Newsletter Category: 2023

It is often said that truth is stranger than fiction. The developments in the recent past at OpenAI is an open and shut case in support of this hypothesis.

There have been earlier instances in corporate history where high profile CEOs were removed from the company, and came back to occupy the same positions after several years had passed. This is the first case in living memory where a CEO was shown the door by the Board of Directors, offered a position in a large company with 49% shareholding in OpenAI, and came back within four days to hold the same position, in the process dismissing almost his entire Board of Directors. A stranger case of musical chairs is not easy to contemplate.

The stated reason for the removal of Sam Altman, the CEO, was that he was not “consistently candid” with the Board in regard to his various moves in the company, hindering its ability to discharge its responsibilities. The removal, which incidentally happened on a virtual call on a Friday, to which Greg Brockman, the Chairman of the company, does not seem to have been invited, and post which, he too was removed from his post, gave rise to more than 500 of the employees threatening to cast their lot with the expelled CEO, and in the process moving to Microsoft or wherever else he was going to be. By Tuesday, Sam Altman was back, and he promptly got rid of the Board that had expelled him, retaining only one Director in the reconstituted Board. Interestingly, the statement that Altman was being removed was read out by Mr Ilya Sutskever, who worked with Altman for 8 years.

Altman’s return to the company was not without its share of excitement. While pitching for the removal of the existing Board, Altman had demanded a Board seat for himself, which was not agreed to. His co-founder, who was earlier the Chairman, too lost his Board seat in the process of negotiation.

One stated reason, for the difference in regard to direction, between the earlier Board and the CEO, was that OpenAI, which was a not-for-profit organisation, had been brought into the for-profit space through a subsidiary. This had been the subject matter of discord within the Board. Some participants, as well as observers, of the ongoing drama expressed concern at the danger inherent in AI assuming a significantly larger presence in our lives. Reportedly, some employees were also concerned that the unbridled growth of AI would negatively impact human lives and security. Mira Murati, who was appointed interim CEO, when Altman was fired, was reportedly one of the persons who had earlier expressed some concerns to the Board.

While negotiations were on to bring Altman back, the Board named a new CEO, Emmett Shear. He could not step into the leadership role because Altman came back to his earlier role. Succession planning, anyone?

There are a number of Corporate Governance lessons that the OpenAI crisis provides us with, and it is through the lens of Corporate Governance that we propose to look at the various developments.

To begin with, as in the case of almost every Corporate Governance meltdown, notice has to be taken of the composition and the functioning of the Board. OpenAI had a 9-member Board. 3 of the Directors left the Board more than a year ago, and those positions were not filled. One of the Directors is stated to have expressed the view that he was uncomfortable with the way in which AI was sought to be used, and its possible negative influence on the world. The vacancies were not filled, and meanwhile, the CEO continued doing what he thought was right. For the Board to suddenly express concern in public, leading to abruptly expelling the CEO, should raise eyebrows. Information is the fuel on which corporate entities run, and if the management was not providing timely and complete information to the Board, action should have been taken much earlier than the time at which the CEO was removed. Even this removal seems to have been triggered inter alia by complaints by employees that the new initiatives were detrimental to public interest. It is reasonable to conclude that the Board was acting in an information vacuum that did no credit to it, and to the management. The related question, which cannot be ignored, is the representative role that the Board of Directors is expected to perform. Conventional Corporate Governance theory requires that the Board, acting on behalf of, and in the interest of, shareholders and other stakeholders, should manifest the ability and willingness to provide superintendence, direction and control. This was a role that the Board either did not perform, or could not perform, on account of information being denied to it, or being resisted by a charismatic CEO, demonstrating significant growth in the company. There is no escaping the fact that the Board had abdicated its responsibilities on a continuing basis. The demand that Altman should be replaced had been made by at least one Board member a year before the defining Friday call.

Let us now look at what Sam Altman did. Clearly, he did not keep his Board informed, leave alone enlightened. He seems to have not carried conviction with a portion of his workforce who felt that some of his moves were far too adventurous to be consistent with public interest. Was he then a lone ranger, with not many others persuaded to think along the lines that he had decided on? Was this a case of the strong CEO model that many persons in the USA swear by, carried to an extreme, where there was one power centre in the organisation, and nothing else? His co-founder, who was Chairman and President, seems to have backed him, but to no avail.

