The fraud admitted by the promoter of Satyam Computer Services demonstrates the ineffectiveness of the present Company Law in ensuring corporate governance. Facts about how the board approval was obtained for Satyam’s ‘investment’ in Maytas are not yet in the public domain. Company chairman Ramalinga Raju now says the aborted acquisition deal was “the last attempt to fill the fictitious assets with real ones.”
Did the proposed transaction between related parties require prior government approval under Section 297 of the Companies Act? The fact is that the present Companies Act, 1956, does not even prescribe any format for agenda papers, nor even the mandatory minimum notice period. Does the draft Companies Bill, 2008 improve the situation? Alas, it doesn’t either.
Of course, the Bill strengthens the institutional mechanism of Board meetings, curbs auditors, institutionalises valuers and empowers shareholders. Also, it mandates the identification of promoters, deemed directors and key management personnel (KMP) and enhances the penalties for wrongdoing on them. On the face of it, the Bill also appears to seek strengthening of independent directors (IDs) through certain provisions—one-third of specified companies’ Board must consist of independent directors; for a quorum at an emergency Board meeting, an independent director is mandatory etc.
However, these measures are not adequate to strengthen the hands of IDs. They (IDs) must make it their right to get data and authorise themselves to take outside consultants’ opinion if required, at the cost of the company. Mere presence for quorum should not suffice; the independent directors’ dissent, if any, with reasons should be recorded. Further, a non-executive chairman of the Board and of the Audit Committee should have the right to an office and executive help.
The Bill should specify mandatory Board agenda as statutory records, eg, order book position, financial results, liquidity position, loans and deposits, budgets, and proposed capital expenditure with justification.
In the UK, the onus is on the directors to refer to the administrators, if there are doubts about liquidity. A mandatory operations review committee – with an ID as chairman – should be mandatory for large companies and it should meet once in three months. The IDs should be held accountable if matters are reported to the Board and the latter does not take action. The case of Nimesh Kampani emphasises the need for this approach, otherwise competent (potential) IDs will stay away.
There are many provisions in the Bill that improves upon the current laws of corporate governance. As per the Bill, a director’s office ceases if he does not attend Board meetings for a year. Independence criteria have been enlarged too.
Related-party transactions have to be done on an arms-length basis, need specific Board approval and for large companies, the approval required would be by special resolution. Any director, who does not give general notice of interest or disclose his interest in a specific business transaction, vacates his office. Related-party transactions are to be disclosed in the annual report, together with justification. For violations of the above, the director or KMP have been made personally liable to compensate the company.
The Bill seeks to enlarge shareholders’ powers and auditor independence. It proposes to make auditors personally liable for damages and create an Institution of Valuers. My view is that ICAI could be asked to introduce a separate certificate course for valuers, instead of creating a separate body.
Source: News Paper written by Managing Partner of SS Kothari Mehta & Co.
