Context: The resignation of an ID should cause concern among investors. This is a case where the disclosure did not reveal the truth.

  • In August, 2014, a listed NBFC appointed a legal professional as an ID.
  • In January 29, 2019, a news website accused the Company and its promoters of violating several laws, including, but not limited to, the Companies Act, 2013, and siphoning off funds.
  • The report inter alia alleged that
    • The promoters had floated several shell companies to siphon off funds to the tune of INR 31000 crores, through grant of loans and advances to these shell companies.
    • These shell companies had no business income, and their mandatory filings on MCA’s website were also not complete.
    • The money was then re-routed via these dubious companies, and was parked outside India so as to acquire assets.
    • The Finance Committee, comprising the 2 promoters, had powers to approve loans amounting to INR 200 crores and more. It ensured that the loans were granted to shell companies, without any collateral or security, and the money reached the companies that were owned or controlled by the promoters.
    • The promoters created a number of shell companies, with a nominal capital of INR 1 lakh, with a number of them having the same/similar registered office address, and having the same set of initial Directors, and on many occasions, having the same group of Auditors, to mask the financial details.
    • Apart from these irregularities, these loans were disbursed in a single tranche, rather than following the established norm of carrying out this process in stages against the progress of the project works.
    • The Company advanced monies to several companies, which had the same address, and whose operations had been put on hold, to the tune of INR 1160 crores and INR 1320 crores.
    • Shell companies of the promoters made huge political contributions to a political party, an act which was prohibited under the Companies Act, 2013.
    • Promoters of the Company were involved in insider trading, amounting to approx. INR 1000 crores.
    • The Company had created offshore assets amounting to approx. INR 4000 crores.
    • The promoters had bought a cricket team, playing in one premier league in another country, by using loan money which was dubiously advanced by the Company.
  • The Company and the promoters denied these allegations.
  • Based on the news article, MCA initiated an enquiry on January 31, 2019 and the Income Tax department issued notices to the Company and its promoters on February 11, 2019.
  • The ID tendered her resignation on February 12, 2019.
  • On February 13, 2019, the Company informed the Stock Exchanges that she had resigned, and cited the reason as “personal reasons”. The Company did not attach her resignation letter with the filing. The then Joint Managing Director and CEO of the Company had signed this filing, and he too resigned a day later.
  • In a media report dated February 25, 2019, it was mentioned that the reason stated by the Company for her resignation was incorrect. The ID had filed her resignation letter with the Registrar of Companies.
  • As per the media report, her resignation letter had stated that
    • At the Company’s Board meeting held on January 25, 2019, the allegations against the promoters and others were discussed at length.
    • She had earlier expressed her desire to resign, but deferred it on the request of the Chairman and Managing Director of the Company (one of the promoters).
    • Her letter stated that - “You assured the members that the allegations were untrue, exaggerated and confirmed that there were no related party transactions and that all laws and regulations were complied with; further that all steps were being taken to legally refute the mala fide charges. As you are aware, the matter is now in public domain and remains a cause of concern. As an independent director, I have been diligent and relied on the report of the auditors, your assurances as Chairman as well as management presentations and representations on the veracity of the information provided and to confirm that the company followed the best practices of legal and regulatory compliance, internal controls and governance. I hope that my trust and confidence is not belied in this respect.”
    • She also highlighted the investigations by MCA and Income Tax department
    • However, she did not give any specific reasons for her resignation.
  • The Company did not respond to this news.
  • It seemed that neither the Stock Exchanges nor any Regulator pulled up the Company for the wrong disclosure.

Points to ponder -

  • Did the IDs delay the resignation?
  • Was being persuaded to stay, by the Promoter, a valid reason for not pulling the plug sooner?


Context: When a large listed textiles Company produces and sells material that does not conform to the description of the product, there will almost certainly be an adverse impact on the financials and the reputation. The importance of quality control cannot be overstated.

  • A listed textiles Company, had certification for their bedsheets being made with 100% Egyptian cotton. In August 2016, an investigation by the second large retailer, by value, in the US, revealed that the bedsheets did not contain Egyptian cotton, as mentioned, but was an amalgamation of lower quality fibres. The retailer wrote to its customers blaming the Company, and offering refund for their purchases. It also terminated business ties with the Company, which amounted to approx. 10% of the Company’s overall business.
  • The Company’s other big accounts in the US also initiated a similar probe, and threatened to stop selling its products.
  • 0n August 20, 2016, the Company filed a statement with the Stock Exchanges calling the issue a “product specification issue”. It stated that it was appointing an external auditor, one of the big 4 firms, to audit the supply systems and processes. It was reported by media that the firm was to give its report in 6-8 weeks.
  • On August 22, 2016, the Company held a conference call with analysts, wherein the Managing Director stated that he took responsibility for what happened, without stating what went wrong. He also mentioned that it was an issue of fibre, and not quality, and that the Company would continue to ship its other products to its customers. He also mentioned the appointment of the audit firm. He however refused to comment on what led to the retailer initiating an enquiry in the first place.
  • In September, 2016, the Company informed the Stock Exchanges that the affected product represented 6% of its annual business.
  • In September, 2016, through a Stock Exchange filing, the Company informed that 2 putative class-action complaints had been filed in the US against the Company, and its US subsidiary. The central allegation in both the complaints was that the product was not 100% Egyptian cotton, as was claimed. They did not challenge the safety or fitness of the product. Both complaints allege that the amount in controversy exceeded $5 million. However, neither complaints sought a specified amount of damage or provided a methodology for determining damages.
  • It further stated that none of the action had been certified for class treatment by the relevant courts, which is required under US law before an action can proceed on a class basis, and no motion to obtain such certifications had been initiated.
  • The Company mentioned that since these cases were only in the preliminary stages, they did not know whether they would be permitted as class actions, and so could not determine whether they were material. The Company engaged 2 law firms, one in the US, to defend the matter, and one in India, as its legal adviser.
  • The big 4 audit firm suggested several remedial measures covering structural, procedural, people and technological measures, on which the Company began action. It increased third party assurances, vendor audit etc. The Company also started producing all Egyptian cotton products in-house.
  • In the Annual Report for FY 2016-17, the statutory auditors, one of the big 4 audit firms, in the auditor’s report, under “Emphasis of Matter” mentioned that “four putative class action suits were filed in USA against the Company and its subsidiary by some consumers who purchased the products manufactured by the Company. In December 2016, these putative class actions suits were consolidated in one of the courts in USA and it is proceeding as a single putative class action. A consolidated amended complaint was filed for the action during the quarter ended March 31, 2017 and, pursuant to stipulation of the parties and the court’s scheduling order, the parties have agreed to conduct mediation in a time-bound manner.”
  • The Board did not respond to this in its report, and stated that the auditor’s report was self-explanatory and therefore do not call for any comment.
  • In the Annual Report for FY 2017-18, the statutory auditor, another big 4 audit firm, since the earlier one had been mandatorily rotated out, stated under “Emphasis of Matter” that “four putative class action suits filed in USA against the Company and its subsidiary by certain consumers were consolidated in one of the courts during the quarter ended December 31, 2016 and are proceeding as a single putative class action. The court proceedings are in a preliminary stage and it cannot be determined at present whether the consolidated putative class action suit will be permitted to proceed as a class action and therefore the monetary impact, if any, of the final outcome of the law suit is currently un-ascertainable.”
  • On May 24, 2019, the Company informed the Stock Exchanges about the consolidated putative class action suits (consolidated during the quarter that ended December 31, 2016). To avoid the burden, cost and uncertainty of continued litigation in US, the Board had approved entering into a settlement agreement, which provides monetary payments to settlement not to exceed $36 million. This was subject to approval by appropriate courts and Regulators in the US.
  • In the Annual Report for FY 2018-19, the statutory auditor, in addition to mentioning what was stated by the Company on May 24, 2019, said that “The Exceptional Item, aggregating to INR 2,080.24 million and INR Nil for the year ended March 31, 2019 and March 31, 2018 respectively, represents a provision for the settlement costs that have been estimated by the management based on expert advice which includes monetary payments or vouchers for all class members in the US who submit claims subject to validation by an independent third party, fees payable to legal counsel, and costs related to the administration of the settlement. The settlement agreement is subject to approval by the appropriate courts in the United States and regulators, and is intended to resolve legal claims”.
  • The Board did not comment on this in its report, stating that the auditor’s comments were self-explanatory.
  • On July 3, 2019, the Company informed the Stock Exchanges that it had received preliminary court approval for its settlement agreement. The plaintiffs in other pending litigations involving these issues had also agreed not to object to the settlement agreement and suspend litigation pending the settlement agreement’s final approval. The Company had agreed to increase payouts to individual settlement class members without increasing the aggregate $36 million settlement cap. The provision already made by the Company during quarter ended March 31, 2019 remained unchanged and adequate.
  • On October 29, 2019, the Company informed the Stock Exchanges that it had received a final approval for its settlement agreement. The provision made by the Company based on expert advice during the quarter ended March 31, 2019 remained unchanged and was adequate.
  • In the annual report for FY 2019-20, in the Management Discussion and Analysis (MDA), the Company stated that “The Company has settled the class action claims during the year which came to a closure now”.