The fact that the decision to remove Sam Altman was taken seemingly abruptly, at a virtual meeting, to which the Chairman was not invited, gives rise to some other questions. Did members of the Board feel that they were inadequate to deal with a corporate leader of this kind? Was relative insecurity at the root of the extreme decision to sack him, rather than to erect a system of checks and balances to see that he did not run riot in the organisation? Clearly, the Board was divided in its assessment of Altman. The reconstituted Board retained one member, while getting rid of the rest. Were there conclusive conversations in the previous Board, with differing viewpoints, on the direction in which the company was headed? Not enough of this is in the public domain. It might be useful for regulatory agencies to carry out a deep dive, in order to determine what the problems were, so that similar events do not take place elsewhere in the corporate sector. Whether the new reconstituted Board will act independently remains to be seen.

In all of this what did Microsoft, with a 49% shareholding, and its celebrated CEO do? The Board did not seemingly keep the investors informed prior to sacking Altman. Having got the news, should Microsoft have welcomed Altman with open arms, rather than push back to have him retained as CEO? Was the largest shareholder, but one without a Board seat, oblivious of the interest of other investors and stakeholders? At least one other institutional investor seems to have expressed concerns a few months earlier. Should the institutional investors not have come together to tell the Board where it got off?

There is also the question of regulation as a check to unbridled adventurism. Off and on, in several jurisdictions, it has been argued by a section of the ecosystem, that external regulation is counterproductive, and that organisations should be left alone to regulate themselves. This stance has been adopted by persons who ought to be better informed, having regard to number of instances where self-regulation, especially when it conflicts with business interests, has been found to be wholly inadequate. In the context of the explosive growth of AI and its various applications, and the impact that it could have on human life and work, there is a need to put in place effective regulations by Government, especially having regard to the fact that there are security aspects that need to be addressed. Effective Corporate Governance cannot be predicated on self-regulation. Nothing seems to have happened by way of regulatory intervention, proving yet again that the policeman is the last person to reach the scene of crime.

There are perhaps some winners and some losers in this saga. What is abundantly clear is that Corporate Governance has taken a bad knock.

Listen to our Chairperson, Mr. M Damodaran, share his views on “The Financial Times’s Adani Story” in an interview with Mr. Karan Thapar. To watch the full interview, please click here.

There was a time, not so long ago, when the infrequent resignations by Directors on the Boards of companies were all on account of “personal reasons”. As the Cola advertisement said, there was nothing official about it. There was one extreme instance of an Independent Director (ID) who was threatened with bodily harm, and in the letter of resignation, stated that it was on account of personal reasons. When friends, who were aware of the circumstances of her quitting, asked her why she had not stated the factual position, her response was that even protection of life and liberty is a personal reason.

Then SEBI decided to play spoilsport, and to introduce some excitement in the proceedings. Directions were issued to the effect that no matter what reason an ID offers for resignation, he/she should state unequivocally that there was no other reason than the one stated in the letter of resignation.

The initial fears that with increasing liabilities, and inadequate compensation, Directors would vacate boardrooms in droves has been belied. The brave men and women that inhabit boardrooms, do not see the risk reward trade-off of being on the Board as being adverse to their interests. However, there have off and on been a resignation or two, and it is to those that we will turn our attention in this newsletter.

The most recent resignation, at least as is learned from media reports, is that of an ID who quit the Board of Dhanlaxmi Bank, a small community-based bank in southern India. In his letter of resignation, he set out quite a few reasons for leaving the Board, the common thread being that his inputs were “deliberately negated/ avoided/ overruled by the other members of the Board, just to support the belligerent attitude of the MD and CEO, who is on public record (in the vernacular press) that he cares little for shareholders and other Directors.” The specific instances cited by him need not detain us. What is important is that he was appointed on the Board on December 5, 2022, confirmed by the shareholders on December 30, 2022, and resigned on September 16, 2023. A news item has surfaced stating that the largest shareholder of the bank had informed the Board that he would be bringing up a proposal for the removal of the ID concerned. According to that version, the Board was to consider the matter in 3 days, but the ID in question made a pre-emptive move to quit the Board.

