Independent directors in a fix after SC order on asset transfer in Jaiprakash Associates case

Independent directors in a fix after SC order on asset transfer in Jaiprakash Associates case

A recent Supreme Court judgement restraining independent directors of Jaiprakash Associates from transferring any personal assets over a group company’s insolvency issue has sent shock waves through the independent directors’ fraternity, with experts warning that there would be few takers for this role.

Several independent directors on boards of companies are now seeking legal advice to find out to what extent they can be held liable for any operational issues in those firms.Kiran Mazumdar Shaw, chairperson of Biocon, said the country is moving from poor governance to extreme governance. “It is unfair to place the entire onus on independent directors who are only privy to the information shared with them by the management,” she said. “Instead of penalising independent directors, the management and promoters should be penalised.”

A corporate veteran who is on the board of several blue chip companies as an independent director said they should be “provided immunity and protection except in cases of wilful fraud or gross neglect”. “We spend so much time and energy to understand issues although the compensation for the same is not adequate enough,” the person said on condition of anonymity.

The Supreme Court had last week restrained independent directors and promoters of Jaiprakash Associates and their family members from transferring any personal assets or property without the court’s permission until its real estate arm Jaypee Infratech deposited Rs 2,000 crore to protect the interest of hundreds of homebuyers who have invested in the firm’s incomplete residential projects.

Many industry and legal experts said independent directors should not be held liable for operational issues, while others defended the court’s decision saying such directors cannot alienate themselves from affairs of companies.

“Independent directors should not be held liable for the business losses or business financial failure of the company,” said Rajesh Narain Gupta, managing partner at law firm SNG & Partners. “People of calibre are wary of joining boards and the recent order may be a jolt to the office of independent directors as it has given a new dimension to this office,” he said

Experts warned that people will now think long and hard before joining the board of companies, leading to difficulties in implementing the recent Uday Kotak committee recommendations on corporate governance, which mooted stronger role for independent directors.
“Public policy must figure out how to ensure that the burden of serving on boards is not so heavy that the beneficial effects of independence emphasised by the Kotak committee are not given up,” said Shailesh Haribhakti, chairman at chartered accountant firm Haribhakti & Co.

“This will be a fine balancing act,” said Haribhakti who is an independent director on the boards of several companies including Blue Star, ACC, Torrent Pharmaceuticals, Ambuja Cements, Future Lifestyle Fashion and L&T Finance Holdings.Deepak Parekh, chairman of HDFC Bank, however, said independent directors are bound to closely monitor operations of the company on which they are a board member.

“In case they come across any governance issues they should put across their views strongly to the promoters or step off such boards,” he said. “While the judgement may be seen as harsh, independent directors cannot alienate themselves from company issues,” Parekh said.

The Economic Times, New Delhi, 29th November 2017