Points to ponder -

  • When this matter first came to notice, could the Board have done anything more to contain reputational risk?
  • How does one satisfy oneself regarding the adequacy of checks and balances?


Context: A listed hospitality Company found itself, along with its Managing Director (MD) and other senior personnel, in the dock for an accident involving a guest staying at one of its properties. It needed the Supreme Court to address the limitless liability that lower Courts had attributed to the MD.

  • In October, 2013, an FIR was registered against a listed Company, with a 5-star hotel in Delhi, the Managing Director of the Company, the General Manager of the hotel, the General Manager- Corporate Affairs, and 4 other persons in-charge of various departments in the hotel (collectively referred to as ‘accused’).
  • The complaint arose from that fact that a guest had fallen from the 6th floor to the 4th floor of the hotel. The guest had alleged that the terrace was dark and that the hotel staff had not stopped him from going there. There was a lapse alleged on the part of the hotel management in taking safety measures for the guests. The hotel stated that the guest had climbed on the parapet wall and was walking there.
  • The Board of the Company, had only one Executive Director, who was the MD of the Company.
  • A charge sheet was filed in March, 2015 against the accused.
  • The charges against the MD were -
    • The Company, through its MD, looked after the hotel and was responsible for every criminal act done in the hotel.
    • MD was the only Non-Independent and Executive Director of the Company. He was present in all the Board Meetings as the Chairperson, and all decisions of the Company/hotel were taken under his signature
    • He was overall responsible for all omission and commission of the Company’s officials, and violations of lodging license/health trade licenses with regards to safety of its guests.
  • The District and Sessions Court passed an order against all ‘accused’.
  • The accused challenged the order, and it went right up to the Supreme Court (SC).
  • SC observed that in the absence of any specific allegations of negligence, with criminal intent, the MD, by virtue of his holding that position, was not liable for prosecution. The cause causans for the incident was the act of the injured climbing on the parapet wall and walking there. No individual can be made accused, along with the Company, unless there was sufficient evidence of his/her active role, with a criminal intent.
  • The incident occurred only due to sheer negligence of the injured.
  • SC further observed that the MD was neither the occupier nor the owner nor the licensee of the hotel.
  • The mere fact that the MD was chairing the Board meetings and taking decisions, by itself cannot directly link the allegation of negligence with the criminal intent.

Points to ponder

  • It is well established that mens rea (a guilty mind) is a prerequisite in criminal offences. How does being in a position of authority translate to mens rea?
  • Given the facts of the case, was there anything the management could have done, within its sphere of responsibility, to prevent the accident?


Context: A large listed entity in the mining space treated its published Dividend Distribution Policy as involving discretionary decision-making when it came to passing on dividends. Policies that are carefully crafted with clear intentions should not be ignored casually.

  • A large listed entity ‘A’ has 64.92% shareholding in another listed entity, also its subsidiary, ‘B’.
  • As per the Dividend Distribution Policy (DDP) of ‘A’, all dividend, other than special dividend, that is received from ‘B’, will be passed on to its shareholders in its entirety (net of taxes).
  • On May 11, 2020, ‘B’ announced a normal dividend of INR 16.50 per share for FY 2019-20. INR 4,526 crores were paid to ‘A’ by ‘B’ on May 19, 2020. This amounts to INR 12.18 per share payable to every shareholder of ‘A’.
  • However, ‘A’, for the first time in 5 years, did not distribute this amount to its shareholders. This was against its DDP. In the past, it had almost immediately passed on the amount to its shareholders. As per its DDP, it does not appear to have any discretionary powers in this matter.
  • As per SEBI LODR Regulations, in case a listed entity proposes to change its DDP, it needs to disclose such changes, along with its rationale, in its annual report/website. ‘A’ did not do so.
  • On May 18, 2020, the Board of ‘A’ gave their approval for delisting the Company.
  • This was approved by its shareholders, via postal ballot, on June 25, 2020, with 93.34% majority votes.
  • In its annual report for FY 2019-20, ‘A’ stated that “Given the current market dislocation and uncertainties caused by the coronavirus pandemic, it is important to maximize financial flexibility across the group. Your Board will decide on the size and timing of any future dividend payments once there is greater clarity on the outlook for the economy and commodity markets. Your Company believe this is the correct decision for all the stakeholders as we navigate through an unprecedented period of volatility for the global economy and our business. The Directors do not recommend final dividend for the financial year ended March 31, 2020.”
  • However, in the annual report for the same FY, the Company had painted an exceptionally healthy picture of its financial strength.
  • Proxy Advisory firms raised questions on both the dividend not being passed on to the shareholders, as also whether this could result in a reduction in the Company’s delisting price, and addition to the amount that the promoter will receive.

Points to ponder

  • Does the unequivocal assurance given in a policy document become enforceable?
  • What purpose does publishing a policy document serve if the contents are not to be honoured?
  • Should the Independent Directors, as custodians inter alia of the interests of minority shareholders, not have ensured that the majority shareholder does not get to keep the entire dividend received from a group Company?


Context: A large textile Company was caught in the middle of a dispute between a father and a son, intertwined with seemingly unjustifiable Related Party Transactions. The Board seemed to be missing in action while the Company was hurt by the family linen being washed in public.