The purpose of disclosing the real reason for resignation ought to be that those tasked with first level regulation, and second level regulation, should ask a few questions which have been given rise to by the contents of the resignation letter. It is not clear whether the Stock Exchanges have sought any report from the bank concerned. The obvious question is whether their responsibility ceases, by taking on record the resignation letter, and doing nothing more about it. As far as the second level Regulator, SEBI, is concerned, it should by now have asked for a detailed report from the bank to determine whether the alleged governance lapses have any merit, and if so, what corrective action(s) would be required. Unlike other listed companies, this bank also had on its Board, 2 representatives of the banking Regulator, and one of them has come in for “mention in dispatches”. This is not a case of a Director not being found fit and proper at the time of appointment. The credentials and the relevant experience of the individual concerned are impeccable. Could a person have turned completely unacceptable in a matter of less than 9 months after appointment? Viewed differently, did the Director concerned find, in a short period of 9 months, that the Board, which he must have joined with great expectations, did not measure up in his eyes?

At the very least, RBI, and/or SEBI, should conduct a detailed enquiry to ascertain the real position, especially considering that this bank has had a chequered history in the recent past when it came to Board level conflicts, resulting in one case of the voting out of the MD and CEO by the shareholders.

Some other instances of resignations should also lead to raised eyebrows.

In the case of Manpasand Beverages, which was in the news around 4 years ago, there were interesting reasons given by the Directors for their respective resignations from the Board. The letter dated May 27, 2019 from the company to the Stock Exchanges stated that one Director resigned due to “preoccupation”, and another resigned “mainly due to GST search”. These two resignations were within one week of each other. Preoccupation is in the normal course, a very strange reason for resignation. Did the preoccupation come about after the Director was appointed, because of subsequent commitments? Nothing is clear from the communication to the Stock Exchanges. What is interesting is that the second Director resigned attributing his resignation to a GST search. Did the search lead him to adverse conclusions regarding the governance standards of the company? Was it for the same reason that the other Director resigned, citing preoccupation, and nothing else? On May 27, 2019, another Director resigned stating that the resignation is “mainly due to press release issued by GST department”. In the absence of any readily available information at this juncture regarding the contents of the press release, or the findings of the search, it is idle to speculate on whether any threat was perceived by the Directors concerned from the investigative/ enforcement agencies. If they were not in the picture, in regard to the circumstances leading to the GST search, should they not have sought protection under Section 149(12) of the Companies Act, 2013? Also, this is not the only case where search operations by GST officials took place in the corporate world. One has not heard of Directors of other companies subjected to search, resigning in droves to protect themselves. As in the earlier case, there is no indication whether any Regulator reached out to the Directors to find out the real reasons, and to take whatever corrective action(s) would have been possible.

2019 threw up a few more cases of resignation. On June 19, 2019, a Director resigned from Wadilal Enterprises, stating, among other things, that he had in the past raised issues regarding arms length pricing between Wadilal Enterprises Limited and Wadilal Industries Limited, which are related parties. He also stated that there were serious issues amongst the promoters of the company, with them having made cross allegations. He further stated that the meetings of the Board and the committees were conducted in a hostile atmosphere, and he found it impossible to carry out his functions as an ID. He also stated that his integrity and independence were being questioned, and he was described as non-ID. The concerns expressed are clearly relevant and genuine. It is interesting that a Director who has insisted on arms length pricing between related parties is being described as a non-ID. It is also thought-provoking that the said Director, while resigning, had stated that the atmosphere in the boardroom was hostile. This is not the first such instance, nor will it be the last. The question arises whether having regard to the interest of the wide variety of stakeholders, the relevant authorities will adopt an attitude of benign neglect while boardroom battles are being fought, with value being destroyed in the process. The company’s explanation that the matters had been gone into by a retired Supreme Court Judge, and that the transaction had been approved by the AC, raises yet another question. Were the two parties related? If so, what method did the Audit Committee (AC) follow to determine that pricing was at arms length. This assumes importance because in some companies, managements take related party transactions to the AC, and the latter takes the position (sometimes in the minutes) that the management had explained that the transactions were at arms length. Surely, that does not travel far enough as far as the responsibilities of the AC go.

