Independent Director - no more a time-pass activity!

Who is an independent director? To put simply, they are supposed to be custodians of the governance process and they should not be employeed or affiliated with the company in any other way. You do find various best attempt definitions in the companies act and listing agreement which focus on technicalities. And it is these technicalities which have become the basis for the appointment of the Independent Directors and also the reason for blatant exploitation of the law governing this role.

What was happening hitherto? With due respect to few Corporates who try to implement this in spirit, majority of the companies were filling this position with people known to them – Alas! They did technically qualify as independent director as many of them were truly independent of the Company to the extent that they may not even know what the business of the company was!

But the culprit here is not the companies but the Law itself, which fails to provide a clear elucidation on the roles and responsibilities of an Independent Director in a corporate set-up

When we talk about technicality, the current law governing the appointment of Independent Director in listed companies finds its place in clause 49 of the listing agreement and stipulates that an Independent director should not have any material pecuniary relationships or transactions with the company, its promoters, its directors, senior management or its holding company, subsidiaries and associates.

Yes, the lawmakers chose not to define ‘material pecuniary relationship’ – that is 3 words undefined and a decent lawyer can play havoc with such a lacunae.

In the Companies Bill 2009 it has been suggested that an independent director is allowed to have a ‘pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or its promoters, or directors amounting upto10 % of its gross turnover or total income during the two immediately preceding financial years (strange, by no stretch of imagination – a person who is interested in 10% of the turnover can be termed ‘independent’).

Interestingly, the Parliamentary Standing Committee, reviewing the Bill completely bans pecuniary relationship - material or otherwise with the company. This committee goes on to recommend that the appointment process should also be made independent of the company management by constituting a panel or a data bank to be maintained by the Ministry of Corporate Affairs, out of which companies may choose their requirement of Independent Directors. Now this whole panel concept is not just a folly – but a disaster in waiting.

In effect, there is again no consensus or clarity - which leads to further confusion.

But, all is not lost – recent spate of judicial activism in this area, where the role is being looked at more seriously offers some relief and hope.

To cite a couple of instances,

Case 1- Lawyer Peter Madhavan, a former independent director at scandal-hit air cargo firm Airocean, was sentenced to four months' jail for his part in making a misleading statement to the Singapore Exchange. He was also fined $120,000. This is believed to be the first time an independent director here has been sentenced to jail for breaking securities laws. Of course, he is on bail pending appeal.

Case-2- SEBI in an order in the Pyramid Saimira issue, restrained 3 directors from being independent directors or a member of audit committee of any listed company for a period of two years. The order stated that these independent directors overlooked numerous red flags in the trend in revenues, profits, receivables, advances, etc. which could not escape the attention of an independent director, who is also a member of the audit committee. The order went on to state that by failing to ask the right questions at the right point of time, these independent directors failed in their duty of care as an independent director. It is also pertinent to note that they were held guilty under the provisions of SEBI prohibition of fraudulent and unfair trade practices relating to securities market.

With this emerging trend of going beyond the letter of law to understand the actual intent - the current crop of independent directors who were taking their role lightly might find the going tough in the times to come.

It’s definitely a welcome change – which promises to ensure that the role of independent director will be taken more seriously and not as a mere time pass.

CSR or Tax?

can you force people to indulge in charitable activities?

the answer is yes.

at least, this is what is envisaged by way of a provision in the companies bill - which mandates that 'companies to earmark 2% of the average profit of the preceding three years for corporate social responsibility activities'.

that's lot of money - especially for big corporates.

oh yes, there is a recent dilution - which says 'companies to disclose to the shareholders what their CSR policy has been and if they have not been able to fulfill the target - why have they not done so!

the whole concept does'nt make any sense. you pay all kind of taxes (can't list down as the type and kind is huge) and there is no accountability on how these tax collections are used.

plus, how are we going to define CSR activity. who is going to certify these CSR earmarking. are we looking at a scenario where book entries are made to satisfy these requirements?

let's wait n watch!