Sucheta Dalal :Dependent Directors
Sucheta Dalal

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Dependent Directors   

January 13, 2009


DIFFERENT STROKES  (MoneyLIFE Issue, 29th Jan 09)

When it comes to debating the nuances of good governance, all the news seems to be emanating from Hyderabad and none bodes well for corporate India. After the cover story in our previous issue, two independent directors on Satyam’s star-studded board – Vinod Dham and Dr Krishna Palepu – decided to call a meeting which would also discuss the possibility of a change in management.
But this expectation was short-lived. A day later, three directors – Dham, Dr Palepu and M Rammohan Rao – suddenly resigned citing that the promoter, B Ramalinga Raju, had not informed the board that a chunk of his shareholding had been pledged to financial institutions. What kind of an excuse is that? And what relevance does the promoters’ pledged shareholding have to their ‘unanimous’ support to Rajus’ attempt to transfer to themselves a hefty Rs6,000 crore of cash lying with Satyam? Well, it turns out that they did not even know that there was no cash there! Maybe they were worried that the donations and consulting fees earned from Satyam would cause further embarrassment to at least two of them. Interestingly, former cabinet secretary TR Prasad and academic VS Raju are holding on to their chairs, even after B Ramalinga Raju confessed to a colossal fraud.
None of the directors acknowledged any dereliction on their part, except Dr Mangalam Srinivasan, who had the grace to accept ‘moral responsibility’ for not recording her dissent at the board meeting. The rest quit at the first opportunity on a flimsy excuse, almost like rats deserting a sinking ship. But Raju’s claim that Satyam was a loss-making wreck is equally implausible. In fact, it raises fresh questions about why the directors were clueless about these losses and what was going on in the company.
The Satyam episode has left India Inc rattled. Packing boards with docile academic dons and business luminaries may no longer allow them to pull off brazen heists. Worse, independent directors with reputations to protect may not remain so docile anymore. Imagine the ignominy of M Rammohan Rao, dean of the International School of Business, having to step down from the committee that selects India’s top regulators!
If Satyam dealt one blow to the concept of ensuring good governance through independent directors, then a far bigger blow was dealt by the madness that has been let loose by the Andhra Pradesh government in the Nagarjuna Finance case. First of all, arresting and jailing the promoters of Nagarjuna Finance without bail, for something that happened a decade ago, raises questions about the dangers of doing business in India. It also raises serious questions about whether the judiciary needs a refresher on jurisprudence and better understanding of the nuances of corporate law. These are issues that India’s leading industry associations need to pay serious attention to, instead of merely lobbying for concessions and bailouts for specific sectors. However, the most scandalous aspect of the action is the arrest warrant issued against Nimesh Kampani which was followed up by a humiliating red corner alert at all airports. Kampani was an independent director of Nagarjuna Finance and quit in 1999. The company began to default on payments only in 2000. Yet, he has been hand-picked from among several independent directors and made a co-accused almost a decade later. Had Kampani not gone to Dubai just before the lookout notice was issued, he may have spent the year-end fortnight in jail like a common criminal because the Andhra Pradesh court, in its wisdom, has refused bail to all the accused.
Contrast this with Satyam. Raju confesses to a Rs7,000 crore fraud (probably bigger), but there was no attempt to arrest him for three days after his confession. In cases of such outrageous misuse of powers, one expects the Securities and Exchange Board of India or the minister in charge of corporate affairs to intervene on their own and brief the prime minister on how it is damaging the concept of good corporate governance. Or, we must ditch the notion that independent directors can be effective watchdogs and strive for strengthening the hands of minority investors by asking all major corporate decisions to be decided by a majority vote of non-promoter directors.

-Sucheta Dalal

-- Sucheta Dalal