  • A promoter Chairman became Chairman Emeritus of his Company in 2000, after serving as Executive Chairman for 20 years. He however continued to be a Director on the Board, and a member of several committees of the Board. His son became the Chairman and Managing Director (CMD) of the Company.
  • In 2015, he gave his stake in the Company, totalling to 37% (valued at approx. INR 1000 crores at that time), to his son, who was the CMD.
  • In 2017, the father accused his son of cheating him out of property, as well as throwing him out of the Company’s offices.
  • Under a 2007 agreement to settle a family dispute, it had been decided that the father could buy a property, which belonged to the Company, at a pre-determined price which was below the market price.
  • However, by 2017, when the father wanted to buy the property, the value of the property had risen significantly. The sale as per the earlier price would have resulted in a loss to the Company. The transaction was a Related Party Transaction (RPT). As a result, the Board recommended this transaction to the shareholders for approval.
  • The CMD of the Company too advised the Board against selling a valuable asset of the Company.
  • Shareholders rejected the proposal, with 97% voting against the resolution.
  • The father felt that the son could have decided the matter at the Board level, and need not have taken it to the shareholders.
  • In 2017, the father approached the Bombay High Court seeking possession of the property.
  • As per the annual report of the Company for FY 2017-18, on January 24, 2018, the father vacated the office of Director, in accordance with Section 167(1)(b) of the Companies Act, 2013, which states that if a Director absents himself from Board meetings for a period of 12 months, with or without seeking leave of absence, he will vacate the office of a Director. In FY 2016-17, he had attended 1 out of 4 meetings, and in FY 2017-18, he had attended no meeting.
  • He wrote several letters to the Company Secretary and to the Board. He complained that he was not being kept in the loop about Board meetings.
  • In August, 2018, he complained to the Board about his son removing him from the Company. He also mentioned that most of the Directors knew him personally and knew how he had built the Company.
  • In September, 2018, the Company Secretary wrote to him stating that “Considering the aspersions cast against the Board, the Company and the Chairman and Managing Director, including repeated unparliamentary language, the Board has decided to withdraw the title of Chairman-Emeritus, post your vacation of office as a Director”. The letter also stated clearly that the disagreement among the family members had nothing to do with this decision.
  • In response, the father stated that he would defy the Board unless or until the proof of the Board's decision of sacking was shown to him.
  • The CMD, in a media interview, stated that the removal of the father was a decision of the Board, and the Board must have had its reasons for the same. He added that he had no role to play in it.

Points to ponder

  • When an inter-generational conflict, of a destabilising nature, affects a Company, should Independent Directors not ensure that the Company’s interests are not jeopardised?
  • Since reputation risk is to be addressed by the Board, was the Board found wanting while this drama was being played out?


Context: Majority shareholding often translates to direct interference in management functions. The experience of the public sector oil marketing companies calls into question the relevance of Boards.

  • The Government of India has majority shareholding in the Public sector oil marketing companies in India. These companies are listed on the Stock Exchange.
  • The Board comprises a mix of Executive Directors (EDs) and Non-Executive Directors (NEDs), including Independent Directors (IDs) and Nominee Directors of the concerned Ministry of the Government.
  • The IDs are also appointed by the Government of India.
  • Some of the critical decisions which the companies have to take from time to time, and which directly affect the profitability of the companies, are materially influenced by the Government’s representatives on the Boards of these companies.
  • This is sought to be justified on the ground that the pricing of POL products has a major bearing on the economics of the common man.

Point to ponder

  • In the context of the negative impact of such decisions, at the behest of the majority shareholder, how should the other Directors react?


Context: When banks get listed, the erstwhile sole owner has to recognise that majority shareholding must not get in the way of the interests of minority shareholders. Capturing of management, and reducing Boards to rubberstamps, is not consistent with good governance.

  • The Government of India has majority shareholding in Public Sector Banks.
  • They are also represented on the Board of Directors of each bank by a serving officer of the Government.
  • In addition, Reserve Bank of India (RBI), the banking Regulator, has a representative on the Board of each Public Sector Bank.
  • Boards of Public Sector Banks comprise, inter alia, Independent Directors (IDs) representing shareholders other than the majority shareholder.
  • There have been, and continue to be, a number of instances and areas in which the Government of India, as the majority shareholder, issues directions to the managements of the banks to act in a particular manner or to desist from acting in a particular manner.
  • This includes directions as to the number of posts that may be created at senior levels, selection process for foreign postings, the setting up of ATMs and other matters which fall within the areas of responsibilities of the Board of Directors/ management.
  • In addition, considerable persuasive influence is used to push banks towards lowering the rates of interest for lending.

Point to ponder

  • What should an ID do in the face of continuing directions to the bank from the majority shareholder, and the Board not discussing and arriving at decisions that are in the interest of all its stakeholders?


Context: A Nominee Director is often conflicted in regard to choices to be made while taking decisions. In the situation described hereinbelow, a Nominee Director has to grapple with choices that are not unmixed blessings.

  • Company XYZ has taken loans from Bank A and Bank B.
  • The outstanding amounts of the 02 (two) loans are identical.
  • Bank A has a Nominee Director on the Board of XYZ.

Point to ponder

  • What, if any, is the role of the Nominee Director in the following situations?
    • Situation 1:
      • XYZ defaults in its installment to Bank B, but has paid the installment to Bank A on time.
    • Situation 2:
      • Rate of interest charged by Bank A on the loan is 15%.
      • Rate of interest charged by Bank B on the loan is 18%.
      • XYZ repays the loan of Bank B, and delays/ defaults on its repayment to Bank A.
    • Situation 3:
      • XYZ services the two loans on time but defaults in payments of statutory dues.


Context: A reputed diversified Group, dug in and resisted the attempts of one promoter branch for Board representation or a proper exit.

