Education

Conflict of interest

S. MURLIDHARAN | Updated on: Jul 03, 2011

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What is wrong in the promoter of a tyre company and the promoter of a car company being directors in both?

Prema Vasudevan, Chennai

This fosters conflict of interest. The promoter of the tyre company would seek to pitch for his company when it comes to tyres as original equipment of the cars manufactured by the car company. While there is no prohibition on such interlocking directorships, these two will not pass the litmus test for independent directorships. Their discussions and vote in the other company are bound to be influenced by their basic allegiance to the first. Therefore the company law, apart from denying them the status of independent directors, also forbids them from participating and voting in the board meetings when the discussions turn on matters they are interested in. A banker sitting on the board of a trading company would eye some banking business from it and hence his decision on choice of banks can be expected to be coloured. Rotation of auditors

Will rotation of audit partner stem the rot in the auditing profession?

Siddarth Bandopadyaya, Burdwan

The policymakers want to emulate their American counterparts and believe that rotation of audit partners would indeed stem the rot, but skeptics are not convinced. They believe that partners after all cogitate with each other and hence would want a ‘roots and branches' rotation which consists in rotating the firm itself every five years as is the case with public sector companies. If branch managers of banks need to be rotated lest they develop cosy relationships with borrowers, auditors also need to be changed lest they cosy up to their clients and wink at their shenanigans for a quid pro quo and lifetime auditorship. The experience with public sector companies in India bears out the sceptics. Audit reports of public sector companies indeed are more scathing in the criticism of managements whereas the reports of private sector companies tend to be laconic . Apart from rotation, what imparts boldness into auditors of public sector companies is the delinking of their appointment from the managements of these companies.

Why a subsidiary

What is the big idea of floating a subsidiary rather than a division when a company goes for expansion or diversification?

Sujatha Vernekar, Mumbai

A new undertaking normally has to go through an agonising gestation period during which its losses mount menacingly much to the consternation of the shareholders. It can bleed the balance sheet and blotch it in red, telling on its market valuation. A subsidiary, on the contrary, is a separate company with its own independent balance sheet. Of course when consolidation of accounts of subsidiaries with their parents becomes the norm, the results would be the same, but even in such a milieu shareholding can be brought down a tad so as to repel the subsidiary tag. Once the subsidiary or the associate company sees through testing times, it can be merged with the promoter company. Reliance Industries has adopted this strategy.

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Published on July 03, 2011
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