Strengthening the role of independent directors in a company

Independent directors (IDs) are increasingly being held accountable for the happenings in listed companies, and their roles and responsibilities are gaining greater importance. Their responsibilities come to the fore when there is trouble in a company as all stakeholders become more dependent on IDs to safeguard their interests.

When the three independent directors of PTC India Financial Services (PFS) resigned on grounds of serious corporate governance allegations, it gave out a message that self-preservation was more important than setting right issues from within the company, for which the IDs are also responsible. PTC India being the promoter of PFS with shareholding of 64.99% also saw one of its ID, who had been an ID on PFS, resign from the board of PTC citing governance failure. Serious allegations like non-sharing of information with board, the managing director taking key decisions without board consultation, forensic report on bad loans not being shared with board, manipulation of information, etc came to the forefront as the IDs tendered their resignation. The outgoing chairman of PFS had also raised concerns on corporate governance in the board meeting held in August 2021.

Securities and Exchange Board of India (SEBI) has directed PFS to address the corporate governance issues and file an action taken report within four weeks. However, given the gravity of the allegations, it should have immediately instituted an independent third-party forensic audit into fraud, controls and governance loopholes at PFS. Only this will unearth the truth and fix the responsibility given the claims and counterclaims from PTC and PFC and restore the faith of minority shareholders in the company. It is also imperative that new IDs of repute be immediately appointed to the board by the regulator and an audit committee of IDs be formed.

Given the fact that the IDs were in a majority on the board, they had multiple options to consider to fulfil their duties rather than to resign:

  • Could the IDs have raised the issues in an open letter to SEBI?
  • Could the IDs have asked the CMD to step down from the board or go on leave?
  • Could the IDs have instituted a forensic audit on their own?
  • Could the IDs have worked from the inside to correct the matter by pressurizing the management?

Case in question

Another case where the role of IDs has been important is at the Future group companies. However, the IDs feigned ignorance of the signed term sheet with Samara Capital and later claimed to have rejected the offer. The IDs have not given timely guidance to minority shareholders and have been vacillating to serve the interests of the promoters though there was a firm agreement with Amazon. This has led to the group being engulfed by the listed companies in a series of legal litigations and battles with Amazon costing crores of rupees and destruction of value to all stakeholders. While on one hand, the company claims that it is struggling to provide salaries to its employees or serve the debt, on the other hand it is sparing no expenses to litigate. The reluctance of IDs to unwind related party transactions and bring back amount to the company or IDs willingness to look at the interests of the Future group promoter entities rather than the listed FRL for whom they are IDs is another aspect that should be worrying SEBI.

In 2020, when Vedanta offered to delist at low valuations during the months following outbreak of the pandemic, the IDs did not guide the minority shareholders and acted at the behest of the management giving their nod to a very low delisting price being offered by the company. The board of Vedanta was made up of illustrious IDs, including a former chairman of SEBI. Yet these IDs did not cover themselves in glory by their inactions at the time of delisting and subsequent promoter actions. The above two examples indicate that inaction by IDs while being on the board is also not desirable.

Need for IDs

Independent directors are more in demand at small listed companies as most promoters find it hard to attract IDs with eminent profiles. Identifying this as a problem, the MCA, through the IICA has put together an ID database where people have to pass an exam and get certified and companies can appoint from this database. Additionally, over the past few years, SEBI has strengthened the institution of independent directors. IDs have been made not liable for any frauds that they aren’t complicit with.

From January 2022, the appointment and removal of independent directors can be done only by way of a special resolution voted for by shareholders. This is expected to reduce the influence of the promoter in the appointment and removal of IDs. The Listing Obligations and Disclosure Requirements (LODR) now requires that at least one meeting just of the IDs be held in a year, so that IDs have an opportunity to discuss issues. To encourage IDs to take active part in company affairs, in March 2020 the MCA announced that legal proceedings against IDs and Non-Executive Director (NEDs) cannot be initiated unless it is proved that they were a party to the fraud, gave their consent to such frauds even after having information about it or showed complete negligence and failed at their responsibility.

While there are many instances of independent directors know-towing to the wishes of the promoters, there are not even a handful of instances where IDs have acted in the best interest of the company when faced with resistance. With SEBI, institutional investors and other stakeholders backing them, IDs should ensure they safeguard the interests of the company by acting in a timely manner.

(The writer is Founder and MD InGovern Research Services)

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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