source Business Standard
CS A Rengarajan
|
Independent directors feel the heat as frauds take centre stage |
|
Mumbai, 12 June Auditors are not the only calling it quits. With increasing instances of high profile corporate frauds, accounting discrepancies and application of global anticorruption laws, independent directors are finding the going tough, too. More than 1,000 independent directors (IDs) have quit since January last year, data from Prime Database show. That number is likely to go substantially in 2019 whenanumber IDs´ terms come up for renewal. More than 1,400 IDs had signed up for terms in FY15 after the Companies Act, 2013, came into existence from April 1, 2014. “Many of these IDs may opt not to extend their tenure given the increase in compliance requirements and greater accountability,” said Shriram Subramanian, founder and managing director, InGovern Research Services. IDs carry both legal and regulatory obligations to raise red flags and record their dissent on board matters. The of IDs in fraud detection has come under scrutiny by the regulators as they, along with the auditors, are the first line independent authorities obliged to question any wrongdoing early in the day. While the enhanced duties, role and responsibilities have been in force forafew years, the role of IDs has gained prominence with the implementation of the Companies Act, 2013, and the Securities and Exchange Board of India´s LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015. The recent recommendations of Uday Kotakled Sebi panel on corporate governance have also expanded the eligibility criteria for independent directors, disallowing companies from appointing individuals related to the promoter group. “The new Companies Act, 2013, putsalot more onus on independent directors. We have had the best of laws in the past but the level of enforcement has becomealot more stringent in the last year or two,” said Subramanian. There could also be scenarios where an independent director on the board ofawilful defaulter —in absence of showing dissent or failure to act —may get tagged asadefaulter in his personal capacity asadirector, said experts. This could result in him/her being declared not fit and proper to hold any significant positions in any financial intermediary or carry out any financial regulatory activity. The National Company Law Appellate Tribunal (NCLT) has reportedly ordered the freezing of the personal assets of some independent directors who served on the board of companies of Nirav Modi, who is accused of defrauding staterun Punjab National Bank of over ~130 billion. “The once famed position is now finding cautious takers andasignificant number of independent directors are seeking advice from lawyers before assuming suchaposition,” said Tejesh Chitlangi, senior partner, IC Universal Legal. sure, IDs are protected under Act and are liable only in such acts byacompany which with their knowledge and consent or connivance or had not acted diligently. when something goes wrong, amongst the first to come and have to demonstrate have acted in good faith to get under the law. directors are more of the need to not only be involved and diligent in discharging their functions, but also that they have acted said Sai partner and head -advisory services, India. Not surprisingly, IDs are not only asking tough questions to promoters and management but also documenting consent or dissent as on various decisions board processes. Some are outside counsel and engaging experts that include lawyers, experts, forensic specialists, and technology specialists to help them deal with complex issues in these areas. “Companies are taking adequate cover under the directors and officers (D&O) insurance policies to provide necessary protection to their independent directors. Directors, on their part, are taking steps to ensure that their personal assets are ringfenced and not at risk,” said Venkateshwaran. According to Chitlangi, the level of due diligence being carried out on the financials and governance standards ofalisted company before assuming the position has never been seen before. “The safeguards in form of D&Oinsurances and indemnifications are becoming the basic asks by the independent directors alongside their demands for putting higher than prescribed governance and fraud detection policies in the system,” said Chitlangi. STRIKING OUT Number of independent directors Year Ceased Appointed FY16 609 811 FY17 647 822 FY18 785 993 FY19* 141 146
|
Practising Company Secretary
Chennai
Mobile 93810 11200/97909 80331