[aaykarbhavan] source Business Standard

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Rubber stamp board – a thing of the past?

One of my friends, who is an accomplished professional and acts as an independent director in a few companies, recently narrated his experience in a company, managed by a highly reputed business family. It is a 100- year company with a turnover of ₹ 6,000-₹ 10,000 crore. The promoter group holds a little more than 40 per cent shares, institutions hold a little more than 20 per cent shares ( including foreign institutional investors ( FII) holding a little more than 10 per cent) and the public holds a little less than 40 per cent shares. The company performs reasonably well in the product market and capital market. The board of the company is a passive board or 'rubber stamp' board. Most documents are placed on the table and the management expects the board of directors to approve all the proposals without any meaningful discussion. My friend thought the board process should improve. He wrote to the company secretary suggesting process improvements. A surprise came in the next board meeting. The promoter separately invited him for a chat. During the meeting, he politely advised my friend to resign, as the company would not be able to meet his expectations regarding the board process. My friend obliged. When I talked to him last, he was looking for a plausible reason for resignation, as the Companies Act 2013 requires directors to state explicitly the reason for resignation in its submission to the Registrar of Companies. One cannot mention that he has resigned due to ' personal reasons'. My friend was not interested in mentioning the actual reason for resignation for two reasons. First, he has no evidence that he was asked to resign. Second, he is not sure whether the corporate affairs ministry can take any action to improve the board process, the objective that he desired to achieve. My friend could have declined to resign. In that case, the company would have to take steps to remove him. Removal of a director requires a simple majority in the shareholders' meeting. The director gets a chance to represent his position. Therefore, the removal process would have given my friend an opportunity to present his case before shareholders. But, I know that like most professionals, he is not an activist. And in this case, perhaps, the promoter could get the resolution passed, as it holds 40 per cent voting rights and all shareholders seldom attend or vote ( through evoting) in a general meeting. Therefore, he must have considered resigning from the boards his best option. The provisions of the Companies Act 2013 regarding removal of director cannot deter the management from removing an independent director in acompany where there is a concentration of ownership. We have seen how independent directors of public sector enterprises were removed. An independent director, who is not an activist, cannot have the motivation to act as a crusader for improving the board process and effectiveness, because he is usually an otherwise accomplished person and he does not have a stake in the company. He loses nothing by quitting a board where he is uncomfortable. The above incident shows that even today ' rubber stamp' boards exist. No outsider can find fault with the corporate governance practice of the particular company. All the disclosures and reports show that it complies with every requirement of the Companies Act and Sebi code of corporate governance. This is the difficulty in assessing corporate governance practice in a company. Nothing is observable from outside. The government can do little to transform ' rubber stamp' boards into 'engaged boards', particularly in companies where there is a concentration of ownership. In a family- run company, key business decisions are taken at the family forum and therefore, the promoter may love to live with an ornamental board. Independent directors in such a company hold office at the pleasure of the promoter. The chairman of the board of directors and the promoter decides to which extent it will engage the board of directors in decisionmaking. Enlightened family- managed companies engage the board in decision making to take advantage of outside perspective and critical review of key decisions and systems by ' loyal critics'. Independent directors who are members of a ' rubber stamp' board are exposed to the risks of being prosecuted for omissions or commissions of the company. It is difficult, or rather impossible, for directors to directly detect management misfeasance, frauds, abuse of related- party transactions and errors in financial statements. They have to depend on the statutory and internal auditors. Therefore, in the absence of an engaged and effective audit committee, directors might be caught in a surprise when a wrongdoing is detected and they may be prosecuted for not applying due diligence. Both the management and independent directors are benefited when the board as a whole gets engaged with the management of the company. The mindset has to change. Affiliation: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor ( Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited ACCOUNTANCY ASISH K BHATTACHARYYA Companies Act 2013 can't deter removal of an independent director from a company with concentration of ownership The govt can do little to transform 'rubber stamp' boards into 'engaged boards'

 

