountability and responsibility on the part of independent directors serving on company boards.

In his blunt assessment, Mr. Pandey emphasized that independent directors cannot afford to be treated merely as “honorary appointees or friendly critics”. Instead, they must act as vigilant guardians of shareholder interest and ensure corporate boards adhere to the highest standards of governance.

In the Backdrop of Gensol

His remarks come in the backdrop of the recent case involving Gensol Engineering, whose promoters — Anmol Singh Jaggi and Puneet Singh Jaggi, also founders of the electric-vehicle cab service BluSmart — were barred from the securities market. SEBI found that funds raised for electric-vehicle projects were allegedly siphoned off for lavish personal expenses.

What made the episode even more troubling was that all four independent directors of Gensol Engineering resigned from the board around the time SEBI raised red flags about these fund diversions. This raised serious questions about whether independent directors were exercising their fiduciary obligations with the diligence expected of them.

This is hardly an isolated case. Over the last two decades, the Indian corporate landscape has been marred by repeated governance failures. From the infamous Satyam Computer Services scandal in 2009 to the collapse of IL&FS, the downfall of YES Bank, the compliance troubles at Paytm Payments Bank, and now the Gensol episode, one recurring theme has been the ineffectiveness of independent directors in preventing or flagging wrongdoing.

To be sure, the Companies Act, 2013, introduced after the Satyam debacle, brought sweeping reforms. It mandated that independent directors must form at least one-third of the board in listed companies and also laid down a clear code of conduct — requiring them to act in good faith, exercise due care and diligence, avoid conflicts of interest, and uphold shareholder trust.

Furthermore, independent directors were entrusted with critical oversight roles by heading committees such as the Audit Committee and the Nomination and Remuneration Committee (NRC).

In theory, therefore, independent directors are not symbolic figureheads but pivotal custodians of corporate governance. Yet, despite these statutory safeguards, India’s governance standards remain patchy. The fundamental weakness lies in the structural nature of Indian companies, which remain largely promoter- and family-driven.

Although independent directors are technically elected by shareholders in general body meetings, in practice, the process is heavily influenced — if not directly controlled — by promoters. Consequently, many independent directors end up being handpicked by promoters and often remain loyal to them rather than to the wider body of shareholders. Generous sitting fees, stock options, and perks further solidify this dependence, leading to a culture where independent directors are hesitant to ask probing questions or challenge executive management. In effect, the role often becomes a sinecure, with little genuine oversight.

However, this era of complacency may be drawing to a close. Both SEBI and the judiciary have begun taking a tougher stance, holding independent directors personally accountable for lapses in governance.

A significant example came earlier this year when the Supreme Court refused to overturn a Securities Appellate Tribunal (SAT) order upholding Sebi’s decision against the independent directors of Setubandhan Infrastructure. Sebi had found that company funds were diverted, and the directors attempted to defend themselves by claiming they neither interfered in day-to-day operations nor actively participated in NRC or Audit Committee meetings.

SEBI rejected this defence, citing not only the Companies Act’s code of conduct but also a 1973 Supreme Court judgment which held that independent directors could be held liable for dereliction of duty. The ruling reinforced the principle that independent directors must “make good” the losses arising from negligence, even if they did not personally participate in the fraud.

Unsurprisingly, this heightened scrutiny has made the position of independent directors more precarious. Many are now reassessing their roles and choosing to resign rather than risk being dragged into protracted regulatory and legal battles. The numbers tell their own story: in FY25 alone, 549 independent directors resigned voluntarily, while in just the first seven months of 2025, 154 independent directors stepped down from their positions.

Against this backdrop, Mr. Pandey’s candid remarks can be seen as both a warning and a call to action. Independent directors, he suggested, must recognize that their role is not ornamental but central to the health of corporate governance in India. As regulators and courts tighten the accountability framework, boards can no longer afford passive directors who merely lend credibility without contributing genuine oversight.

A Blow to Governance

India’s boardrooms are undergoing a quiet but consequential transformation. In the past two years, an increasing number of Independent Directors (IDs) have resigned mid-term, often citing ambiguous reasons. This wave of exits reflects deeper discomfort with the governance climate they face. IDs are meant to be the conscience keepers of companies—upholding accountability, safeguarding shareholder interests, and questioning decisions when necessary. So, when they begin to step down in large numbers, the real question is not why they leave, but what they are unwilling to remain part of.

A recent Deloitte India–Institute of Directors survey highlighted a pressing concern: most board members believe fraud risks in Indian companies are on the rise. Disturbingly, many IDs confessed they feel underprepared to detect or mitigate these risks. More than half admitted to receiving little or no training on fraud-related responsibilities, and several were unaware of their own company’s fraud response frameworks. This leaves IDs exposed—risking their reputation and potential legal consequences—without adequate information or institutional backing to fulfil their duties. For many, stepping away becomes the safer choice.

Yet, the role of IDs is too critical to ignore. Their independence enables them to ask uncomfortable but necessary questions, helping to avert governance failures and sustain market confidence. The churn among IDs is therefore not just a boardroom issue—it undermines investor trust, weakens regulatory oversight, and threatens business continuity itself.

Charting the Future

The exodus of IDs can only be addressed by fixing the root causes of their departure. Five areas demand urgent reform:

• Strengthening training and induction frameworks

Directorships have grown increasingly complex, with rising risks around cybercrime, ESG violations, and regulatory or financial irregularities. IDs need more than orientation—they require structured industry insights, practical toolkits, and a clear grasp of regulatory expectations and legal obligations to perform effectively.

• Equipping IDs with better access and tools

Many IDs face a lack of timely and comprehensive information. Boards must move beyond mere compliance checklists, ensuring early and regular access to operational data, internal audits, and whistleblower reports—well before issues escalate.

• Fostering a culture of respectful dissent

An ID’s role is not to rubber-stamp decisions but to challenge them. Chairs must cultivate an environment where questioning assumptions, flagging risks, and raising red flags are valued as contributions, not confrontations. A strong board is defined not by consensus but by debate, challenge, and independent thought.

• Clarifying accountability and liability

Regulators must provide clearer liability protections for IDs who act in good faith, while companies should ensure IDs are not held accountable for decisions in which they had little say. Shared accountability is vital for balanced governance.

• Ensuring transparency in exits

Resignation letters filled with boilerplate references to “other commitments” undermine trust. Companies should be encouraged—or required—to disclose genuine reasons for exits. If IDs resign over governance concerns, these should be flagged to shareholders and regulators.

India’s economic aspirations rest on a foundation of sound governance, and the boardroom is its nerve centre. If IDs exist faster than they are appointed, it signals a governance crisis. Companies that commit to transparency, empowerment, and ethical vigilance will not only retain IDs but also attract the most capable ones.

To conclude, an independent director positions, once seen as ceremonial post-retirement roles, have become far more demanding after SEBI’s regulatory amendments effective from 2022. No longer passive attendees of board meetings, independent directors are now expected to bring specialised skills and critically examine a company’s operations and governance with rigour and diligence. However, since they hold no executive authority, this heightened accountability has placed them in a precarious position, leading many to resign rather than risk legal liability arising from potential corporate mis-governance.

In today’s technology-driven environment, independent directors require contemporary knowledge to remain effective. While structured training can help bridge this gap, appointing directors who already possess technological expertise would be a more forward-looking approach. Ultimately, independent directors serve as the conscience keepers of companies—providing insight, ensuring accountability, and asking the difficult questions that uphold corporate integrity.