By Jayant M. Thakur
Chartered Accountant
Background
In a recent ruling, the Supreme Court has
directed a freeze on assets of all the directors, including independent
directors, owing to certain defaults by the Company. They have also been
required to be personally present at hearings of the Court. At this stage,
there does not appear to be any conclusive finding about the guilt of the
independent directors and the matter is still sub judice. But this order
does raise concerns about the liabilities and inconveniences that independent
directors can be subjected to. As will be discussed later herein, being an
independent director is in a sense a thankless job. Their remuneration is
subject to statutory limits while their liability is enormous. There have
already been several orders by SEBI, that has taken different types of actions
against them. The defences available in law owing to recent changes appear to
have been diluted. Let us consider this decision (Chitra Sharma vs. UOI,
dated 22nd November 2017) generally in the light some existing
provisions.
Needless to emphasise, Chartered
Accountants, Company Secretaries, lawyers, etc. are sought after persons
to fill in the posts of independent directors in listed companies and also
committees like Audit Committee. They too will warily see the developments in
law and court rulings.
Role of independent directors
Independent directors are a major pillar of
good corporate governance. They are meant to balance against the control of
Promoters, and directly or indirectly protect the interests of minority/public
shareholders and even other stakeholders. Committees like Audit Committee or
Nomination and Remuneration Committee are to have majority or at least half of
the number of members as independent directors.
The Companies Act, 2013 (“the Act”) lays
down in Schedule IV a very detailed code for independent directors. Their role
and obligations are laid down broadly and generally as well as specifically.
Apart from the specific code for independent
directors, there is a very detailed role under the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 (“the Regulations”) for the
Board generally.
Powers of independent directors
The powers of independent directors are, in
comparison, relatively scanty. They do have powers as part of the Board generally.
They have right of information as part of the Board/Committee. However, these
are available few times a year when the Board/ Committee meets. Between these
meetings, they do not have direct substantive powers, either individually or
collectively. In meetings too, they individually do not have powers except to
participate and vote and perhaps require that their dissenting views be
recorded.
Remuneration
Independent directors are in a peculiar
position. They cannot be paid too much simply because they would lose their
independence since they would become dependent on the Company. Paying them too
less means that they do not have enough compensation and incentive to do
justice to their efforts and the risks that the position carries, of action by
regulators.
Typically, independent directors are paid by
way of sitting fees and, where the Company is profitable and if the Company so
decides, payment by way of commission as a percentage of profits. Sitting fees
are, however, limited to Rs. 1,00,000 per meeting (in practice, often a lesser
amount). Such level of remuneration in many cases would not be adequate for
many competent directors to accept the responsibilities and liabilities that
law imposes.
Kotak Committee appointed by SEBI has
recently recommended certain minimum remuneration for independent and
non-executive directors and though it still does not appear to be adequate in
proportion to liability, it is clear that attention is being given to this
area.
Liability of independent directors generally
Non-executive directors usually do not have
specific and direct liability under the Act/Regulations. Generally, executive
directors, key managerial personnel, etc. are taken to task first, for their
respective general or specific role in defaults. Non-executive directors who
are promoters may of course face action under certain circumstance. But
generally, non-executive directors can ensure that due role is formally
apportioned to competent persons so that they do not face actions on matters so
delegated. However, under the Act and even the Regulations, this has changed to
an extent. Under section 149(12) of the Act and the Regulations, some further
relief is sought to be given. Essentially, an independent director will be
liable, only if the default is with his knowledge through board proceedings.
This does help him because, unless the matter is brought before and part of
board proceedings, he may not be held liable. However, this is subject to the
condition that he should have acted diligently. This provision has not been
tested well and it will have to be seen how much it helps.
Orders/actions against independent directors
SEBI has general and special powers by which
it can pass adverse orders against independent directors. And it has passed
such orders. SEBI can, of course, take action for violation of specific
provisions of the Regulations applicable to them. However, depending on their
role, SEBI can use its general powers to pass orders against them. This may
include debarring them from acting as independent directors of listed
companies.
The Order in case of Zenith Infotech as
originally passed is particularly noteworthy. (Order No. WTM/RKA/ISD/11/2013
dated 25th March 2013). In this case, SEBI had alleged diversion of
funds of Zenith. SEBI ordered the whole Board, including the independent
directors, to provide personal bank guarantee to the extent of $33.93
million for the losses suffered by Zenith. The guarantee was to be provided
without use of the assets of Zenith. Needless to emphasise that, independent
directors, particularly professionals, would usually not be able to provide
such guarantees. Professional directors would then face further adverse
directions for not complying with orders which may include prosecution.
