 "Independent directors redesignate as “non-independent” to ensure compliance of Sebi cap")
Some independent directors (ID) have been altering their status as ‘non-independent non-executive directors’ in some boards, to help get appointed in a new company as ID. This helps them get around the cap on IDs, while continuing to keep their board seats.
The Companies Act of 2013 permits a maximum of directorships in public limited companies, listed or unlisted. And, the listing agreement specified by the Securities and Exchange Board of India, in effect from October 1, 2014, has limited the maximum number of IDs in listed companies to seven.
The cap was to ensure directors are able to give adequate time and effort to each board, since their responsibilities have increased under the new framework. IDs are appointed by shareholders in the annual general meeting (AGM) for a specific period, such as five years. If a director is appointed during the year, this requires approval at the next AGM.
A director so appointed cannot change his/her status in the middle of a term, argue corporate governance experts. J N Gupta, managing director, Stakeholders’ Empowerment Services, says converting it from an ID to a NED by the board, without shareholder approval, makes a mockery of the law. “These directors are using board seats like a pack of cards, shuffling these at their will. The board is subservient to the shareholders, not the other way round. It doesn’t have powers to alter the terms of appointment determined by the shareholders general body, which is supreme in corporate democracy.”
According to data provided by Prime Database, at least 20 directors had touched the cap of seven IDs. Five of these had board seats as non-independent NEDs, in addition to their ID positions.
Business Standard reached a couple of IDs, both senior lawyers, who have become ‘non-independent’ in the middle of the term.
Rajendra Ambalal Shah, 85, had first altered his position from independent to non-independent in Abbott India on July 31, 2015. By making this change, the number of his IDs fell to seven. The change itself was intimated to the exchanges after Business Standard had got in touch with the company and Shah, questioning the breach of Sebi cap at that time.
Three months later, on October 28, 2015, Shah was appointed as ID again at Abbott India, making it his eighth such. His other board positions as ID on that day were at Lupin, Pfizer, Procter & Gamble, BASF India, Bombay Dyeing, Colgate-Palmolive and Godfrey Phillips India.
On November 10, Godfrey Phillips said it had informed the BSE exchange that the board of directors in a meeting on October 31 “took note of the intimation received under Section 149 (7) of the Companies Act” from Shah for considering him a NED. The shareholders had originally appointed Shah an ID for five years in the AGM of September 2014. By these records, for three days between October 28 and October 31, he was again in breach of the Sebi ceiling.
On Monday, the shareholders of Abbott India would consider a resolution for approval of Shah’s reappointment as ID with effect from October. “Abbott is in full compliance with all applicable laws, rules and regulations,” a company spokesperson said.
In response to an e-mail questionnaire, Shah also said the company was in compliance with all laws and regulations, adding: “Changes in directorship became necessary in view of the combined operation of the changes in the company law, which were brought about by the Companies Act, 2013, and the new listing regulations. Both these regulations provided for different ceilings on IDs and became effective from divergent dates.”
Another case of a similar redesignation from independent to non-independent was of Kolkata-based senior lawyer Pradip Kumar Khaitan, 75. He’d been appointed by Dhunseri Petrochem as ID director in August 2014 for five years. His other IDs being Emami, Graphite India, Electrosteel Castings, Dalmia Bharat, CESC and India Glycols.
On August 7, 2015, Dhunseri informed BSE that Khaitan “had vide his letter dated July 3 expressed willingness to continue as a non-ID instead of an ID”, noted by the board of directors at their meeting on August 7. A month later, Khaitan was appointed an ID of OCL India in its AGM, with effect from August 8.
Asked to respond to criticism of this practice, Khaitan in an e-mail said, “Under sub-section (6) of Section 149 of the Companies Act, an ID in relation to a company, means a director other than a managing director or a whole-time director or a nominee director: A) who in the opinion of the board, is a person of integrity and possesses relevant expertise and experience;”
Adding, “You will therefore observe that the board of a company will determine if a person can be an ID and not the shareholders or any director unilaterally. In my case, it was decided by the boards of the companies involved. Not me unilaterally.”