When one looks at a few cases, and is about to reach a conclusion that the most interesting of them have been seen, another case surfaces, which makes the earlier resignations seem commonplace. One Director, who was appointed on the Board of Zee Media Corporation on January 24, 2019, informed the company on January 27, 2019 (exactly 3 days after appointment) that “the recent developments in the group, especially the big upheaval in the market, and the unprecedented fall in the share value, coupled with media reports of an open letter by the promoter, had left him perturbed and amazed”. He added that he “will not be able to contribute in such turbulent times”. He indicated that he would resign wef January 27, 2019. Several questions arise, the most fundamental of which is whether the individual concerned had undertaken any due diligence whatsoever before joining the Board 3 days prior to his resignation on January 27, 2019.

2 Directors resigned from the Board of Zee Enterprises, one on September 21, 2019, and another on November 22, 2019. The first of them indicated that he was informed by the promoter, subsequent to sale of shares by the promoter group, that the new institutional investors expressed a desire to recast the Board. He therefore tendered his resignation with immediate effect. In his resignation letter, he has referred to a number of positive initiatives and efforts by the company, and wished the company a great future with its new aspirations and new Board. The other ID stated upfront in her letter of resignation that the primary reasons were “several instances of poor corporate governance in FY 2018-19”. She cited 8 specific instances of poor governance, and added that she felt “highly uncomfortable, and increasingly unsure about her ability to discharge her duties and responsibilities as an ID”. It is difficult to resist the comment that two resignations, within a space of 2 months, offer diametrically opposite reasons for the exits from the Board. With one of the alleged irregularities relating to diversion of funds, the securities market Regulator took up investigations, and passed orders thereon, holding the persons in charge and the company responsible.

In the case of one prominent non-banking financial company, 2 Directors exited around the same time. The first of them stated that he had served on the Board for 10 years, and found it very fruitful and rewarding. He gave no other reason for his resignation. The other Director, who resigned within 4 days of the earlier resignation, indicated, in considerable detail, that issues raised by the IDs were not taken seriously by the management, and in the absence of any indication that concrete steps would be taken on those issues, he was resigning from the Board with immediate effect. In his letter, he referred to a meeting of the IDs, during which the senior most ID, the one who had resigned after 10 years, had pointed out that the IDs had several concerns, and they were not being taken seriously. It is difficult to reconcile the position taken by these two persons in their letters of resignation.

In the case of Asian Hotels, one Director resigned in June, 2021 stating that the hotel had stopped functioning on account of “lack of finances, and with no funds coming from the promoters”. He added that despite repeated requests, the Chairperson did not “respond to a discussion on the financial problems of the company”. He concluded that his “usefulness to the company is no longer seen”.

3 IDs manifested their clear dissatisfaction while resigning from the Boards of PTC India Financial Services, a subsidiary of PTC India Limited. All of them gave fairly detailed resignation letters, setting out instances of corporate governance violations by the management of the company. These were gone into by the Regulator, with corrective action(s) being initiated, even though the stand of the company was that the IDs had not done what was expected of them. One wishes that similar corrective action had been initiated in all other cases where IDs have alleged corporate governance failures on the part of the management.

Self preservation is often a very strong reason for doing the right things, even if such action is somewhat delayed. There is reason to believe that in enlightened self interest, if nothing else, IDs will show a mirror to the management and the promoters, thereby ensuring the protection of the interests of all stakeholders.

Leaving corporate governance issues unaddressed is like leaving the balls outside the off stump. It will not disturb your presence at the crease (or in the boardroom), nor will it disturb the scorer. However, stepping out of the crease, and hitting a few balls out of the park, will keep the scoreboard (of independence) moving at a brisk pace.