  • In a diversified Group, which has been in operation since 1900, and with 28 registered businesses, including 10 listed companies, one criticism which has often been voiced, is that only male heirs to the family have been selected to succeed persons from the previous generations.
  • In the Group's family tree published on its website, only male heirs are listed. Of the 8 branches of the family, only 7 are mentioned since one of branches has two daughters and no sons.
  • The daughter from that branch, along with her sister and mother, jointly inherited an 8.15% stake in the holding Company of the Group, from their father, who was the family patriarch, and the Chairman of the holding Company (an unlisted public Company, which has controlling stake of the Group, with 91% being held by the family) as also some of the other listed companies in the Group. The holding Company had, as members of the Board, persons from the other branches of the family as also a few Independent Directors (IDs).
  • Post the passing away of the patriarch in 2017, his daughter had discussed, with her uncle, who was then the family patriarch as also a Board member, and part of the management of the holding Company, two options for her inheritance.
  • One of the options was to give her or her sister a seat on the Board of the holding Company. The second option was that she exits by selling her stake to other family members at a fair market value. She mentioned that both she and her sister were qualified and experienced, and were eligible to get a seat on the Board. She is a nuclear engineer by qualification and a technology consultant by profession.
  • Both these options were rejected by the Group.
  • The Group claimed that she was fighting for succession, and not for her shareholding, as was being claimed by her. She backed her claim with the amendment to the Hindu Succession Act 2005, which allows daughters to inherit equally as sons. She is the Karta of her HUF.
  • She alleged that till the Board meeting held in November, 2019, the approach to the matter was very vague and generalised. Later, finally, the Group allowed for her Board nomination, but did not appoint her in the interim, and asked her to wait for the next Annual General Meeting (AGM), which was 9 months later, in September, 2020.
  • In a media interview in early January, 2020, she stated that, “My father, in his will, bequeathed everything to me, my younger sister and my mother, and clearly stated his wish to give us equal rights and to represent our branch in the family business, We are only running from pillar to post to get what is rightfully ours, but nobody is reciprocating in the same manner,”
  • She further stated that their branch of the family had amongst the largest shareholding group in the holding Company. However, it is the only branch of the tree that is not represented on the Board since her father passed away.
  • On January 6, 2020, she stated that the Chairman of the Group had sent an email to the senior functionaries of the Group, after she went public, that that the Group will try to amicably settle the issue. However, he expressed disappointment with the matter going public.
  • On September 22, 2020, her claim to a Board position was put to vote at the AGM. 91.36% of the shareholders rejected her appointment. The shareholding of the promoters is 91%.
  • In October, 2020, she served a legal notice to the family members and the holding Company’s management, and other persons related to this matter, following a denial of a Board seat on the Board of the holding Company. She stated that with the voting results of the AGM, an amicable settlement was not possible.
  • In November, 2020, the Group was reported to have undergone restructuring. It was decided to dismantle its two-decade-old non-statutory Corporate Advisory Board. Instead of the Advisory Board, which comprised a family member and five outsiders, the Group and individual companies were to be led by senior family members.
  • This Advisory Board had been formed in January, 2000 as part of a ‘new millennium strategy’, under a new corporate governance structure. The main role of this Advisory Board was to advise group companies on various matters.
  • The Chair of the Advisory Board had resigned from it, and 3 other listed entity Boards of group companies, post attaining the age of 65 years. The Group had a practice of Executive Chairmen resigning from their positions on reaching the age of 65 years.
  • In response to the news of restructuring of the Group, she stated that the restructuring exercise had been done to safeguard the family's interests, rather than protecting the interest of the shareholders. The decision to dismantle its two-decade-old non-statutory Corporate Advisory Board was not in the interest of the shareholders. She also claimed that her family was not part of the decision-making and that they learnt about this from media reports.

Points to ponder

  • Is Board representation a right derived from being a shareholder from the larger family Group?
  • Could the family versus shareholder issue have been handled better?
  • What could the IDs have done differently?


Context: As this automobile major experienced, Joint Venture agreements tend to fray over time, giving rise to possible Corporate Governance issues. The context could necessitate tough decisions. Could the Board have anticipated the way this would play out?

  • In a large listed public Company in the automobile sector, the Indian promoter group and a foreign company formed a Joint Venture (JV) with each of them having 26% of the shareholding. The JV was formed in 1984.
  • The Indian group was responsible for the marketing of the products, while the foreign partner was responsible for providing the technical know-how.
  • The relative rights and responsibilities of the JV partners, inter alia, envisaged that the foreign company shall not market, in India, its products in the segment where the Indian Company is present in the market.
  • The Company had 16 Directors in its Board, including 8 Independent Directors (IDs). As per the Shareholder Agreement, the Indian promoters and the foreign company had 4 Directors each on the Board. Also, the Company had an Executive Chairperson (Indian promoter).
  • There were the following conflicts between the 2 partners, that started surfacing in 2008-09–
    • The JV was only for domestic production and consumption. However, the listed Company became world’s biggest player in its segment. The JV agreement was subsequently modified to allow exports of limited products to a few countries. In 2008, competition in other countries, with subsidiaries of the foreign company in those countries, became an issue since the foreign company mentioned that it would not influence its subsidiaries into buying products from the listed Company.
    • Of the 4 representatives of the foreign company on the Board of the listed Company, one was the head of its Indian operations, to whom the Indian subsidiary of the foreign company reported. A second was working in Bangkok and represented the foreign company’s two-wheeler business in Asia. The other 2 were nominated by the foreign company. As Directors on the Board, all of them had access to its plans and strategies.
    • The technology tie-up was till 2014, and the listed Company wanted to have an independent R&D unit for manufacturing its own products. This was not liked by the foreign company.
    • The listed Company was not comfortable with the high payouts to the foreign company.
    • The listed Company refused to merge the Company's spare parts business with the Indian subsidiary of the foreign company.
    • The foreign company wanted to enter the Indian markets since the market was growing drastically.
  • The Board was sensitised to the growing concerns of the Company in 2008-09 and the Audit Committee, which comprised only IDs, actively discussed these matters also.
  • The IDs played a very active role in questioning the foreign company on the possibility of the growth of the listed Company, without being dependent on the foreign company.
  • When the foreign company refused to help, the IDs strongly advised that the listed Company should go to the next growth phase independent of the foreign company.
  • Many of IDs felt that there was a risk for minority shareholders. But they agreed that complete elimination of risk was not possible and the Company could only mitigate them through its actions and strategies.
  • In 2010, the JV ended, and the Indian promoters bought out the foreign company.


Context: In this large IT company, Related Party Transactions posed a challenge to the Board, especially to its Independent Directors. Being unafraid to ask, but unwilling to bite, is an inadequate response. Should the Board have put its foot down?

  • A Company, listed in India and in the US, was considering the merger, with it, of two other companies owned by the family members of the promoter Chairperson.
  • When this matter came up to the Board of Directors for decision, the two promoter Directors, namely the Chairperson and his brother, did not participate in the discussion. The relevant portion of the Board Meeting was chaired by the Chair of the Audit Committee.
  • During discussions, the Independent Directors (IDs) expressed serious reservations on the desirability of the proposed transaction, with one ID even questioning whether they were being requested to rubber stamp the proposal that had been already decided on by the management. The Board had marquee names.
  • Notwithstanding the reservations expressed, the participating Directors decided unanimously to go ahead with the transaction. When the proposed transaction was announced, some analysts questioned its appropriateness.
  • Taking note of the severe criticism, the promoters / management decided to reverse the decision to merge the two companies with the listed entity. This decision was taken and announced before formally coming to the Board for reconsideration of its earlier decision.
  • The reason given for such unseemly haste was that since the Company was listed in the US, it was necessary to communicate the change in the decision to the Exchange in the US before it opened for trading and therefore the prior formal approval of the Board could not be taken for reversing the earlier decision.
  • After approx. 3 weeks, the promoter wrote to SEBI stating that there were fraudulent entries in its books of accounts.
  • The Directors were unaware of this fraud.


Context: The CMD of this construction company got away lightly. Regulators usually come down heavily when there are material transgressions. Was this a case of “even Homer nods”?

