Are Independent Directors Really Independent?

 

Full Blog:  Independence Questioned

 

Clause 149 of the new Companies Bill, 2011, states that an independent director must not have “any pecuniary relation” with the company, amounting to 10% or more of the gross turnover of firm the professional belongs. Clause 49 of the Listing Agreement of SEBI states that “an Independent Director is one who is not the partner or an executive or was not partner or an executive during the preceding three years, of the legal firm(s) and consulting firm(s) that have a material association with the company“. However, it doesn’t define the term “material”.

 

Companies in India have very well utilized this loophole in the mandatory requirements of the Listing Agreement. There are various cases that we find wherein; the company has Independent Directors (IDs) on its Board who are also partners of the companies Solicitors and Advisors. There are various concerns for the investors in such cases.

 

Red Flags:

1)      Such arrangement questions the Independence of the Independent Directors as the solicitor and advisory firm will draw a fee from the company and will be working with the management.

2)      The solicitor and advisory firm no longer acts as a third party and hence the advice given by them and any valuation done can be questioned as the ID (being a partner in the firm) may influence the advice.

3)      Companies often don’t disclose the fees paid to these firms as well and just state that it is not “material”.

4)      Often these IDs sit on the Audit Committee or even Chair it. This raises questions on the independence of the most important committee on the Board.

 

Below we detail many such cases. It includes some very big names and companies even forming a part of Nifty / Junior Nifty / S&P 500. Please note, this is not an exhaustive list.

 

Company

Director

Audit Committee

Solicitor / C.A. / Advisory firm

Pecuniary Relationship

Colgate – Palmolive Ltd.

Mr. R. A. Shah

Chair

M/s Crawford Bayley & Co.

No disclosure was made of the amount of fees paid.

Asian Paints Ltd.

Mr. R. A. Shah

No

M/s Crawford Bayley & Co.

No disclosure was made of the amount of fees paid.

Procter & Gamble Hygiene And Health Care Ltd.

Mr. Bansi. S. Mehta

Member

M/s Bansi S Mehta & Co., Chartered Accountants

No disclosure was made of the amount of fees paid.

Procter & Gamble Hygiene And Health Care Ltd.

Mr. R. A. Shah

Chair

M/s Crawford Bayley & Co.

No disclosure was made of the amount of fees paid.

Crisil Ltd.

Mr. Ravinder Singhania*

No

Singhania & Partners

Mr. Ravinder Singhania is a Managing partner. Company makes payment for legal services.

Pidilite Industries Ltd.

Mr. Bansi. S. Mehta

Chair

M/s Bansi S Mehta & Co., Chartered Accountants

Is consulted by the Company for legal/tax advice.

Bharat Bijlee Ltd.

Mr. Prakash V. Mehta

Member

Messrs Malvi Ranchoddas & Co.

He is also a member of Remuneration Committee and Shareholders’ Grievance Committee. However, no mention in the Annual Report of this pecuniary relationship. Also, no disclosure made of the amount paid to the solicitors during the year.

Rolta India Ltd.

Mr. K. R. Modi

Member

Kanga & Co.

Provides professional services as Solicitors of the company

Siemens Ltd.

Mr. Darius C. Shroff

No

M/s Crawford Bayley & Co.

He is Chair of Investors Grievance, member of Remuneration & Corporate Governance committee. The professional fees of Rs. 7,76,000 paid to  M/s. Crawford Bayley & Co., for FY 2010-11.

HCC Ltd (Hindustan Construction Company Ltd.)

Mr. D. M. Popat

No

Mulla & Mulla & Craigie Blunt & Caroe

Nowhere in the Annual Report has this been mentioned that a pecuniary relationship exists as he is a partner of the firm. Also, no disclosure made of the amount paid to the solicitors during the year.

Ingersoll-Rand (India) Ltd.

Mr. Darius C. Shroff

No

M/s Crawford Bayley & Co.

Director since 1983 and is the Chairman of the Investors/Shareholders Grievance Committee since 2000. No mention in the Annual Report of this pecuniary relationship. Also no disclosure of the amount paid.

Clariant Chemicals Ltd.

Mr. R. A. Shah

Chair

M/s Crawford Bayley & Co.

He is also the Chairman of the Board. A sum of Rs. 11.62 lakhs (Previous year Rs. 33.07 lakhs) has been paid as professional fees during year ended at December 31, 2010.

Pfizer India Ltd.

Mr. R. A. Shah

Chair

M/s Crawford Bayley & Co.

The professional fee of Rs. 50.08 lakhs that was paid to them for FY 2011.

Century Enka Ltd.

Mr. R. A. Shah

Member

M/s Crawford Bayley & Co.

No disclosure made of the amount paid to the solicitors during the year.

Century Enka Ltd.

