The Hindu Business Line : Role of independent directors in investor protection

An independent director, in addition to his role as required by the law, must also involve himself in all commercial decisions which affect the overall interest of stakeholders.

S. Chandrasekaran

Investors play an important role in every sphere of corporate activity. Persons who invest funds in a company vary depending on the nature of investments. Those who invest money in shares are termed as shareholders and those who invest in loan funds are termed as deposit/debenture holders. Vendors invest in their own businesses and play a supportive role, expecting a reasonable rate of return. Customers put in their hard-earned money to buy or utilise the services and nat urally demand a right product or service.

Besides, employees invest their talent, time and efforts for the efficient performance of the entity. Overall, companies do have their corporate social responsibility (CSR) towards the state. All of them in the real sense are otherwise, the stakeholders.

The Securities and Exchange Board of India (SEBI), the regulator of the capital market, and the Ministry of Corporate Affairs (MCA), the administrator of the Companies Act, have, in order to protect investors’ interests, initiated actions to mandatorily appoint independent directors on the boards of companies.

Independent Director defined

The meaning attached to independent director, as expressed in the code of Corporate Governance, is that he should not have any pecuniary relations or transactions with the company or its promoters. His decisions should be independent of those who have controlling stake in a company and be in the overall interest of the company and its stakeholders.

If a stakeholder is to understand the meaning of an independent director, he should, in addition to his involvement, as required by the mandatory provisions of law, also involve himself in all commercial decisions which affect the overall interest of stakeholders.

Role at meetings

It is the requirement of law that for convening board meetings there shall be at least one such meeting in every quarter and, at the same time, for listed companies, the gap between two board meetings shall not be more than four months. Independent directors also play an important role in the audit committee at which all financial matters are dealt with.

At every board meeting it is the practice to transact business, such as:

Confirmation of minutes of the last board meetings, taking note of all proceedings of committee meetings; and

Consider matters relating to: compliance of applicable provisions of laws to the company; budgets, periodical financial reports and its approval; issue of securities, including transfers; investments, including restructuring and acquisitions; changes in the corporate directorate, and senior level management cadres; and certain miscellaneous items.

Investors’ Interest

There is no compulsion in any of the meetings to address the grievances of investors, except perhaps to indicate the number of shareholder complaints involving non-receipt of dividend, annual reports and so on and their redressal at the quarterly/annual financial results published.

The interests of employees, including that of independent directors, for issue of ESOPs or any labour disputes for wages, etc., are also mandatory for consideration at meetings. Whereas, commercial decisions which have some element stakeholder interest and such other issues are mostly not discussed.

Independent directors are neither aware of such issues nor do they have the right to interfere in commercial decisions for they fall in the domain of day-to-day management. The role of independent directors, therefore, needs a re-look to protect the overall interests of investors or stakeholders.

Sector-wise analysis

Oil: Despite crude prices in the international market surging , domestic oil companies cannot increase the prices without government approval. The oil companies are losing heavily in the proces.

Recently, SEBI stated that most public sector companies are yet to comply with the appointment of independent directors. But one wonders whether even if such appointments are made, the directors would have any role to play in crucial decision-making.

Banking: The RBI Deputy Governor, Ms Usha Thorat, in a speech made at the Indian Banks’ Association, said that some banks are not up to when it comes to offering basic services to customers, be it cash exchange facilities or account opening. In such a situation, one wonders what role independent directors can play. Such issues are not dealt with at board meetings as these are not mandated by law.

Cement and steel: The spurt in the prices of cement and steel in the last few months makes one suspect cartelisation in the said industries. Steel companies have assured the government that they will not increase the prices for at least another couple of months. Cement manufacturers have given similar assurances.

One doubts whether any independent director can take any active part in pricing decisions which not only affect the customers but also the shareholders.

Realty sector: The soaring prices in the realty sector have forced people defer purchase of a house/flat. And though the market is slightly sluggish now , there are no indications of price reductions.

There being no regulator for the industry, it is debateable whether independent directors in real-estate companies can interfere in the decisions of price fixation. Thus, the role of an independent director at board/committee meetings is limited. He cannot have any pecuniary relations or transactions with the company but, at the same time, he does not take part in any of the commercial decisions which affect the interest of stakeholders one way or the other.

(The author heads Chandrasekaran Associates. Responses to blfeedback@thehindu.co.in)

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