Order of the Supreme Court
The Company concerned here is facing
insolvency proceedings. Numerous persons have booked flats and it appears that
the buyers are looking at loss of advances paid for purchase of flats. The
Supreme Court had earlier required the promoters to infuse funds in the
company. However, this apparently was not done to the extent ordered. The
Supreme Court has thus ordered that, inter alia, the independent directors
and their dependents will not transfer any of their assets till further notice.
The Court ordered:-
(d) Neither the independent
directors nor the promoter directors shall alienate their personal properties
or assets in any manner, and if they do so, they will not only be liable for
criminal prosecution but contempt of the Court.
(e) That apart, we also direct
that the properties and assets of their immediate and dependent family members
should also not be transferred in any manner, whatsoever.
…
Matters be listed on 10.1.2018. On that day, all the independent
directors and promoter directors of Jaiprakash Associates Limited, shall remain
present.
Thus, the directions are (i) the assets of
the independent directors and their immediate and dependent family
members are frozen (ii) the independent directors are required to be personally
present before the Court at the hearing of the case.
The broad based order means that independent
directors’ business/professional and even personal activities are seriously
affected.
At this stage, there does not appear to be
any final ruling of the guilt of the independent directors. It is also not
clear whether there is any finding of complicity or even negligence of their
duties as independent directors. Even if such a direction is reversed in the
future, in the interim, the independent directors face serious difficulties.
As stated earlier, there are some defences
available to independent directors in case of wrong doings by the company. If
they have taken due safeguards and carried out their role with diligence, they
may not ultimately be held liable. But in the interim, such orders are
effectively a punishment.
Recent order of SEBI exonerating
independent directors where they exercised diligence.
In the case of Zylog Systems Limited (Order
dated 20th June 2017), there was a finding that the Company declared
dividends but did not pay it. The question arose as to the role of the Board
generally and also of the independent directors in particular. SEBI issued show
cause notices to, inter alia, the independent directors, alleging
violations and seeking to pass adverse directions. The independent directors
explained in detail their role as independent directors generally and as
members of the Audit Committee. They explained how they brought to notice such
non payment of dividends to the Board of Directors of the company. When the
Board of Directors did not still take steps to pay the dividends, the said directors resigned. SEBI dropped the
proceedings against them and observed.
I have considered the charges alleged in
the SCN and replies filed by the noticees. I note that the Independent
Directors do have an important role to play in guiding the management so that
the interest of the Company and the minority shareholders are protected.
Further, the Independent directors will also have to ensure that the
functioning of the Company is in full compliance with the applicable laws. In
this case, I have noted that noticees after noticing the violation of non-payment
of dividend have taken strong stands to convince the Company’s Board about the
necessity of ensuring that the statutory dues and the dividends are paid
without any delay, in the Board meeting held on November 14, 2012. As the
company failed to comply, the two noticees resigned from the Company ’s Board.
Considering the above facts and
circumstances of the case, I am of the view that since both the noticees did
not have any role in the day-to-day management of the company and have
discharged their responsibility as Independent Directors putting in their best
efforts, I do not deem it fit to pass any directions under section 11 and 11B
of the SEBI Act, 1992 against Mr. S. Rajagopal and Mr. V. K. Ramani. The SCN is
disposed of accordingly.
Conclusion
Many of the cases till now where independent
directors have faced adverse actions are fairly glaring cases of serious
alleged violations causing losses to shareholders/others. Clearly, if
independent directors are complicit with such violations, adverse action
against them is expected and inevitable. However, adverse directions before
such allegations are proved can cause losses. Even otherwise, proving their
innocence or that they exercised diligence in their duties can itself be an
expensive affair. It is submitted that specific and general guidelines should
be framed both by Ministry of Corporate Affairs and SEBI. There should be
guidance as to the specific steps an independent director should take to
discharge his duties with diligence on one hand and clear examples where they
can be held liable. Else, there will be increasing disillusionment amongst
existing and potential independent directors. In the absence of clarity, the
intention of the lawmakers to have good corporate governance may fall flat. _
