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All you wanted to know about conflict of interest

Aarati Krishnan | Updated on: Apr 16, 2018
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ICICI Bank and its CEO, Chanda Kochhar, are now at the centre of a controversy about a loan given out by the bank many years ago. A whistle-blower has alleged that the CEO is guilty of conflict of interest, in allowing a loan to a corporate group which had dealings with her relatives.

‘Conflict of interest’ is a term that often crops up in heated debates about corporate governance and corruption in high places.

What is it?

Conflict of interest is a situation in which one is torn between one’s professional duties and one’s personal interests, in making a business decision.

In the ICICI Bank case, a whistle-blower has alleged that Chanda Kochhar faced a conflict of interest as CEO and Managing Director of ICICI Bank, when the bank decided to lend ₹3,250 crore to the Videocon group in 2012.

The concern is if the lending decision was improper because Deepak Kochhar, Chanda Kochhar’s spouse, had business ties with the Videocon promoter Venugopal Dhoot, prior to the grant of the loan. Deepak Kochhar and Venugopal Dhoot had jointly operated a business venture called NuPower Renewables in 2008. Dhoot financed the venture and later transferred full ownership in it, to a trust helmed by Deepak Kochhar through a complicated deal.

What is being investigated , is if ICICI Bank’s CEO informally pushed the loan to the Videocon group because of benefits received by her family members from the group’s promoters.

Members of the ICICI Bank Board have denied any allegations of irregularity. ICICI Bank was only one of the consortium of banks which lent ₹40,000 crore to the Videocon group, and the terms at which it lent were not very different from its peers. Chanda Kochhar was only one of the 12 members of the investment committee that sanctioned the loan. But sceptics point out that, whether or not evidence of actual wrongdoing emerges in the Videocon case, the loan certainly did entail a conflict of interest for the CEO. She should have stayed away from the decision to avoid any suspicion of nepotism.

Why is it important?

Conflicts of interest are at the heart of most corporate governance controversies at India Inc, whether they are about big-ticket acquisitions, unreasonable CEO pay, related party transactions or hiring and firing. Conflicts of interest are inherent to widely held companies where the owners or shareholders hand over their decision-making powers over a company to an elite set of top managers who then make all the key business decisions on their behalf. Governance mechanisms such as independent directors on the Board, or a nomination and remuneration committee are put in place mainly to check such conflicts of interest.

Conflicts of interest are quite widespread in the financial world, be it for distributors who earn hefty commissions from financial products they sell, or advisers who own personal positions in the stocks they widely recommend.

Why should I care?

If you’re an investor, you should be aware of the conflicts of interest that loom large whenever you deal with a market player or intermediary. But then, conflict of interest situations crop up almost in every facet of your daily life, be it the doctor who accepts expensive gifts from pharmaceutical companies, a journalist who goes on sponsored junkets or a school-teacher who runs expensive tuitions. The only realistic way to tackle it to insist on adequate disclosures.

The bottomline

Everyone faces conflicts of interest at one time or another. If you face one, it is best to disclose it at the earliest.

Published on April 16, 2018

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