The Companies Act of 2013 permits a maximum of directorships in public limited companies, listed or unlisted. And, the listing agreement specified by the Securities and Exchange Board of India, in effect from October 1, 2014, has limited the maximum number of IDs in listed companies to seven.
The cap was to ensure directors are able to give adequate time and effort to each board, since their responsibilities have increased under the new framework. IDs are appointed by shareholders in the annual general meeting (AGM) for a specific period, such as five years. If a director is appointed during the year, this requires approval at the next AGM.
A director so appointed cannot change his/her status in the middle of a term, argue corporate governance experts. J N Gupta, managing director, Stakeholders’ Empowerment Services, says converting it from an ID to a NED by the board, without shareholder approval, makes a mockery of the law. “These directors are using board seats like a pack of cards, shuffling these at their will. The board is subservient to the shareholders, not the other way round. It doesn’t have powers to alter the terms of appointment determined by the shareholders general body, which is supreme in corporate democracy.”
According to data provided by Prime Database, at least 20 directors had touched the cap of seven IDs. Five of these had board seats as non-independent NEDs, in addition to their ID positions.
Business Standard reached a couple of IDs, both senior lawyers, who have become ‘non-independent’ in the middle of the term.
Rajendra Ambalal Shah, 85, had first altered his position from independent to non-independent in Abbott India on July 31, 2015. By making this change, the number of his IDs fell to seven. The change itself was intimated to the exchanges after Business Standard had got in touch with the company and Shah, questioning the breach of Sebi cap at that time.
Three months later, on October 28, 2015, Shah was appointed as ID again at Abbott India, making it his eighth such. His other board positions as ID on that day were at Lupin, Pfizer, Procter & Gamble, BASF India, Bombay Dyeing, Colgate-Palmolive and Godfrey Phillips India.
On November 10, Godfrey Phillips said it had informed the BSE exchange that the board of directors in a meeting on October 31 “took note of the intimation received under Section 149 (7) of the Companies Act” from Shah for considering him a NED. The shareholders had originally appointed Shah an ID for five years in the AGM of September 2014. By these records, for three days between October 28 and October 31, he was again in breach of the Sebi ceiling.
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On Monday, the shareholders of Abbott India would consider a resolution for approval of Shah’s reappointment as ID with effect from October. “Abbott is in full compliance with all applicable laws, rules and regulations,” a company spokesperson said.
In response to an e-mail questionnaire, Shah also said the company was in compliance with all laws and regulations, adding: “Changes in directorship became necessary in view of the combined operation of the changes in the company law, which were brought about by the Companies Act, 2013, and the new listing regulations. Both these regulations provided for different ceilings on IDs and became effective from divergent dates.”
Another case of a similar redesignation from independent to non-independent was of Kolkata-based senior lawyer Pradip Kumar Khaitan, 75. He’d been appointed by Dhunseri Petrochem as ID director in August 2014 for five years. His other IDs being Emami, Graphite India, Electrosteel Castings, Dalmia Bharat, CESC and India Glycols.
On August 7, 2015, Dhunseri informed BSE that Khaitan “had vide his letter dated July 3 expressed willingness to continue as a non-ID instead of an ID”, noted by the board of directors at their meeting on August 7. A month later, Khaitan was appointed an ID of OCL India in its AGM, with effect from August 8.
Asked to respond to criticism of this practice, Khaitan in an e-mail said, “Under sub-section (6) of Section 149 of the Companies Act, an ID in relation to a company, means a director other than a managing director or a whole-time director or a nominee director: A) who in the opinion of the board, is a person of integrity and possesses relevant expertise and experience;”
Adding, “You will therefore observe that the board of a company will determine if a person can be an ID and not the shareholders or any director unilaterally. In my case, it was decided by the boards of the companies involved. Not me unilaterally.”
