KUMAR MANGALAM BIRLA FIR
Spotlight on accountability of non- exec directors
NIKHIL INAMDAR, SUDIPTO DEY& DEV CHATTERJEE
Mumbai/ New Delhi
The first information report ( FIR) against Kumar Mangalam Birla,
Chairman, Aditya Birla Group, has raised some questions. Apart from
the usual debate on overreach on the part of the Central Bureau of
Investigation (CBI), which has divided the legal community, it has put
the spotlight on legal accountability of non- executive and
independent directors on a board under the Companies Act.
Most legal experts, corporate lawyers, auditors, and some serving
independent directors feel the move may make non- executive directors
err on the side of caution and be selective in giving their
concurrence to certain contentious decisions of the company.
Perhaps, the most famous case of prosecution and conviction of a non-
executive chairman in corporate India was that of Keshub Mahindra of
Mahindra Group, who had occupied the position at Union Carbide India,
during the Bhopal gas tragedy.
Accountability of non- ED
Legal experts point out that the term " non- executive directors"
finds no reference under the Companies Act, 1956, anywhere.
Though the Companies Act, 2013, also does not define "non- executive
directors", the rules define an executive director as a whole- time
director.
"Non- executive director is understood to be a director who is not
involved in the daytoday affairs of the company, and receives his
remuneration by way of sitting fees and/ or commission," says Pallavi
Bakhru, director, Grant Thornton Advisory Pvt Ltd.
In case of an offence committed by a company — apart from the company
itself — the law makes relevant individuals accountable. This leads to
a concept of officer in default, both in the 1956 Act, as well as
under the 2013 Act. According to the 1956 Act, in Section 5, meaning
of officer who is in default covers any person in whose accordance the
board is accustomed to act.
"A person being non - ED maybe held only if it can be proved that the
current board of directors acts in accordance with his directions or
instructions," points out Kavish Sarawgi, director, Resurgent India, a
corporate advisory firm.
Under Companies Act, 2013, section 149( 12) states that nonexecutive
directors or independent directors shall be held liable, only in
respect of such 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,
provided he is not a promoter or KMP ( key management personnel).
Therefore, a non- ED cannot escape penalty, if he is a promoter or
KMP, say auditors and corporate lawyers.
Section 197( 13) provides that an insurance may be taken by a company
on behalf of its MD, manager, CEO, CFO or CS for indemnifying any of
them against any liability in respect of any negligence, default,
misfeasance, breach of duty or breach of trust for which they may be
guilty. As the section doesn't cover non- executive directors,
promoter or KMP, they cannot be indemnified, point out experts.
In other words, if the independent director puts it on record —
through minutes of the board meeting — that he did not concur with a
certain decision of the board, he is not liable for prosecution.
However, the burden of proof is on the director, point out legal
experts.
Promoters and any KMP of a company — including nonexecutive directors
who are part of the promoter group — are liable for prosecution
whether or not they are involved in the daytoday operations of a
company.
Interestingly, the Ministry of Corporate Affairs had in March 2011
issued a circular instructing its officers to be cautious while
initiating prosecution against independent directors, which included
non- executive directors.
Divided legal fraternity
The Birla FIR issue has created adivide in the legal fraternity.
According to H P Ranina, noted corporate lawyer and senior advocate,
Supreme Court, the law does not say anything specifically about the
role of non- executive chairman's accountability. " The question is
whether you are aware of what is happening or not," he says.
Ranina points out that even if a person is a non- executive director,
who is not in charge of day- to- day affairs, but has given his
consent for something, he is liable. " In the case of Birla, he has
admitted himself that he went to the PM with a representation," he
adds.
However, another Supreme Court advocate, Gopal Jain, differs.
"A non- executive director is not bound by the normal principles which
apply to a person responsible for, and in charge of day- to- day
affairs, that is, an executive director. So, I don't think you can
take any penal or coercive action," says Jain.
Commenting on the Birla case, he says, the CBI hasn't even been able
to prove any criminality before an FIR was filed.
"When a government decision is taken, there is always a presumption of
legality, in this case, it seems to be the other way around," he says.
The shadow of this case will have a negative impact on independent
directors as an institution, says Samir Barua, who is on the board of
several companies including Axis Bank, ONGC and Torrent Power. "They
will be extremely wary of getting involved, going forward" he adds.
Rajat Sethi, partner, S& R Associates, a Delhi- based legal firm,
feels that this may even have implications in relation to availability
of qualified persons willing to be appointed to such positions. Agrees
Gopal Jain: "Absolutely, this is going to make people more wary. This
defeats the entire purpose of having credible, independent persons
come on board to improve governance." According to Ranina, who is on
the board of 48 companies as an independent director, the normal
practice is that non- executive directors and independent directors
take a letter of compliance from the MD of the company saying that all
rules have been complied with.
But there are also members on the board who are non- executive only on
paper, but are fully clued into what's happening in the company, he
points out. But there are many in corporate circles who feel this
incident should not cow down the "independence" of independent
directors. Says, Shriram Subramanian, Founder and Managing Director,
InGovern Research Services, a proxy advisory firm, " I dont think
directors should shy away from decisions and be careful. They have to
use their judgment and act in a fair and correct manner.
They should not be complicit in wrongdoings of the company." Echoes
Pallavi Bakhru of Grant Thornton Advisory: " The intention of the 2013
Act seems to be very clear that a non- executive director is expected
to 'speak up' and ' blow the whistle' in case he is privy to any
misconduct or default." Perhaps independent directors will do good to
remember the famous quote by Peter Spiderman Parker's uncle Ben: "With
great power comes great responsibility"
ILLUSTRATION: BINAY SINHA OFFICER IN DEFAULT WHAT THE LAW STATES
COMPANIES ACT, 1956 Section
5Meaning of officer who is in default 201 Avoidance of provisions
relieving liability of officers and auditors of company
COMPANIES ACT, 2013
2( 60) Officer who is in default 149( 12) notwithstanding anything
contained in this Act (i) an independent director
(ii) a non- executive director not being promoter or key
managerial personnel, shall be held liable, only in respect of such
acts of omission or commission by a companywhich had occurred with his
knowledge, attributable through Board processes, and with his consent
or connivance or where he had not acted diligently
Source: Companies Act, 2013, & Companies Act, 1956
A non- ED cannot escape penalty, if he is a promoter or key management
personnel, say auditors and corporate lawyers
--
CS A Rengarajan
9381011200
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