  • A listed Company was finalizing the termination of a shareholders’ agreement that it had signed with another Company. The Board approved the termination on August 09, 2013.
  • On September 03, 2013, the Stock Exchanges were informed about the termination of the shareholders agreement, 3 days after the signing of the agreement on August 30, 2013.
  • On August 22, 2013, the CMD of the Company sold shares of the Company, which represented approximately 70.56% of his holding in the Company.
  • This trade constituted approximately 99% of the trade in the shares of the Company on that day on both the Exchanges together.
  • In September 2013, the CMD resigned from his post, after around 2 weeks of the disclosure to the Stock Exchanges, but continued to be on the Board as a Non-Executive Director (NED).
  • SEBI initiated investigation against the CMD on grounds of insider trading and banned him from trading in the securities market.
  • The annual report of the Company continued to classify the former CMD as a Key Managerial Personnel (KMP) for the time period that he was only an NED (as mentioned elsewhere in the report).
  • In December, 2006 too, SEBI had barred the CMD for one year for his alleged role in the rights issue of the parent Company. In 2008, his appeal to Securities Appellate Tribunal (SAT) was also dismissed.
  • In May, 2016, the Nomination and Remuneration Committee proposed the reappointment of the CMD for a period of 3 years, and the CMD was reappointed. In 2018, he was appointed as Non-Executive Chairperson.
  • In 2020, SEBI disposed off the case stating that considering the minor proportion of the transaction to the turnover of the Company, the information cannot be termed as price sensitive information. The other company in the agreement had not even disclosed the said information to the Stock Exchanges. Even if it is assumed that the information is price sensitive, "still the appellant cannot be blamed of insider trading for the reasons that he did not trade on the basis of the information". It was also noted that the former CMD was able to show that he needed the money that he garnered from sale of shares for infusing capital in one of his firms that was undergoing corporate debt restructuring (CDR) during the time. Besides, he was even required to sell his agricultural land and flat.
  • This is a rare instance of an insider trading case against a CMD.


Context: The Compliance Officer of this IT major did not close the trading window because he felt that there was no reason to do so. Timing is of the essence when it comes to announcing the closure of the trading window. Delayed closure decisions can hurt as much as premature closure decisions. Should “contemplation” of an acquisition be the trigger for closure?

  • SEBI issued a show cause notice in May, 2012 to the Company Secretary and Compliance Officer (the noticee) of an IT major, for violation of the Model Code of Conduct under SEBI (Prohibition of Insider Trading) Regulations (PIT Regulations). As the Compliance Officer, he was obliged to close the trading window when in possession of Unpublished Price Sensitive Information (UPSI) till that information was published and for 24 hours thereafter.
  • On December 06, 2008 morning, the Executive Chairperson (EC) of his Company had informed the noticee that he was contemplating acquisition of two companies, and that he planned to appraise the Board shortly regarding the same.
  • The EC also informed few senior officials, such as those responsible for statutory compliance, accounts and treasury activities and M&A, of the same, and asked the Head of M&A to make a presentation for the Board meeting. They were requested to maintain utmost confidentiality about the proposed acquisitions, until they were approved by the Board.
  • On December 7, 2008, a professional firm was engaged to obtain equity valuation report relating to the companies that were to be acquired. On the same day, the EC went to the USA to apprise who were Directors stationed there. The valuation report came on December 13, 2008, the same day the EC returned to India.
  • On December 13, 2008, the Noticee sent a notice, without an agenda, for a Board meeting to be held on December 16, 2008.
  • On December 13 and 14, the EC and the Managing Director met several senior persons in the Company to apprise them about the proposed acquisitions.
  • On December 15, 2008, the noticee emailed, to all the Board members, the agenda for the Board meeting, as well as the draft resolutions and three presentations relating to the proposed acquisitions.
  • In the Board meeting held on December 16, 2008, the acquisitions were approved by the Board, and immediately thereafter, the Stock Exchanges were informed about the same.
  • In view of negative response from investors/ shareholders, that followed immediately after the public announcement, the Board decided not to go ahead with the acquisitions, and communicated the same to the Stock Exchanges on December 17, 2008. On the same day, the share price of the Company fell by 33.5%.
  • The Compliance Officer closed the trading window, for this deal, from December 17, 2008 till beyond January 9, 2009.
  • The Noticee, in his defence, stated that the information received by him on December 6, 2008 from the EC was a price sensitive information, but not such a price sensitive information warranting closure of trading window, because of the following reasons:
    • On December 6, 2008, when the EC disclosed the proposal, there was not even an in-principle approval granted by the Board.
    • As per the best professional judgment of the noticee, the proposal would not have been approved by the Board since the two companies were in different fields.
    • Closing of trading window without any sufficient reason, merely on the basis of proposals and presentations, without there being any decision in that regard, could have defeated the purpose of the code of conduct.
    • In the ordinary course, first an in-principle approval would have been granted by the Board, followed by a final approval. In this case, the Board directly gave a final approval.
    • The professional judgment of the noticee turned out to be correct, as the Board themselves had reversed their erroneous decision on next day.
    • Only one senior employee had traded in the shares between December 06 and December 16.
    • On December 13, 2008, since no agenda was sent along with the Board meeting notice, the agenda for discussion was not clear. It was only on December 15, 2008, when the agenda was sent, that it became evident that the Board would consider the acquisitions.
    • The agenda was only in the form of a proposal. Closure of trading window without direction or in-principle approval could have led to speculative trading by innocent investors.
    • Since there was no direction from the Board to close the trading window, the same was not closed by him.
  • SEBI, in its order in July, 2012, held that the acquisition proposal was price sensitive information. Compliance Officer’s submission that unless communicated to him and approved by the Board, he would have no knowledge of UPSI requiring closure of the trading window was not correct.
  • The noticee had not made any submissions regarding when and what steps he took for taking approval from the Board for closing the trading window. If the noticee were to always wait for instructions from the Board to close the trading window as contended by him, then the purpose of the Moral Code would be defeated as the provision clearly emphasises upon the role of the Compliance Officer who shall, inter alia, be responsible for implementing the Code under the overall supervision of the Board. As Compliance Officer, he cannot raise the defence that internal approvals were not available.
  • The proposal became a UPSI when it was discussed on December 6, 2008, and he should have closed the trading window then.
  • SEBI imposed a penalty on the notice. The noticee appealed in the Securities Appellate Tribunal (SAT), which upheld the order of SEBI.
  • SAT held that the Compliance Officer could not claim to be oblivious of what steps were being taken by the Company from December 6, 2008 in relation to the acquisition proposal. Even if he had any doubt on December 6, 2008, by December 13, 2008, it was clear that all requisite steps were taken to ensure approval of acquisition proposal finally from the Board.
  • Merely because the notice was sent to the Board without agenda, he cannot claim that he was not aware of as to what was to be discussed by the Board in its meeting.
  • Events such as apprising of Board members by the EC, even before the Board meeting, and notice of the Board meeting with an agenda show that the acquisition proposal was to be considered as a highly sensitive proposal, and in such a case the trading window should have at least been closed on December 13, 2008.
  • Further, the draft resolution, appended to the agenda, required the Board to approve names of the CFO and the Compliance Officer to enter into and sign the share purchase agreements relating to the acquisitions.
  • SAT held that it was difficult to ascertain the quantum of loss to investors as a result of the said failure to close the trading window when there was UPSI. This was very significant information which led to substantial fall of 33.5 % of share price.


