WHY INDEPENDENT DIRECTORS ARE ACTING AS “PUPPETS” OF THE MANAGEMENT ?

 

* There are around 7000 Listed Companies and 66000 unlisted companies in India. All listed companies and a majority of unlisted Public Limited Companies are required to have Independent Directors on their Board as per the Companies Act, 2013 as well as in terms of the Listing Agreement of Stock Exchanges.

*The basic intention and spirit behind appointing the Independent Directors on the Boards of Companies is to ensure that the operations of these entities are monitored by Independent experts because these Companies are running on the funds invested by the general public and the funds borrowed from the Financial Institutions and Banks.

* If the really "Independent" persons are appointed on the Board of these Companies, which was the true intention and spirit of law, it would mean that there will be no misuse and diversion of public money and funds borrowed from the Banks and the Financial Institutions.

*Companies Act, 2013 provides a negative list of persons who could  not be appointed as Independent Directors. Apart from this list, Promoters and Companies are free to appoint any person of their choice as Independent Director. This freedom given to the promoters and Companies defeats the very purpose for which provision has been made in the law for appointing the Independent Directors.

* Since these so called "Independent directors" are appointed by the promoters   of the Companies, it is not possible that they will discharge their duties in the "independent" manner and in all likelihood, they will act as “Puppets” as per the wishes of the promoters of the companies.

* It is not that the so called “Independent” Directors, presently appointed by the Promoters of the Companies are not competent to check the misappropriation or diversion of funds from these Companies. They are not able to do the same as they are forced to work under the influence of the promoters who have appointed them.

 

NEED FOR "REALLY INDEPENDENT DIRECTORS":

* It is clear that presently "Independent Directors" appointed by the listed Companies are not really independent in the true spirit. Listed Companies are indulging in all types of diversion of public money and even the funds borrowed from the Government Banks and Financial Institutions. There are thousands of such cases where Companies have diverted and misappropriated the public money and these so called "Independent Directors" remained mute spectator of this illegal act of the promoters. I will just give one example to show how Companies are taking the general public and Government, both for a ride despite there being "Independent Directors" on their Boards.

                                                  

* I will try to illustrate how general public is being cheated with the help of an example. In the year 2006 the Deccan Aviation Limited promoted by Captain G.R. Gopinath came out with an IPO at a hefty price of Rs.148 per share. After few months in 2007, Captain Gopinath sold the controlling stake of this Company to Vijay Mallaya who was running an unlisted Company Kingfisher Airlines Limited.

Eventually the company promoted by Captain Gopinath lost its existence within a period of one year and got merged into the Kingfisher Airlines Limited. What happened thereafter, is a sad history for general public who invested their hard earned money into the Company. Kingfisher has already stopped its operations long time back and the investment made by the public became zero even before Vijay Mallaya left the country.

Retail investors who invested Rs. 14800 in 2006 have been left with empty hands and they have no recourse available with them to recover their lost money. Unfortunately, this is not the isolated case. We may find thousands of such cases, if we have the time to dig into the records of wrongdoings of the companies. Kingfisher has not only diverted all the public money, but also owes more than Rs.7500 crores to Banks and Financial institutions. My question is what were these so called "Independent " Directors were doing all these years when the Company was diverting/misappropriating the money belonging to the public and the Government Banks and Financial Institutions ?

WHAT IS THE SOLUTION ?

* There is an urgent need to set up an "Authority for Appointment of Independent Directors", which should function as an autonomous body of the Ministry of Corporate Affairs. This Authority will discharge the following functions:

1. To maintain the Data Bank of the experts from the different fields, who are eligible to be appointed on the Boards of the listed Companies and Banks as per the provisions of the Companies Act,2013.

2. After the Authority comes into existence, promoters of the listed Companies will not be able to appoint the Independent Directors on their own and will invariably request the Authority to nominate a person from the Data Bank whenever there is any vacancy of Independent Director in the Company.

3. All Independent Directors will be appointed by the Authority and will be accountable to the Authority only. These Directors will send a written report to the Authority after attending the each and every Board Meeting of the Company and will list out their observations on the discussions and decisions made in the meeting. The Authority may prescribe a format for this "Report from the Independent Director".

4. After receipt of the Report from the Independent Directors, Authority will make a scrutiny of the same to know whether it has any negative or adverse observations regarding the operations or finances of the Company and will forward the same to SEBI or some other regulatory body so that timely action could be taken on the findings of the Report. If it is in the interest of the public, the Authority can make public the observations of this Report in full or in part.

                                                  

WHAT ARE THE MAJOR BENEFITS OF APPOINTING REALLY INDEPENDENT DIRECTORS WHO WILL NOT ACT AS “PUPPETS”

1. When Directors are appointed by the Authority and not by the Promoters, they will be able to act in truly "Independent" manner, which is the true spirit of law and is the need of the hour.

2. Listed Companies are diverting and misappropriating a huge amount of public money and the funds borrowed from Banks and Financial Institutions as illustrated above in the Kingfisher example. Such types of misappropriations and diversions will stop to a larger extent if there are "truly independent directors" on the Boards of the Companies.

3. When everybody will come to know that the Independent Directors are being appointed by some autonomous body, the confidence and trust of the General Public as well as of the Institutional Investors will increase manifold which will attract more investment into the Country, giving a boost to the economy.

4. Independent Directors will be able to monitor and check the misappropriation and diversion of the borrowed funds from the Banks and Financial Institutions and therefore there will be substantial decrease in the NPAs of the Bank.

5. Few years back CMD of Syndicate Bank was caught red handed by accepting bribe from the CMDs of some listed companies. With the appointment of Independent Directors on the Boards of the Banks, such corrupt practices will be checked to a greater extent and there will be significant improvement in the asset quality of the Banks.

6. Independent Directors will be able to monitor and check the business operations of the Company and Companies will not be able to "understate" their profits by increasing the expenses of the Company by putting "Bogus and Fictitious" expenses. This will increase, both direct and indirect tax revenue for the Government and will be able to check the generation of black money into the system.

It is hoped that sooner or later Ministry of Corporate Affairs will have to implement these suggestions so that Independent Directors could actually act as ‘Independent’ instead of acting as ‘Puppets’ in the hands of Company Management.

 (My this article was first published in Times of India on 9 September 2022 at the following link:   

  Why Independent directors are acting as ‘puppets’ of the management? (indiatimes.com)                                

 

                                                                                       -RAJEEV GUPTA