Independent Directors: Role, Risk and Ruination Ranjeev C Dubey Managing Partner ADVOCATES C- 62 B, SUPERMART- 1, DLF PHASE- IV, GURGAON- 122009, HARYANA, INDIA TEL NO: +91 -124 - 4042521 FAX: +91- 124 - 4042522 E mail : email@example.com
Independent Director: Directors In Comp Act ‘56. • Individual directors have no general powers. Sec 292(1): BOD shall exercise powers on behalf of the company and only by Board resolution at meeting limited to powers in MOA/AOA. • BOD role includes duties to act: honestly and in good faith, not misuse position or information received, for proper and legitimate purpose, with reasonable skill and care, act in best interests of company (and to shareholders colly), avoid conflicts of interest + disclose all material personal interests to the company. • BOD’s third party duties - not to permit company to trade when insolvent, delegate powers responsibly, notified Stock exchanges and government of all relevant info, maintain company registers, pay dividends only out of profits, etc. • Learning: Role lay in BOD, not Individuals, permitting disclaiming.
Independent Directors: Definition of IDs in Comp Act ‘56. • Comp Act ’56 did not define ID. SEBI’s Clause 49 of Listing Ag’ment: “who…apart…from director’s remuneration, do not have any other material pecuniary relationship….with company, its promoters, management or subsidiaries, which in the judgement of the board may affect independence of judgement of the directors”. • Listing Ag’ment also sets disqualifications to becoming ID: (a) Related to promoters, management at BOD/BOD-1 level; company executive in last 3 years; (b) Partner or executive of internal audit firm or legal or consultancy firm, during the last three years; (c) Company Suppliers, service provider or customer NOT extending to FII or lender nominee; (d) holds below 2% Comp shares, etc., etc. • Main role of ID re Clause 49 is being Chairman of Audit Committee. • Learning: An Undefined director can have no defined role!
Independent Directors: Duties and Risk of IDs in Comp Act ‘56. • Comp Act ‘56 did not distinguish between director categories regarding liability. • Sec 21 SCRA ’56 binds listed company to Listing Ag’ment contravention of which attracts 10 yrs and 25 Cr. • Sec 21 SCRA: Director liable where “offence has been committed by the connivance or is attributable to any gross negligence of the officer.” • Except as part of Audit Committee, IDs had no special duties either so presumably liability flows from Sec 21. • Learning: ID’s are celebrity endorsements, lifetime achievement awardees, high end vendors or wall flowers!
Independent Directors: All Directors in Comp Bill • Section 166 now comprehensively defines duties of directors thus: • Act in accordance with AOA, in good faith to promote objects of Company for benefit of all members, company, employees, shareholder, community and protection of environment !! • Exercise duties with due care, skill, diligence + independent judgment. • Abstain from conflicts of Interest. • Gain no undue advantage for self or relatives or associates. To breach is to pay penalty = gain. • Learning: Naturally, this also extends to IDs.
Independent Directors: Definition of IDs in the Comp Bill • Sec 149(6): now (highly simplified and inaccurate!) defines ID as: • Person of integrity with expertise and experience who is not promoter of company, related to promoter or director or their mom or daughter; • No pecuniary relationship with, Comp, mom or daughter, promoters or director in last 2 yrs NOR relative has such relationship or employed by any of them for last 3 years. Shareholding of 2% or more. • Not partner in auditor, Co Secy, Cost Accountant for last 3 yrs of Comp, mom, daughter or associate; or legal/consultant with transaction = 10% of gross turnover of Comp. • Lesson: Comprehensive Criterion has been created.
Independent Director: Role of IDs in the Companies Bill Sec 149(8) and Schedule IV create new role: • Corporate Governance: IDs are now broadly seen as GRC drivers. • Minorities: “safeguard interest of...minority shareholders”. Resolve conflicts of interest with Promoters. • Board Role: Independent voice, “scrutinise the performance of management in meeting agreed goals and…monitor the reporting of performance”. Determine remuneration levels of executive directors and senior management. • Policing Co-Directors: In separate meetings w/o non-IDs or management, review performance of non-ID and Board, Chairperson and “assess the quality, quantity and timeliness of flow of information” to Board. Learning: Stake-less external director now moral force opposing promoter.
Independent Directors: Liability • Sec 149(12): “Independent Director shall be…liable only in respect of 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.” • Sec 166(7): Director who does not perform his duties pursuant Section 166 risks Rs. 1 to 5 Lakh penalty. • Sec 23M of SCRA default penalty for all contravention and offenses is 10 yrs and 25 Cr. • Axiom: Enlarged role is always = enlarged liability.
Independent Directors: Illustrative Fall Guy Clauses Taking examples from Schedule IV: I. Guidelines of professional conduct: (1) “uphold ethical standards of integrity and probity”; (9) “assist the company in implementing the best corporate governance practices”. II. Role and functions: (4) “satisfy themselves on the integrity of financial information”. Whither Satyam? (5) “safe guard the interests of all stakeholders, particularly the minority shareholders”; (7) “determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management.” Learning: IDs personally charged with securing the impossible: clean Accounts!
Independent Directors: Structure of Indian society • A multi-tribal society, based on caste, not guild or economic interest. • Marriage, social security, economic viability and political power flow from caste. • Scarce resources mean a continual political struggle for leverage, again based on caste/community. Inter-caste relationships are hostile. Khap Panchayat Mentality. • No concept of universal morality: concept of Dharma. • Nascent concept of nation with India gone from feudal back to tribal masquerading as modern democracy. • Lesson: Comp Bill imposing modern norms on pre-feudal society.
Independent Directors: Structure of Indian Politics • Politics is a war for control of resources. Caste and class coalitions collaborate to seize power promising booty to participants. Victors then share booty by: • Establishing nakedly partisan laws benefiting followers, excluding rest; • Selling state assets for kick-backs, job sales, ‘seat’ auctions; • Appropriating state assets viz Roshni Act and VadraGate; and • Extorting money from citizens through irrational regulation. • Party structure and election funding not organized along transparent legit lines. • Corporate sector is nothing if not pragmatic. • Question: How do you “act diligently” given the structure of our democracy?
Independent Directors: Conclusion • Anna rang in inflection point heralding end of Robber Barron period; • Signs are: Raju, Raja, Hassan Ali, Kanimozi, Unitech, Kalmadi, Chautala; • Comp Bill is initiative to change corporate GRC paradigm; • Asymmetrical impact has and must result for a period; and • Meanwhile, IDs have un-performable role making them fall guys. Learning: Those who are thus exposed live in extraordinarily “interesting times”! Thank You!