Independent directors' role under lens post-Satyam

LEGAL EYE

The Satyam scam, or rather, the promoter Chairman’s decision to acquire the controlling stake in the Maytas, companies controlled by his family members is the last thing India Inc needed in the year of inflation, global meltdown and bomb blasts. India’s image as a preferred investment destination, with best practices and transparent systems was badly dented, provoking a fresh debate on standards of corporate governance in India. The brazenness of the promoter’s statement and justifications of diversification in infrastructure, as opposed to Satyam’s core business, had few takers. As did the management comment that there was no violation of any law or regulation, that no shareholders’ approval was required as the promoters’ holding in Satyam was less than10 per cent.

Shareholders paid dearly as the stocks plummeted and the institutional investors threatened to oppose the deal. The wide-open Pandora’s Box revealed huge cash accumulations in the company’s current accounts, resulting in low dividend payouts. A UK-based client has apparently filed a suit against the deal alleging the stripping of surplus cash in a related party transaction, benefiting the promoter chairman’s family.

Satyam was quick to call off the acquisition, given the shareholders’ opposition and has announced a reversal on the lines that the Maytas sellers will buy back the shares. A board meeting for this purpose is slated for later this week. But the deal cancellation modalities are yet to be worked out. There are rumours of Raju’s stake being sold out. Apart from the negative impression that may have been conveyed on a wider and global spectrum, this incident raises certain fundamental questions – as to the laws and regulations that listed companies are bound by, the dividing line between corporate governance and laws, and whether corporate governance is only an illusory lip service, which can be thrown to the winds, with no restitution.

Corporate governance consists of a set of processes, customs, policies and laws which takes within its ambit various relationships among the several stakeholders involved in the company’s operations and governance, which is not necessarily limited to the shareholders and management covering as it does a wider spectrum of customers, creditors, employees, regulators and in a broader sense, the community at large. The concept of corporate governance is to ensure accountability and economic efficiency. Not all corporate governance norms can be translated into legislation, as these are determined very often by market forces, the dynamics of the corporation’s business and scale. Sebi Committee Report defines corporate governance as acceptance by management of the inalienable rights of the shareholders. Many principles are based on internal controls, independence of the entity of auditors and functioning and transparency of the board of directors for which the key lies in self regulation.

What has shocked public and investor conscience in this case is that the Satyam Board which cleared the deal had six independent directors including the luminary chairing the meeting. As a company listed on the stock exchange, Satyam would necessarily be bound not just by the Companies Act but also the corporate governance norms in the listing agreement. Some of these directors must have been members of the company’s Audit Committee and would have had prior opportunity to review independently the synergies and advisability of the transaction, before this item was placed before the Board. It was open to any one director to have sought independent professional advise. Clause 49 II specifically provides for the Committee’s power to review related party transactions. The resignations of four of these “independent” directors, all “honourable men” makes the scenario more murky.

Under the Companies Act, the powers and duties of directors has evolved under interpretation of various Sections such as, 291, 297, 299, 397, 398, 408, 629A, to name a few which have recognised and upheld directors’ fiduciary duties to shareholders, to act with due care, skill and good faith. Sections 297 and 299, for example, are intended to eliminate possibility of conflict of interest Unfortunately, the Act does not envisage a proper remedial regime, providing for recission of underlying transactions, compensation for corporate and stakeholder losses, disgorgement of illgotten gains etc. Theoretically, some of these reliefs can be agitated for before the Company Law Board – but courts are hesitant to pass such drastic orders, in cases of such large, reputed companies.

As things stand now, with the backtracking, litigation is unlikely. But the key issues, of accountability, role of independent directors, and governance remain unaddressed, and may be violated in future in the absence of proper safeguards.

Kumkum Sen is a Partner in Rajinder Narain & Co. and can be reached at

kumkumsen@rnclegal.com