The Hindu Business Line : A case of oppression to rely on

RELIANCE Industries Ltd, which held a meeting of its board of directors last week, has approved, inter alia, a proposal for buyback of its equity shares at Rs 570, involving a cash outflow of Rs 2,999 crore.

Both the Ambani brothers, Mukesh and Anil, are managing directors of the company.

From news reports it is understood that at the board meeting Anil opposed all the resolutions barring the one on buyback of shares. Rather than oppose the buyback proposal, Anil abstained from voting on the ground that "he was not taken into confidence". All the items of business at the meeting were approved by the board by a majority decision in spite of the fact that one of the managing directors of the company was not in favour of the agenda.

The events at this board meeting raise a number of issues for consideration, such as: Who is a managing director? What are his powers? Can a board ignore the view of its own managing director? Are the actions of the RIL board in conformity with law? And, is it good governance to ignore a managing director?

Though a managing director functions under the overall control and superintendence of the board, he is a managerial person who is entrusted with substantial powers of management of a company.

Though legally there is no bar on a company having two managing directors, as in the present case, there is always an unanswered question of who is the primus inter pares. And if there are differences of opinion between the two whom should the board support, is another serious issue not addressed by law.

In the present case, when one of the managing directors has not agreed on an important issue of `buyback', the board should certainly have thought twice before ignoring him outright. The dissenting MD, in the instant case Anil, has no choice as he is in law bound by the decision of the board. Except two items of business at the board meeting, the rest required approval only by a simple majority.

The MD can do nothing with his substantial powers in the affairs of the company. The Companies Act doe not give any veto power to any single director or group of directors except to identify two items if business as requiring the unanimous approval of the board. The two items are:

Appointment of a managing director under Section 316 of the Act or a manager under Section 385 of the Act if the person is already a managing director or manager in one and not more than one company; and

Invest funds of the company in securities or by way of inter-corporate loans or

provide guarantee or security in terms of Section 372A of the Act.

Buyback, being not a business falling under any of the above two, does not necessarily require the approval of all directors. The resolution in the given case approving the buyback is, prima facie, valid in law.

The exercise of buyback, of course, involves complex procedures .The legal formalities and the accounting adjustments are unusual. The company concerned, while retuning a part of the paid-up capital, should demonstrate it is still solvent, besides accepting a cooling-off period to raise further capital. Therefore, the issue is still wide open from various angles.

Though the board resolution has, prima facie, passed the test of corporate law, the proposal would certainly look bigoted when one of the MDs does not support it. The decision would be viewed as an instance of bad governance.

The seriousness of the situation would be better understood if the company had only one MD and the rest of the board decided on a buyback without his approval.

Considering the shareholding pattern, Anil will have a good case for `oppression', as he is virtually being expelled through the buyback route.

(The author is a Chennai-based chartered accountant.)

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