“When the One Great Scorer comes to mark against your name,

He writes not that you won or lost,

But how you played the game.”

Listen to our Chairperson, Mr. M Damodaran, share his views on “The Financial Times’s Adani Story” in an interview with Mr. Karan Thapar. To watch the full interview, please click here.

It was unexpected, to say the least. At the dry run of an Annual General Meeting (AGM), which was expected to be a routine affair, one surprise question popped up from one of the employees, who was playing the role of a shareholder who would ask questions at the AGM. The question referred to an Independent Director (ID) by name, and sought information on whether that person was on too many Boards, implying thereby that justice might not be done by him to the role of an ID on the Board of this company. Management and the Chairperson responded by saying that the number of directorships were not more than what had been prescribed by the Companies Act, 2013 (the Act) and the SEBI LODR Regulations, 2015 (the LODR). The Chairperson added that the Director concerned had not only attended all meetings, but had contributed significantly to the deliberations of the Board. It later transpired that the question was prompted by an observation in the report of one of the proxy advisory firms, and was asked at the dry run in order to prepare the management for responding to the question, if it got asked at the AGM.

Moving away from the specific case involved, it is necessary to ask ourselves the question “how many is too many” when looking at Board positions. There was a time when a person could be on the Boards of as many as 20 listed entities, and not break sweat in the process. Those were leisurely days, in which an ID had to only turn up for the meeting, and after some time, post the obligatory tea or coffee, and the marking of attendance, leave post haste to attend the next Board meeting. Expectations from the IDs were very low, and the IDs generally performed up to expectations.

The maximum number of directorships got reduced from 20 to 10, and thereafter to 7, when the LODR was amended. By this time, the specific responsibilities of the Directors had significantly increased, and alongside the responsibilities, the liabilities also came into focus. This clearly meant that Directors had to invest far more time and effort in preparing for Board meetings, as well as for attending Board meetings.

Simultaneously, the committees of the Board also assumed a much larger role. To begin with, the 4 mandatory committees provided for by the Act, with the large number of duties and functions attached to each such committee, increased the workload of the IDs. It was no longer possible to breeze into the boardroom, exchange pleasantries, make a few comments, often tangential, and wait for the meeting to end.

It is useful to look at some changes which have happened along the way. Earlier, most companies had 4 mandatory Board meetings, in which the major agenda item was the consideration and approval of quarterly results. Over time, most companies have gone in for 6 Board meetings a year, with the non-accounts meetings providing the Boards the opportunity to discuss strategy, and other important matters, in detail. Alongside the increase in the number of Board meetings per year is also the increase of the number of meetings of the Audit Committees (ACs), which in a year, would be not less than 6, if important matters are to be discussed.

The workload in some of the other committees has also increased. To begin with, there were no minimum number of meetings prescribed for Nomination and Remuneration Committee (NRC). Now there is a prescribed minimum of 1 meeting a year. With the importance and urgency attached to some of the responsibilities of the NRC, many companies are requiring 2 or more meetings to address all the issues falling within the remit of that committee. The Corporate Social Responsibility Committee (CSRC) and the Stakeholders Relationship Committee (SRC) are also found to have more than 1 meeting in a year.

There is one other important committee that should not be lost sight of, and that is the Risk Management Committee (RMC). One of the major failures of the Act was the non-inclusion of the RMC in the list of mandatory committees. Now that risks have increased in diversity, impact and number, many companies are requiring their RMCs to meet at reasonably frequent intervals.

Given the increased time commitment and responsibilities of IDs, the question has been asked for some time whether directorship on the Boards of 7 listed companies, and membership of a few Board committees, is not excessive. With a major churn expected in boardrooms in 2024, as a result of the terms of many Directors coming to an end, corporates will seek to find appropriate replacements, in order to rightly compose the Board. Many corporates have already embarked on this exercise, without waiting for the term of office of the outgoing IDs to come to an end. Interestingly, the possibility exists that those completing their second term on any Board could be picked up by other companies, and in turn, their outgoing Directors could find a place in the companies from where two term Directors had already exited, or were in the process of exiting. This expectation of musical chairs gains ground from the behaviour noticed in the past, which led to corporates looking at a limited universe of potential Board members, without expanding the area of search. What this will not do, is to address the question whether 7 directorships constitute an overload, and whether such Directors are being overboarded.

