Ranjeev Dubey

8/12/2019 Ranjeev Dubey

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C- 62 B, SUPERMART- 1, DLF PHASE- IV,

GURGAON- 122009, HARYANA, INDIA

TEL NO: +91 -124 - 4042521 FAX: +91- 124 - 4042522

E mail : [email protected]

Independent Directors: Role, Risk and

Ruination

Ranjeev C DubeyManaging Partner

ADVOCATES
mailto:[email protected]:[email protected]


2/12

Independent Director: Directors In Comp Act 56.

Individual directors have no general powers. Sec 292(1): BOD shallexercise powers on behalf of the company and only by Boardresolution 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 legitimatepurpose, with reasonable skill and care, act in best interests ofcompany (and to shareholders colly), avoid conflicts of interest +disclose all material personal interests to the company.

BODs third party duties - not to permit company to trade when

insolvent, delegate powers responsibly, notified Stock exchangesand government of all relevant info, maintain company registers,pay dividends only out of profits, etc.

Learning: Role lay in BOD, not Individuals, permitting

disclaiming.


3/12

Independent Directors: Definition of IDs in Comp Act 56.

Comp Act 56 did not define ID. SEBIs Clause 49 of ListingAgment: whoapartfrom directors remuneration, do not haveany other material pecuniary relationship.with company, itspromoters, management or subsidiaries, which in the judgement ofthe board may affect independence of judgement of the directors.

Listing Agment also sets disqualifications to becoming ID: (a)Related to promoters, management at BOD/BOD-1 level; companyexecutive in last 3 years; (b) Partner or executive of internal auditfirm or legal or consultancy firm, during the last three years; (c)Company Suppliers, service provider or customer NOT extending toFII 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!


4/12

Independent Directors: Duties and Risk of IDs in

Comp Act 56.Comp Act 56 did not distinguish between director categoriesregarding liability.

Sec 21 SCRA 56 binds listed company to Listing Agment

contravention of which attracts 10 yrs and 25 Cr.

Sec 21 SCRA: Director liable where offence has been committedby the connivance or is attributable to any gross negligence of theofficer.

Except as part of Audit Committee, IDs had no special dutieseither so presumably liability flows from Sec 21.

Learning: IDs are celebrity endorsements, lifetimeachievement awardees, high end vendors or wall flowers!


5/12

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 ofCompany for benefit of all members, company, employees,

shareholder, community and protection of environment !!

Exercise duties with due care, skill, diligence + independentjudgment.

Abstain from conflicts of Interest.

Gain no undue advantage for self or relatives or associates. Tobreach is to pay penalty = gain.

Learning: Naturally, this also extends to IDs.


6/12

Independent Directors: Definition of IDs in the Comp BillSec 149(6): now (highly simplified and inaccurate!) defines ID as:

Person of integrity with expertise and experience who is notpromoter of company, related to promoter or director or their momor daughter;

No pecuniary relationship with, Comp, mom or daughter, promotersor director in last 2 yrs NOR relative has such relationship oremployed by any of them for last 3 years. Shareholding of 2% ormore.

Not partner in auditor, Co Secy, Cost Accountant for last 3 yrs ofComp, mom, daughter or associate; or legal/consultant with

transaction = 10% of gross turnover of Comp.

Lesson: Comprehensive Criterion has been created.


7/12

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 ofmanagement in meeting agreed goals andmonitor thereporting of performance. Determine remuneration levels ofexecutive 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 offlow of informationto Board.

Learning: Stake-less external director now moral forceopposing promoter.


8/12

Independent Directors: Liability

Sec 149(12):Independent Director shall beliable only inrespect of acts of omission or commission by a companywhich had occurred with his knowledge, attributable throughboard processes, and with his consent or connivance or

where he had not acted diligently.

Sec 166(7): Director who does not perform his dutiespursuant Section 166 risks Rs. 1 to 5 Lakh penalty.

Sec 23Mof SCRA default penalty for all contravention andoffenses is 10 yrs and 25 Cr.

Axiom: Enlarged role is always = enlarged liability.


9/12

Independent Directors: Illustrative Fall Guy Clauses

Taking examples from Schedule IV:

I. Guidelines of professional conduct:

(1)upholdethical 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 executivedirectors, key managerial personnel and senior management.

Learning: IDs personally charged with securing theimpossible: clean Accounts!


10/12

Independent Directors: Structure of Indian society

A multi-tribal society, based on caste, not guild or economicinterest.

Marriage, social security, economic viability and politicalpower flow from caste.

Scarce resources mean a continual political struggle forleverage, again based on caste/community. Inter-casterelationships are hostile. Khap Panchayat Mentality.

No concept of universal morality: concept of Dharma.

Nascent concept of nation with India gone from feudal backto tribal masquerading as modern democracy.

Lesson: Comp Bill imposing modern norms on pre-feudalsociety.


11/12

Independent Directors: Structure of Indian Politics

Politics is a war for control of resources. Caste and class coalitionscollaborate to seize power promising booty to participants. Victorsthen share booty by:

Establishing nakedly partisan laws benefiting followers,excluding rest;

Selling state assets for kick-backs, job sales,seatauctions;

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 ofour democracy?


12/12

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 fallguys.

Learning: Those who are thus exposed live in extraordinarilyinteresting times!

Thank You!

Ranjeev Dubey

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