Context: The infrastructure major decided to erect governance structures to preserve and protect family unity in business. Anticipation and preparation are major contributors to a peaceful existence. Is there a lesson here for business families that tend to disintegrate?

  • A Group, which is considered an infrastructure major, was set up by a first generation entrepreneur, who is the Group Chairman.
  • He made it clear that he will step down from his position when he reaches the age of 70 years.
  • He also made it clear that no outsider will head the Group after him, and the successor will be chosen from the core team of three members – his two sons and son-in-law. All three of them are Business Chairmen in charge of different businesses. The Group also has non-family members as Business Chairmen.
  • The Group has structured all its organisations for the future in a professional manner, with job rotation after every 4 years among its key businesses for all the three core team members, to familiarise them with all the aspects of business.
  • All family members have clearly demarcated roles and functions.
  • To facilitate this, the Group has put in place an extensive “Family Constitution”, which is a voluntary effort. It defines how a successor to him will be selected. It also defines the minimum qualification the family members must have to enter business, their remuneration and perks, including what car they will get to drive, and provides for a family member wanting to branch out.
  • This document has been crafted participatively over several years, involving all senior family members, to avoid possible infighting among family members. It addresses issues such as conflict resolution, ownership, leadership, code of conduct and power sharing.
  • The starting point of this exercise was a Family Business Board. The entire family has committed to certain core values and a willingness to manage differences. It has also laid down policies on all family and business matters, including consensus in decision making, media policy, code of conduct and the process of inducting family members into the business as well as providing for those who do not want to enter the business.
  • The Family Business Board works on a three-year business plan. It has a Family Council, with a well-documented code of conduct. All family members meet every three months to resolve any conflicts and discuss all important matters. Minutes of these meetings are also kept.
  • The document also has a concept of a deadlock trustee who will resolve any disagreements between the three next-gen successors when it comes to deciding the next Chairman. As per the Constitution, the two options available in case of a deadlock are either a partnership model, where the Group is run as a partnership by the three core team members or a rotating Chairmanship among the three every five years.
  • The Group took these steps as early as in 2007, when the document was signed by the core family members in the presence of 150 senior management personnel of the Company.


Context: In the case of a very large NBFC in the housing sector, institutional investors, on the advice of Proxy Advisory firms, voted against a fresh term for the Non-Executive Chairman, and would have voted against two other Independent Directors, if they had not withdrawn their candidatures. Was this the case of inadequate communication which could have led to disruptive results?

  • The shareholders of a large housing finance company re-appointed their Non-Executive Chairman, with 77.3% of votes being cast in his favour.
  • 22.64% of the votes, mostly by FIIs, were cast against his reappointment. This was a special resolution requiring at least 75% of votes in favour of the resolution.
  • Proxy Advisory firms had asked investors to vote against this resolution stating that he was a Director on more than 6 Boards, and may have time constraints that could prevent him from discharging his duties effectively. It was also stated that 4 Independent Directors (IDs) on the Board were affiliated to the Company/ had served the Board for over 10 years, reducing the actual independence of the Board to 20%, which was below the acceptable ratio of at least 50%.
  • 2 IDs of the same Company, who had to be reappointed in the same AGM, decided to opt out after 2 global Proxy Advisory firms advised investors to vote against their reappointment. The reason given by the Proxy Advisory firms for one of them was his poor attendance in meetings (less than 75%), and for the other, his presence on more than 6 Boards.


Context: As this garment company discovered, when Private Equity investors bring in funds, they sometimes also bring in problems. To seemingly play along with the management, and to then blow the whistle, can destroy even a good company. Investors, auditors and managements seemed to have stepped out of line. Did the Directors do too little, too late?

  • In 2010, 2 Private Equity (PE) firms had together co-invested in 45% stake in a garment company, with the remaining stake being with the promoter. It was a secondary transaction with another PE investor, and was brokered by one of the Big 4 audit firms. The Indian arm of that Big 4 firm was the Statutory Auditor of the Company since 2007-08.
  • In September, 2011, the PE investors and the Board approved a plan to go ahead with an IPO of the Company.
  • A day later, an unnamed whistleblower, believed to be a senior executive of the Company, alerted one of the PE firms regarding the lack of authenticity of the Company’s accounts. He had apparently mentioned this to the Auditors, who did not take cognisance of his complaint, and instead certified the Company’s accounts.
  • Thereafter, the investors received a number of anonymous calls, within a span of 3 days, raising doubts on the credibility of the Company's financial statements.
  • One of the 2 Nominee Directors sent a mail to the promoter mentioning the anonymous phone call and the information received by him, and indicated that an independent agency (another Big 4 audit firm) should investigate the accounts of the Company, its subsidiaries and related parties. He also mentioned that the Company should not incur any more debt, and should not draw down existing facilities any further, till the next Board meeting.
  • The next day, the promoter received another letter from the PE firm, withdrawing consent for the IPO. The promoter expressed surprise that the investors were acting on the basis of an anonymous call, since their representatives were involved in day-to-day operations of the Company, and that financial decisions were taken with their active knowledge. He suggested that an internal investigation should be conducted, and he be allowed to report to the Board within 2-4 weeks, since involving an outside agency at that juncture would have created a panic and hampered work, having regard to the proposed IPO. This was not agreed to.
  • In the next Board meeting, 5 days after the IPO was approved by the Board, a resolution was passed to direct the Statutory Auditors to re-audit the accounts, and to appoint another audit firm, the one that had been suggested by the Nominee Director, as an independent agency to investigate the accounts.
  • Simultaneously, the annual accounts for FY 2010-11 were not approved by a majority vote.
  • The PE firms also wanted to inform the banks and financial institutions about the developments, but the proposal was struck down as it was certain to “destroy the Company’s reputation, hampering its operations and financial prospects.”
  • The Company wanted banks having exposure of over INR 500 crores, to suggest the name of an auditor for an investigative audit. After a meeting with the bankers in October, 2011, a Chartered Accountancy (CA) firm was nominated to look into the books of accounts. However, later, the High Court chose another CA firm.
  • Subsequently, the 2 Nominee Directors and 4 Independent Directors resigned, leaving only 2 Directors, including the promoter, on the Board.
  • The Statutory Auditors also resigned, and in the resignation letter stated that they were not being granted access to the books. When a team from the Auditor went to re-audit, it was only provided with limited information, and later was denied permission to enter the premises of the Company.
  • The promoter alleged that the PE firms were trying to take over the control of the Company by derailing the IPO, since they did not want to be diluted. He also alleged that the PE firms were getting too involved in the operations of the Company.
  • In early October, 2011, the Company filed a case against the PE investors in Delhi High Court, seeking an ad-interim relief to stop them from obstructing the operations of the Company or harming the image of the Company. In his petition, the promoter had asked the Court to restrain the two PE firms from selling, alienating, transferring or creating third party interest in the stake that they owned in the Company.
  • He alleged that they were trying to get the Company into a mode akin to distress sale. It was also alleged that the PE firms had forced the Company to take a property which belonged to their legal advisor on a monthly rent of INR 33 lakhs. This highlighted their material interest and involvement in the transaction. This had caused the Company to incur losses since the lease agreement carried a 3 year lock-in.
  • The PE firms, in their reply to the Delhi High Court, asked for a forensic examination of the Company’s accounts, and also sought to appoint a different auditor to investigate the financials of the Company. They also mentioned that the promoter was resisting the demand for an audit on the grounds that the 2 PE firms had full access to the Company's monthly profit and loss accounts and expansion plans.
  • Following litigation in the High Court, both the PE firms and the promoter were restrained from giving any adverse publicity and were instructed to act according to the minutes of the earlier Board meeting. It also asked the two parties to come up with 3-4 names each for the appointment of an auditor and an arbitrator by the next hearing.
  • In November, 2011, the High Court decided that another audit firm should be appointed to carry out an independent audit. It also asked the Statutory Auditors, who had resigned, to reconsider its communication with the Company, and help with statutory audit of the accounts. It also restrained the 2 PE firms from selling their shares without first offering them to the promoter.
  • Subsequently, both the sides also agreed to resolve all their disputes and differences. But this did not happen since the Company did not provide the relevant documents to the Auditors. At one stage, the Court also ordered the Company to provide all the necessary information to the Auditors.
  • Finally, the Company approached the 2 PE firms for an out of court settlement, and in October, 2012, the PE firms wrote off their investments, and the promoter again owned 100% of the Company.
  • Creditors from within and outside India approached the High Court with winding up petitions against the Company, since it had defaulted on payments due to them.
  • The Company again tried to file for IPO, but did not succeed.
  • Later, one of the 2 PE firms, attempting to recover its written off investment, sued the Statutory Audit firm, as well as its India chief, for fraud and negligent misrepresentation. The PE firm also alleged that the auditing group, acting as the auditor and as the agency for bringing in investment, was clearly a conflict of interest. This conflict pre-dated the investment by the 2 PE firms, but was ignored at that time.
  • It was alleged that the Statutory Audit firm did an out of court settlement with the PE firm.