Looking for new Directors who have not been on Boards so far does not come easily to the corporates, who are unwilling to move out of their comfort zones. This was evidenced when the LODR provided for a woman ID, in place of a woman Director. Women IDs, who were on multiple Boards, and had become marquee Directors, were approached by many companies seeking to fill the newly mandated position of woman ID. It was as if there was not a single woman outside that small universe who could be considered for Board positions. Given this mindset, it is not unlikely that while looking for new Directors, corporates will look at those who are exiting other Boards, and ignoring potentially good Directors, who are presently outside the system. While it is likely that the corporates might not have the bandwidth to conduct a meaningful search for new Directors, nothing should prevent them from seeking outside professional help to identify the right candidates.

This brings us back to the mother question – how many Boards should an ID be on? 2024 is the appropriate time for SEBI to lower the maximum number of independent directorships per person to 4-5. This will ensure that Directors have the mental bandwidth to contribute significantly to the deliberations of the Board and the committees, as also to interact with senior management between Board meetings.

Prior to the coming into force of the Act and the LODR, Boards were packed with persons who made general comments, without getting into adequate detail, on agenda items. While it is readily conceded that a Board should not comprise only persons with the specific domain expertise, domain knowledge and domain familiarity are non-negotiable requirements. If an ID is on the Boards of too many companies from different domains, it would be well nigh possible for that person to acquire adequate domain knowledge of all the companies whose Boards he/she is on, and this could lead to suboptimal contributions in the boardroom.

On account of Covid, almost every company had to go in for virtual meetings of the Board and the committees. This gave a false sense of comfort to the overboarded IDs, since they did not have to travel for attending physical meetings. There have been instances where on account of virtual meetings being scheduled very conveniently, a Director has been able to attend 2 Board meetings and 1 committee meeting on the same day in 3 different cities, by sitting in front of his/her computer screen. Those good times have disappeared. Nowadays, there are more in-person meetings, which involve travel, with additional time having to be committed for moving from one city to another. This too should point in the direction of reducing the maximum number of Boards that an ID can be a part of.

The message to the corporates is very clear. They must expand the area of search. They must look for younger Directors, with skillsets and expertise, that have contemporary relevance. This is also an opportunity to look for all manner of diversity, not limited to gender diversity. The search must enable corporates to identify, and induct on Boards, persons who can add great value, but remain hitherto hidden.

Well might Thomas Gray have said:
“Full many an ID of purest ray serene,
The dark unfathom’d caves of ocean bear,
Full many an ID is born to blush unseen,
And waste his (her) sweetness on the desert air.”

“Our Board has no issues” is the biggest issue. To know more, please click here.

This could not have come a day too soon. At a recent press conference, the Chairperson SEBI referred to a new regulatory design. While setting out the details, she referred to the consultation mechanism leading to the writing of regulations, and the subsequent, not necessarily consequent, difficulties being faced by the regulated universe at the time of implementation. She articulated the new approach in the following words:

“Essentially, this new element in the regulatory design is as follows: We have seen over the last many months that as we bring out various regulations or modify various regulations, we find that at a policy level we have a lot of valuable inputs that comes to us from advisory committees and public consultation. We get a lot of input, we take that and create our regulation, then public consultation and we approve it.”

“However when they are implemented, we find that two things happen. One is that a lot of queries come to us on how are these supposed to be implemented…and will this be adequately compliant etc. First we tried to explain this through FAQs and more detailed circulars. On deeper reflection, we came to the conclusion that what we are dealing with is standard setting for implementation… this is not the regulation but about implement. This task is done by industry bodies themselves.”

“Now our regulations will take us to a certain stage of expressing regulatory intent and what is to be done, but a lot of ease of doing business lies in the details of how to implement.”

