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Conflict of interest rules need to be clear

Somasekhar Sundaresan  |  New Delhi 

The concept of conflict of interest in commercial jurisprudence is hogging the headlines. A judge of the has recused himself from adjudicating a high-profile corporate war since his daughter now works for a law firm that had been involved in scripting a document that the court would have to interpret.

The judge also held shares in companies under the control of each party to the dispute, but when he had made that disclosure, the parties had expressed their faith in his professional judgement i.e. they had waived any potential conflict-of-interest objection they could raise. Senior legal counsel for the two sides are reported to have attempted to persuade the judge in the court room not to withdraw himself over his daughter’s employer, but later in the evening were engaged in a public spat over who had engineered the exit.

Another judge recused himself from another hearing involving one of the parties to the dispute because he realised that his wife held shares in one of the parties. In yet another development, the has issued a notice on a contempt petition against a lawyer who gave an interview insinuating judicial corruption by stating that a judge had ruled in favour of a mining lease awarded to a company in which he held shares.

In those proceedings, the judge had apparently disclosed his shareholding interest and continued to preside over the proceedings after parties waived potential conflict-of-interest objections and reposed confidence in the judge. The judge has now recused himself from hearing a case involving another dispute involving the same corporate group because of such shareholding.

All in all, shareholding in corporate India and the conflict of interest that it may pose for the judiciary has never taken on a greater focus in public debate. If we would like good quality lawyers to become judges and add to the strength of the judiciary, we need to devise a framework to deal with the issue comprehensively and transparently. After all, any reasonably successful lawyer would end up having investments either through discretionary portfolio managers or directly in shares of several companies. When he becomes a judge, his shareholding interest could pose a conflict of interest.

Of course, the ideal approach for any judge would be to follow the standard principle of not offering to recuse from a hearing but to simply steer clear of controversy by staying away entirely when a potential insinuation of a conflict could emerge. However, the concept of conflict of interest is an unruly horse. What is clear as daylight to one is not so clear to another, particularly in the area of commercial jurisprudence.

Strangely, the law that governs corporates and commerce in India is replete with codified provisions that deal with conflict of interest. The Reserve Bank of India (“RBI”) disallows directors on the boards of borrowers of banks from being directors of the bank. The appointment of a head of a foreign bank in India was brought under cloud by the because she had the standing to be requested to join the global board of a multinational manufacturing company.

Indian company law requires disclosure of interest of directors in specific contracts, and a failure to make the disclosure results in an immediate loss of office. Contracts for supply of goods and services executed by any company with a private company or with a firm in which a director of the executing company is also a shareholder, are required to adopt special modes of approval, including government approval.

The Securities and Exchange Board of India (SEBI) has specific regulations on how people associated with an issuer of securities should not act as merchant bankers to the issuer. has norms requiring provision of “independent” valuations and fairness opinions on specific transactions. also has requirements for appointment of “independent” directors on the boards of listed companies.

Not all these norms are clear. In fact, many are imprecise, requiring lawyers to give opinions confirming compliance. The more clear and precise these norms, the better it would be for society. For example, if there were a law on a reasonably low shareholding threshold, either in terms of percentage or value or both, that would determine an interest or the lack of it in a dispute being adjudicated by judges, one would not have any controversy over perceived conflicts in the judicial mind.

Institutional governance in India would be best served by clear rules rather than vague principles. Even the most average Indian prides himself on how the Indian human mind is very ingenuous. Vague and abstract principles such as “thou shalt not cheat thy client” have been found to be severely wanting in jurisdictions such as the United Kingdom. It can only get worse here. After all, we have Union Cabinet ministers overseeing entire ministries without any Chinese-Walled mechanism, in industries where they have a direct commercial interest. There is a crying need for attention in this space across all walks of Indian society. (The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own) 

First Published: Mon, November 09 2009. 00:21 IST