Mr. Bansi. S. Mehta

Member

M/s Bansi S Mehta & Co., Chartered Accountants

No disclosure made of the amount paid to the solicitors during the year.

Century Enka Ltd.

Mr. S. K. Jain

Chair

An Advocate for legal/tax advice

No professional fees have been paid to Mr. S. K. Jain after his appointment as a Director.

Abbott India Ltd.

Mr. R. A. Shah

Member

M/s Crawford Bayley & Co.

No disclosure has been made of the exact amount paid.

Godfrey Phillips India Ltd

Mr. C.M. Maniar

No

M/s Crawford Bayley & Co.

Rs. 41.52 lacs paid during the year to Crawford Bayley & Co.

Godfrey Phillips India Ltd

Mr. R. A. Shah

No

M/s Crawford Bayley & Co.

He is the Chairman of the Board. Rs. 41.52 lacs paid during the year to Crawford Bayley & Co.

Godfrey Phillips India Ltd

Mr. Lalit Bhasin

Member

Bhasin & Co.

Rs. 13.83 lacs paid during the year for professional services.

Godfrey Phillips India Ltd

Mr. O.P. Vaish

Chair

Vaish Associates

Relatives of Mr. O.P. Vaish are partners in Vaish Associates.  Rs. 16.37 lacs payment made for professional services.

Piramal Healthcare Ltd.

Mr. R. A. Shah

Chair

M/s Crawford Bayley & Co.

No mention in the Annual Report of this pecuniary relationship. Also, no disclosure made of the amount paid to the solicitors during the year.

Wockhardt Ltd.

Mr. R. A. Shah

Member

M/s Crawford Bayley & Co.

Been a director since 2000. Nowhere in the Annual Report has this been mentioned that a pecuniary relationship exists as he is a partner of the firm. Also disclosure of the amount paid is not there.

Lupin Ltd.

Mr. R. A. Shah

No

M/s Crawford Bayley & Co.

He is a member of the Remuneration Committee. Professional fees aggregating Rs. 1.23 million was paid during FY 2011 to the solicitors.

The Bombay Dyeing And Mfg. Co. Ltd.

Mr. R. A. Shah

Member

M/s Crawford Bayley & Co.

The professional fees of Rs. 47.96 lakhs paid/accrued to the legal firm during the year.

The Bombay Dyeing And Mfg. Co. Ltd.

Mr. S. S. Kelkar

Member

N.A

Directors have booked flats in the residential building being constructed by the Company on its Spring Mills land. No amount is outstanding against their names as on 31st March, 2011.

The Bombay Dyeing And Mfg. Co. Ltd.

Mr. Ishaat Hussain

No

N.A

Directors have booked flats in the residential building being constructed by the Company on its Spring Mills land. No amount is outstanding against their names as on 31st March, 2011.

BASF India Ltd.

Mr. R. A. Shah

Member

M/s Crawford Bayley & Co.

No disclosure made of the amount paid to the solicitors during the year.

Zuari Industries Ltd.

Mr. D. B. Engineer

Chair

M/s Crawford Bayley & Co.

The Company has paid a professional fee of Rs. 0.34 crores for FY 2011.

Zuari Industries Ltd.

Mr. Marco Wadia

Member

M/s Crawford Bayley & Co.

The Company has paid a professional fee of Rs. 0.34 crores for FY 2011.

Bhansali Engineering Polymers Ltd.

Dr. B. S. Bhesania

Member

Mulla & Mulla & Craigie Blunt & Caroe

No disclosure made of the amount paid to the solicitors during the year.

REI Agro Ltd.

Dr. ING N. K. Gupta

Member

Dr. ING N. K. Gupta Technical Consultants (P) Ltd

A professional fee of Rs. 0.22 crores for FY 2011.

Jain Irrigation Systems Ltd.

Mrs. Radhika C. Pereira

No

Mulla & Mulla & Craigie Blunt & Caroe

Has worked with Mulla & Mulla, Cragie, Blunt & Caroe, Advocates and Solicitors in the past. The said firm is also the solicitor of the company.

Alok Industries Ltd.

Mr. K. R. Modi

Member

Kanga & Co.

Director since 10 November 1994. The Company made payment of legal fees of Rs. 1.74 lakh to M/s. Kanga & Co.

Alok Industries Ltd.

Mr. Ashok Rajani

Member

INA

Sales transactions aggregating to Rs. 238 lakh with a firm and company in which Mr. Ashok Rajani is a Partner and Director.

N.A. – Not Applicable; INA – Information Not Available

* Alternate to IDs, Thomas Schiller, David Pearce and Deven Sharma on the Board of CRISIL

 

 

Covered in ET Mumbai Edition: ET – 3rd March 2012 – Mumbai Edition

 

Covered in ET Delhi Edition: ET – 3rd March 2012 – Delhi Edition