Context: In this large private sector bank, the Board turned a blind eye to the dealings between the family of the Chief Executive, and a large industrial group. Was the Board captive to the power and influence of the Chief Executive?

  • The spouse of the MD & CEO of a large commercial Bank had business dealings with an industrial group.
  • The industrial group had a borrowing relationship with the Bank.
  • In March, 2018, when allegations of conflict of interest and corruption were levelled, following a whistleblower complaint, the Bank took the position that a similar complaint, which had come in October, 2016, had been looked into, and nothing adverse was established.
  • When the criticism in the press increased, the Chairperson of the Bank, on March 20, 2018, made a statement indicating inter alia that the Bank fully supported the MD & CEO concerned.
  • With questions regarding the conduct of the MD & CEO being increasingly raised in the media and elsewhere, the Board of Directors discussed the future course of action in their Board meeting on May 30, 2018.
  • At the end of the meeting, a statement was issued that the MD & CEO was proceeding on leave with effect from June 01, 2018.
  • The Bank separately requested a leading legal luminary to enquire into the matter and to furnish his report.
  • The Bank also engaged a firm to undertake a forensic audit of the concerned transactions.
  • After close to 6 months had elapsed since the press reports surfaced, on October 04, 2018, the MD & CEO tendered her resignation.
  • Until the resignation was tendered, no report had been received from the legal luminary. The understanding was that the report would be received only towards the end of December, 2018. The report was finally submitted to the Board on January 30, 2019.
  • CBI filed an FIR against the MD & CEO, her spouse, and the promoter of the industrial group on January 22, 2019. On the basis of this FIR, Enforcement Directorate (ED) registered a case against all 3 of them on February 02, 2019.
  • The role of the Board of Directors came in for considerable criticism in the context of their alleged inaction following the allegations against the MD & CEO.
  • An Indian institutional investor, with a significant shareholding, had a Nominee Director on the Board of the Bank.


Context: This large public sector undertaking, witnesses an instance of unprecedented activism by an international hedge fund, acting on behalf of minority shareholders. When Independent Directors, facing the threat of litigation, decided to act independently, the majority shareholder showed them the door. Is a forced exit, the price to pay for independence?

  • An international hedge fund, with a little over 1% stake in a Public Sector Undertaking (PSU), created ripples through its activism on behalf of minority shareholders.
  • Government of India, being the majority shareholder, controlled the pricing of the products of the Company and set it significantly below the market price.
  • The Fund felt that this alleged undue interference from the Government was depriving the Company of its potential revenue and hurting the interest of shareholders, especially minority shareholders. The Government felt that it had to resort to this step-in order to help other PSUs and to achieve their social objectives.
  • The Red Herring Prospectus of the Company had stated upfront that the Company’s operations were extensively regulated by the Government and by various statutory and regulatory authorities, and that they sold their product at prices lower than the market price.  The Fund had still gone ahead with its investment in the Company.
  • There was a standoff between the Fund and the Company’s management. The fund alleged, inter alia, that the Independent Directors (IDs) were not acting in the interests of the Company and its shareholders, and commenced legal action, against the Company’s management and the IDs.
  • Subsequent to the commencement of the litigation, the IDs opposed the management’s decision.
  • Thereafter, the IDs were removed at the instance of the majority shareholder.
  • After raising their concerns, and taking note of inaction, the Fund sold its entire stock within a year.
  • Incidentally, the Fund did not raise any objection to the fact that the PSU, one of world’s biggest in its sector by output, was being run without a Chairperson for close to 6 months.


Context: In this storied IT company, musical chairs in the boardroom gave rise to several questions, both substantive and procedural. Was this a case of a misplaced belief that a perceived reputation for high standards would be a sufficient explanation for questionable processes and practices?

  • In a promoter run professional Company, each of the promoters became MD by turns.
  • One of the promoters was the MD of the Company from 1981 to 2002, and then was promoted to the position of Executive Chairman from 2002 to 2011.
  • While he was the Executive Chairman, two other promoters were MDs by turns (from 2002 to 2007 and 2007 to 2011).
  • He retired post reaching the age of 65 years, in compliance with the policy he had laid down for co-founders at executive posts. It was decided that going forward, the Company would only have Non-Executive Chairpersons (NECs).
  • When he retired, he was made Chairman Emeritus. One of the Independent Directors (ID) was made the NEC. The then-MD was made Executive Co-Chairman, and the then-Chief Operating Officer (COO), also a promoter, was made the MD.
  • The MD continued in this position from 2011 to 2014.
  • Subsequently, after the Company’s performance dipped, the former Chairman, who had retired, re-joined the Company as Executive Chairman in June, 2013, for a period of 5 years. His son was hired for the post of his Executive Assistant. Many concerns were raised about his son joining the Company since the promoters had decided that none of their family members would work in the Company. Also, the former Chairman had claimed that he had mentored a number of young professionals for higher offices.
  • The process of his appointment too raised a number of questions.
  • The agenda for the Annual General Meeting (AGM) did not mention this appointment, even though the decision had been made earlier. In the Board meeting, a fortnight before the AGM, the former Chairman was appointed as an Additional Director.
  • For this re-appointment, the retirement age for Board members was revised upward, and there was revival of the post of Executive Chairman.
  • At the AGM, the shareholders were informed that the Company had received a request from a shareholder one day before the Board meeting seeking election of the former Chairman in the ensuing AGM. However, this was not mentioned in the press release on the date of the Board meeting.
  • The Stock Exchanges were also not informed about the request from the shareholder.
  • A day before the former Chairman’s re-appointment, the stocks of the Company gained significantly, without the information of re-appointment being in the public domain.
  • As a part of this change, the NEC became the Lead ID, replacing the then-Lead ID, and the Executive Co-Chairman became the Executive Vice-Chairman, and was to focus on key client relationships and broader industry issues. The then promoter MD, was to continue in his position.
  • At the time when all these changes were taking place, the founders of the Company, and their family members together owned around one-sixth of the shares in the Company, with approximately five-sixth in the hands of outsiders, including institutions and individuals.
  • In June, 2014, the promoter stepped down as Executive Chairman, and continued to be NEC till October, 2014. Thereafter, he again became Chairman Emeritus. His son left with him. The earlier NEC, who had become the Lead ID, again became the NEC.
  • In August, 2014, the Company appointed an outside professional MD, for the first time. Prior to this, promoters were MDs by turn.


