The Hindu Business Line : Satyam – In undistinguished company; but the debris needs clearing

Chennai, Jan. 11 Mr Raju’s shenanigans at Satyam have left everyone including industry captains outraged and frothing about how he has run a top company down and damaged brand India. Sorry to fuel your inflamed feelings, but, Mr Raju isn’t alone.

Raju has company

As former SEBI chief, Mr M. Damodaran, put it pithily; it is neither the first nor the last such instance. True. Mr Raju has company and plenty of it. Just jog your memory a bit and look at this illustrative, although not exhaustive, pantheon: Global Trust Bank, CRB Capital, Sterling Holiday, Dunlop, Peerless General Finance & Insurance Co., Pentamedia Graphics, DSQ Software, RBF Nidhi, Alwarpet Benefit Fund et al. Corporate law is replete with cases of oppression and mismanagement and running companies in a manner that are prejudicial to the interests of its members.

Strong Medicine

So what does the Central Government normally do in such situations? Fire and Hire – by the due process of law. Empowered by Section 388-E of the Companies Act, the Government can remove directors or any other person concerned in the conduct and management of the affairs of a company. And under Section 408 of the same Act, it can appoint new directors on the board. These it can do, after obtaining appropriate direction from the Company Law Board, a quasi judicial body.

The law has been framed in this way in order to allow for a judicial application of mind on these issues, rather than allow this extraordinary power to be exercised only by bureaucratic whim. This is a rather powerful section as it allows the Government to act with a speed that would not have been possible through the “protracted proceedings of the Courts of Law”.

The immediate future

It will now be up to the new board as soon as it is constituted to clear the debris and help the battered company resume operations normally. The appointment of Mr Deepak Parekh, Mr Kiran Karnik and Mr C. Achutan to the board marks a welcome first step, said Mr N.R. Sridharan, Chartered Accountant and a former Director in the Ministry of Corporate Affairs. Having been a Government nominee (appointed under Section 408) on the boards of a couple of troubled companies, he feels that three directors is the ideal number to move fast on a range of issues.

A larger number of directors may end up paralysing decision making during this crisis – especially when they have to cope with a lot of paper work and litigation. And the business needs to keep running and clients need to be reassured. A lot will depend on the first line of executives that report to the board. The new board will have to meet often, possibly once a week or 15 days for the next few months, he said.

A review of independence

The Government needs to assess the role of independent directors, not only in this specific case but also on a generic basis, according to Mr K. Ramesh, corporate lawyer. Pointing out the limitations in the role as well as practice of ‘independent directors’, Mr Ramesh said that the demands on and obligations of directors were high, but their rights were not specified by law.

Citing an example, he said that even when a director wanted to resign, he needed to fill up a form (No.32) for which he would have to depend on the company secretary. He would not independently be able to inform shareholders that he had resigned, and would continue to be responsible to shareholders if there was a delay in notifying the authorities by the company, according to him. Also, handsome remuneration that sometimes runs into lakhs of rupees actually ends up compromising the independence of directors, he said.

These are issues that the Government must address, if it wants to get more independent directors to come on board – and deliver what is expected of them.

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