Last week, C M Maniar, former non-executive director of Financial Technologies (India) Ltd, or FTIL, and MCX, was stopped from boarding an international flight. Mr Maniar, 78, a senior advocate, had a "look-out notice" in his name. Mr Maniar complained to this paper: "I am no longer associated with any of the Financial Technologies group companies. I was never on the board of NSEL [National Spot Exchange Limited] and was a non-executive director of FTIL." Is that a good enough argument?·
It is unseemly for a 78-year-old man to be stopped while he is boarding a plane at an international airport. But the fact is that being stopped at the airport is relatively pretty harmless. One should ask: what will happen if the provisions of the new Companies Act with regard to independent directors are applied to their fullest extent? Here are some little-discussed aspects of two laws that have been drastically amended recently.
Mr Maniar surely knows that the provisions of the new Companies Act put an onerous liability on directors. For instance, the Act makes independent directors liable only when a fraudulent act is done with their consent, knowledge and connivance; but if they have received the minutes of board meetings where s/he was not present and did not raise objections to a dubious decision, s/he will still be liable. And here is the clincher: if some wrongdoing is caught, the punitive action includes a fine of up to Rs 25 crore and/or imprisonment. Under the new Companies Act, numerous acts and omissions, termed "fraud", have a minimum (yes, it is minimum, not maximum) and mandatory imprisonment. The persons who are potentially liable are directors, officers, auditors, advisors and so on. The imprisonment ranges from a minimum of six months to 10 years. In case of frauds involving "public interest" (not defined clearly, as you would expect), you can go to jail for three years.
Even as the Companies Act with such draconian provisions (I have alluded to just a few) was being passed, a 16-page ordinance dramatically enhanced the powers of the Securities and Exchange Board of India (Sebi), which is now a police and revenue department rolled into one. Sebi can conduct search and seizure of assets/documents, arrest and disgorge unfair gains. Sebi can call for information or records from any person, including banks or any other authority/board or corporation, and from other authorities in India and abroad. Sebi will be able to search any building, vessel, aircraft, or break open the lock of any door or safe. Sebi can also seize books of accounts, place marks of identification and record on oath the statement of any person.
While the provisions of the new Companies Act have been out in the open for discussion for two years, did you see any serious representation by industry associations, chambers of commerce, or business leaders who regularly meet top ministers in different fora? And what about the new powers of Sebi, which, in the past, has shied away from using the powers that it already had? Instead, it preferred to pass "consent orders" to let off various market players under dodgy legal provisions.
People like Mr Maniar, who represent the cream of the Indian corporate sector, have collectively buried their heads in the sand about laws and practices that should affect them directly. Indeed, do Indian businesspersons really think they can coexist peacefully with these horrifying provisions? Public memory is short. Nimesh Kampani, chairman of J M Financial, one of the contenders for a banking licence today, had a look-out notice on him by the Andhra government in 2008 for a flimsy case, in which he, too, was a non-executive director and defaults had occurred after a management change. He was on the run, after being whisked out of the Ahmedabad airport, thanks to timely corporate help. Mr Kampani could only come back more than a year later to celebrate Diwali in 2009.
That was a case of one chief minister out to teach him a lesson using a state law. Given the severe provisions of the Sebi Act and the Companies Act, the entire Indian corporate sector should feel as though a sword is hanging over its head. But why has it been silent? In another business paper, Rajiv Kumar, former secretary general of Ficci, described the apex business associations "as insiders' clubs and event managers, rather than the representative voice of our business community".
Personally, I am less concerned about why corporate India exhibits a "battered wife" syndrome - their cosying up to the powers that are making it harder to do business in India. What is more worrying is that the real brunt of such provisions is borne by consumers and investors even as businesspersons somehow "manage" the system.
To go back to Mr Maniar's case, on August 28, FTIL had informed the exchanges that he had resigned. Two days later, he resigned from the board of MCX too. He argues that this should absolve him of all blame. But when the NSEL scam broke, every single "independent" director across the group resigned, like rats deserting a sinking ship, making a mockery of the various laws, rules and codes of governance that everyone piously vows to uphold. Does Mr Maniar not see a pattern in these desertions? If this is not quickly shirking responsibility after enjoying the fruits of power for years together, what is it? It amounts to a perversion of the very concept of independent directors. And if that is so, who, then, protects the interests of shareholders?
Shareholders of a scam-ridden company pay the price for crashing stock prices; customers pay the price for lousy services; and all that an independent director suffers is the ignominy of being turned back from an international airport, even when the laws have become rougher. We surely have created a lopsided idea of corporate power and responsibility.
The writer is the editor of www.moneylife.in
editor@moneylife.in
editor@moneylife.in
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