Context: In this large automobile company, the proposal to compensate some Whole-Time Directors and the family of a former Managing Director did not survive the test of shareholder scrutiny. As the company discovered, sharing of complete information, in a transparent manner, with the shareholders, was the way out. Should wisdom dawn only when rejection kicks in?

  • One of India’s largest companies sought shareholder approval in July, 2014 for payment of compensation, in excess of the limits prescribed by law, to two serving Whole-time Directors (WTDs) and the legal heir of the former MD (since he had passed away).
  • The proposal was for the compensation to be paid that year, and to ratify the payment already made the previous year. The compensation was apparently as per their terms of appointment, but the Company had to seek shareholders’ approval due to inadequacy of profits.
  • Law mandates shareholders’ approval (in the form of a special resolution) in case the Company has inadequate profits.
  • Nearly 30% of the votes were cast against the resolution. Two-thirds of the financial institutions, which together held a 37% stake in the Company, voted against the resolution.
  • Explaining the negative vote, an institutional representative stated that the fourth quarter losses were more than double of those in the corresponding quarter of the previous year.
  • A spokesperson of the Company mentioned that the structure of the remuneration proposals, outlined in the three special resolutions was established, fully communicated and approved during FY 2012-13. These proposals were consistent with market benchmarks and based on a series of metrics relating to the Company’s overall performance and health, and aggressive implementation of strategies for future growth.
  • In December, 2014 the Company approached the shareholders, addressing their concerns by highlighting that the remuneration paid / payable to its executives were in line with the industry standards and Board level positions held in similar sized companies.
  • In January, 2015, 6 months after shareholders had rejected the proposal, the Company obtained shareholders’ approval for the proposed increase.
  • On obtaining shareholders’ approval, the Company said inter alia that the positive results are an endorsement of the Company’s disclosure and governance policies.
  • In case the resolutions had not been approved, the Company would have had to reclaim the excess compensation already paid to these executives (since the resolution pertaining to the previous year had come to the shareholder for ratification).
  • This was the first time in India that a resolution on executive compensation was rejected.


Context: In this large group, with presence in various sectors, the rigour of the SEBI (Prohibition of Insider Trading) Regulations exposed a chink in the armour. The need-to-know principle is a good defense when faced with an allegation regarding the sharing of Unpublished Price Sensitive Information. Was regulatory action disproportionate?

  • In 2016, SEBI issued a joint Show Cause Notice to a Company, its Chairman, 2 Executive Directors (EDs) and the Compliance Officer (the noticees), in relation to possible violation of provisions of SEBI (Prohibition of Insider Trading) Regulations (PIT Regulations).
  • In May, 2010, the Company had sold one of its businesses, and made a public announcement to the Stock Exchanges on May 21, 2010, the same day the Audit Committee (AC) and the Board had approved the transaction.
  • It was alleged that the noticees failed to handle Unpublished Price Sensitive Information (UPSI) relating to this transaction on a ‘need-to-know’ basis as the son of the Chairman and one of the EDs, who was neither an employee nor a Director, was privy to the decision to sell at every stage.
  • The noticees stated in their reply that at no point of time was the son involved in the decision-making process, and that he did not trade in the scrip of the Company at any time during the period.
  • It was also alleged that the Compliance Officer failed to close the trading window. Notice for Board meeting was given on May 20, 2010, and the Board met on May 21, 2010 to approve the transaction. Stock Exchanges were informed about the deal on the same day. However, the trading window was not closed at all.
  • Also, in a letter from the Company in January, 2011, it had listed the names and designations of all the persons who were privy to the decision regarding the sale at every stage, and the son’s name was one amongst them. SEBI took note of the letter.
  • SEBI in its order stated that it was necessary to ensure that UPSI was shared strictly on a need-to-know basis and not communicated to others who were not involved in the transaction, irrespective of their position in the Company or relationship with promoters and senior management.
  • Also, it was the responsibility of the Company to decide about the commencement of closure of trading window, which was to be opened only 24 hours after the price sensitive information was made public.
  • The Chairman, and 2 EDs (the appellants) filed an appeal with Securities Appellant Tribunal (SAT) against the decision of SEBI.
  • On May 15, 2019, SAT set aside the order of SEBI.
    • SAT found that due diligence was carried out by the Company up to May, 2010 in strictest confidence. Except for certain individuals, who were identified as being privy to the transaction and informed to SEBI in January, 2011 itself, no one in the Company was aware of the information at any time prior to the Board meeting and subsequent public announcement on May 21, 2010.
    • Also, the Chairman informed the Board members on May 10, 2010, of the possibility of the pending deal that may take place, and none of the persons identified as being privy to the deal, had sought any pre-clearance for trading in the scrip.
    • It stated in its order that the information was given to the son, and others only on a ‘need-to-know’ basis.
    • Also, the son was “deemed to be connected person” as per PIT Regulations. Being a promoter, holding about 2% of equity capital of the Company, he had to give an undertaking relating to multiple clauses in the Business Transfer Agreement like non-compete provision for 8 years. Hence, he had to know in advance regarding the decision.
    • Further, he had not traded in the scrip of the Company during this period.
    • SAT also noted that the purpose of closing the trading window was for a salutary purpose. It was to ensure that trading is restricted during the period in question and pre-clearance requests can only be sanctioned as per the Model Code of the Company. Even though the trading window was not closed, there was no trading of the scrips by any of the designated employees of the Company, nor any pre-clearance requests were received by the Company. Thus, even though, no announcement was made for closure of the trading window, the Model Code was followed.
  • SAT in its order stated that the object of the SEBI Act is not only to protect the investors, but also the securities market. SEBI is a watchdog and not a bulldog. If there is an infraction of a rule, remedial measures should be taken in the first instance, and not punitive measures. In the absence of any direct or clinching evidence of insider trading or misuse of UPSI, a reasonable benefit of doubt should be extended to the Company, instead of mechanically imposing a penalty.
  • Consequently, the imposition of penalty was converted into one of warning, with a further direction that if any such incident occurs in future, it would be open to SEBI to proceed in accordance with law.