BRIEF CASE BIFR alone to decide if unit has revived The Board for Industrial and Financial Reconstruction ( BIFR) does not lose control over a sick company even if it has revived on its own and its net worth has become positive. The civil court cannot claim jurisdiction on the ground that the company which was once sick has turned the corner, the Supreme Court ruled last week in the case, Ghanshyam Sarda vs M/ s Shiv Shankar Trading Co. In this case, some parties moved the civil court which was resisted by others. Thus the dispute arose over the power of the civil court and BIFR. The court stated that the law gave " complete supervisory control to the BIFR over the affairs of a sick industrial company from the stage of registration of reference and questions concerning status of sickness of such company are in the exclusive domain of the BIFR." The judgment asserted that the aspects of revival of such company being completely within its exclusive domain, it is the BIFR alone, which can determine the issue whether such company now stands revived or not. " The jurisdiction of the civil court in respect of these matters stands completely excluded. The BIFR alone is empowered to determine whether the net worth has become positive as a result of which it would cease to have such jurisdiction," the court clarified. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Green signal for 5- star hotel near lakes Environment rules framed after permission was granted to make constructions cannot be applied to a project, the Supreme Court stated in the case, Vardha Enterprises Ltd vs R K Razdan. In this case, a five- star hotel was to be built in Udaipur, near Fatehsagar lake and the Pichola lake. A public interest case was moved in the Rajasthan High Court alleging that the project, sanctioned in 2009, violated the Wetlands (Conservation and Management) Rules. The high court stopped the project, against which an appeal was moved in the Supreme Court. It directed the authorities to allow the constructions in view of two factors. The area under construction has not been notified as wetlands under the rules. " Even if such identification were to be made tomorrow, the vested rights of the firm cannot be defeated by executive action," the order said. Moreover, the firm was given permission in 2009 under the then existing laws. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Non- delivery of yarn to Bangladesh The Supreme Court has dismissed the appeal of a transporting company which allegedly did not deliver a few consignments of cotton yarn sent from Ahmedabad to Benapole in Bangladesh. In this case, Transport Corporation of India vs Ganesh Polytex Ltd, the latter received intend from Aleef Enterprises calling upon it to export the goods to Azim Garments Ltd in Dhaka. The exporter was required to negotiate the various documents through Islami Bank Bangladesh Ltd, the buyer's banker. Five consignments of goods were entrusted with the transport company. The dispute started when the bank did not honour the documents and did not pay for a long time. The consignments were rebooked. The exporter alleged that the goods were not fully delivered and moved the National Consumer Commission. It ordered the transporter to pay ₹ 30 lakh with 12 per cent interest. The appeal was dismissed with the Supreme Court observing that the transporter could not prove that the goods entrusted to it were satisfactorily delivered in Bangladesh. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> ICMR to pay for land acquisition The Supreme Court last week slightly reduced the compensation awarded to land owners in Belgaum, whose land was acquired for a research centre for Indian Council of Medical Research. The government notified the acquisition in 1994 and the land acquisition officer assessed the compensation at ₹ 1,050 per ' gunta' or ₹ 42,000 per acre. The land owners moved the civil court for redetermination. It hiked the amount to ₹ 7,000 per ' gunta'. They appealed to the Karnataka High Court for higher rate. It enhanced the compensation to ₹ 99,000. Therefore ICMR, a central government organisation, moved the Supreme Court. It arrived at ₹ 70,000 per ' gunta' applying the relevant factors like: the location of the land, its potentiality, the rate at which adjoining lands were sold a few months before, the condition of the undeveloped lands and expenditure required to develop it for the project. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Insurer to pay higher compensation Rejecting the computation of compensation in a road accident case by the Himachal Pradesh High Court, the Supreme Court directed the insurance company to pay an enhanced amount to the widow and two minor children in the appeal case, Kala Devi vs Bhagwan Das. The 25- year- old matriculate driver died when he pushed his vehicle stuck over snow and the vehicle toppled over him. The wife and children claimed ₹ 13 lakh as compensation but the tribunal granted only ₹ 4.40 lakh. On appeal, the high court raised it to ₹ 7 lakh. On appeal to the Supreme Court it raised the compensation further to ₹ 14.61 lakh, more than what was originally demanded. The Supreme Court observed that the high court had granted only ameagre sum of ₹ 30,000 for loss of consortium and ₹ 40,000 for loss of love and affection with regard to children. The court raised it to ₹ 1 lakh each as per earlier guidelines set in a leading judgment. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> No TDS on deposits with court The Delhi High Court last week set aside the demand of the tax authorities which insisted that in cases where deposits were made in terms of directions issued by the court, the banks were required to deduct tax at source and issue tax deducted at source certificates. The CBDT had also issued a circular to that effect. The high court, in its judgment in the case, UCO Bank vs Union of India, struck down the circular on several grounds. " The circular," said the court, " proceeds on an assumption that the litigant depositing the money is the account holder with the bank and/ or is the recipient of the income represented by the interest accruing thereon. This assumption is fundamentally erroneous as the litigant who is asked to deposit the money in court ceases to have any control or proprietary right over those funds. The amount deposited vests with the court and the depositor ceases to exercise any dominion over those funds. It is also not necessary that the litigant who deposits the money would be the ultimate recipient of those funds. The person who is ultimately granted the funds would be determined by orders that may be passed subsequently." A weekly selection of key court orders

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A.Rengarajan
Practising  Company  Secretary
Chennai

Mobile 93810  11200

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Posted by: CS A Rengarajan <csarengarajan@gmail.com>

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