The argument proceeds on the assumption that the present consultative process is satisfactory in all aspects. A few points might be worth pondering over. Is the time given for absorption of the proposal, consideration of its implications, and articulation of concerns, if any, adequate to get an informed response? It is relevant to note that elsewhere information has been put out to show that in the last six months, SEBI issued 40 consultation papers, which is a multiple of what had happened during similar periods in the past. The extraordinary number of consultation papers, and the limited time available for responding to the content of those papers, would necessarily have led to either an absence of an adequate number of responses, or responses that did not carry evidence of completeness or of comprehensiveness. The first element in the reform process ought to be the putting in place of a meaningful and pragmatic consultation process. It is also necessary, in the interest of all concerned, that consultation should be at least a two-stage process, the first being the receipt and collection of the initial responses, and the second being responses to a revised consultation paper, factoring in all the worthwhile suggestions that have been received.

Going further, Chairperson SEBI has observed as under, in the context of implementation of the regulations:

“However when they are implemented, we find that two things happen. One is that a lot of queries come to us on how are these supposed to be implemented…and will this be adequately compliant etc. First we tried to explain this through FAQs and more detailed circulars. On deeper reflection, we came to the conclusion that what we are dealing with is standard setting for implementation… this is not the regulation but about implement. This task is done by industry bodies themselves.”

“Now our regulations will take us to a certain stage of expressing regulatory intent and what is to be done, but a lot of ease of doing business lies in the details of how to implement.”

There ought to be the clear recognition that regulation is a means, and implementation is the desired objective. Further, it is not industry bodies that undertake implementation, but the regulated entities to whom the regulations apply. Industry bodies come into the picture when they offer comments on the contents of the consultation paper, and thereafter, on occasion, pointing out the difficulties in implementation, based on representations made to them, by their member entities, which are the regulated corporates. If a wider role is contemplated for the industry bodies, the proposal set out in the following paragraph, could be given some thought.

The first consultation paper may be put out in the public domain, and also sent to the representative chambers and confederations, giving them enough time to offer their comments on the various elements of the proposal. Where there are serious concerns expressed, the Regulator should convene a meeting, with representatives of the chambers and confederations, to discuss and understand the practical difficulties that are being faced, and to iron out those problems. Improving the ease of doing business is the common aspiration of both entities across the regulatory divide, and a constructive conversation is, without argument, the best method of reaching agreed conclusions.

A related aspect merits consideration. For some years now, we in Excellence Enablers, have articulated the need for an in-house body that examines the Regulatory Impact Assessment of proposed regulations. This could take the shape of a Regulatory Review Authority, also functioning as a Regulatory Preview Authority. What this in-house body should do is to look at the proposed regulation, and ask a few questions. Firstly, is this new regulation necessary, or are existing regulations adequate to address the identified problem. Secondly, if this proposed regulation is implemented in the present form, what benefit, if any, will accrue to the intended beneficiaries, and what costs will be attached to such regulations. The fact that compliance riding on regulations comes with a cost, should not be lost sight of.

Chairperson SEBI also referred to an earlier consultation paper on tracking unpublished price sensitive information (UPSI), and mentioned that since there will be more USPI events, a good trading plan is all the more essential. She indicated that by the end of August, there would be a consultation paper to make the trading plan easier. Before embarking on this revised consultation paper, it might be worthwhile for SEBI to ascertain, from the listed entities, how many persons serving in them, have opted for trading plans. Our guess is that the number would be abysmally low, and we would be delighted to be proved wrong.

The improvements required in delisting norms also figured during the press conference. Chairperson SEBI rightly identified that the reverse book building mechanism has several concerns, one of which is that some persons in anticipation of delisting, acquire shares in order to cross the 10% limit, so that the persons attempting the delisting, cannot cross 90% of the shareholding. This gives an opportunity to those holding a little higher than 10%, to quote very high prices, thereby frustrating the delisting attempt. The requirement of ensuring that persons on both sides of the transaction get a fair value is one that SEBI is expected to address. One option that the media has commented on is the determination of a fixed price. It would be prudent to await SEBI’s considered response on a worthwhile policy in this area.

The vexed question of rumour verification also figured in the press conference. Chairperson SEBI observed as under:

“Let’s take for instance one of our circulars on rumour verification. The regulation in the circular conveys the intent of saying that if there is a rumour in the market… it is there and making the price move, then the company needs to come in and verify that rumour. That is a regulation that no one has a dispute about… but the challenge is how to implement it. What we understood is that most corporates already has a media-tracking service… it is already there. Is it our desire as a regulator that they invest hundreds of crores to invest in a parallel system? Of course not!”

The present circular, which is laudatory in intent, regarding rumour verification, raises quite a few implementation related issues, and the corporates have been genuinely concerned about them. The intent of the circular cannot be questioned, but to assert that “this is a regulation that no one has a dispute about” is a bit of a stretch. If, as admitted, the challenge lies in implementation, clearly the regulation is not undisputed or indisputable. SEBI’s suggestion is that since most corporates have a media tracking service, they should use the services of such entities to help them with the implementation of this circular. It is necessary to ask the question as to the extent of coverage that the media tracking service provides. Good media tracking services make available the entirety, or nearly the entirety, of published material, on any aspect relating to the company, including every unverified rumour, that is published. It is thereafter for the management to plough through that information, and to make judgement calls on what are the rumours that are either already influencing, or might have the potential to influence, the movement of share prices. This has to be done in real time, and a well-considered response sent to the Stock Exchanges within the stipulated time. Secondly, Chairperson SEBI is also have reported to have said that it is not SEBI’s desire, as a Regulator, that corporates invest hundreds of crores to create a parallel system. She is reported to have said that this will cost only a few additional thousands of rupees. Informal consultations, with a couple of renowned media tracking agencies, give the impression that while it might not necessarily lead to crores of investments by individual entities, it would be far more than a few thousands of rupees, to set up a worthwhile system. Setting up a system, and collecting the information, is the least of the problems. The real issue is whether unverified rumours should be legitimised by detailed responses, rather than a simple denial. The collective wisdom of the confederations and the apex associations could possibly help in separating the grain from the chaff. Until a reasonable system is devised by them, and endorsed by SEBI, would it not be more prudent to put this regulation on hold?

Earlier in this article, a reference was made to a large number of consultation papers that have been put out in the recent past. Some numbers will help to explain the position. In 2023, 40 consultation papers have been put out in the first 6 months. The highest number in the previous 13 years has been 24 in 2021 (the full year). Further comment on this is superfluous.

Since a new regulatory design is on the anvil, may we present our wishlist, which hopefully echoes with much of the regulatory universe?

1. SEBI should put in place a Regulatory Review Mechanism, which doubles as a Regulatory Preview Mechanism.
2. A Regulatory Impact exercise should be a condition precedent to undertaking any new regulatory initiative.
3. Regulations must be written in simpler language, and with attention being paid to grammar and syntax, so that there are no interpretation issues likely to arise.
4. Capacity building, both in numbers and in contemporary skillsets, should be given high priority.
5. When it is reasonably clear that a regulation is intended to address a current set of problems, it should contain a sunset clause, so that it does not remain on the statute book after its relevance is lost. A few months before the sun sets on the regulation, a review should be done to assess whether it is needed after sunset date.

Even as this newsletter was being put to bed, came an announcement from the Hon’ble Minister of Finance and Corporate Affairs that Regulatory Impact Assessment should be given priority. To say that this was music to the ears of those who have, for several years, like a stuck record, kept repeating this demand, is to make a gross understatement. There is reason to expect, not merely hope, that the Minister’s exhortation would usher in a regulatory regime that is not laden with unnecessary regulations, and focusses on what is necessary and contemporary.

“Hope dwells eternal in the human breast”.

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The first ever conference of Directors on the Boards of banks, both in the public sector and in the private sector, was organised by the Reserve Bank of India (RBI) in May, 2023. These were in reality two different conferences, held a week apart. The commonality was that both the Governor and Deputy Governor, Mr M Rajeshwar Rao, delivered the same speeches to both these audiences, while making it clear that there were aspects that did not apply equally to public sector and private sector banks.

There can be no doubt whatsoever that a conference of this kind is a welcome initiative in which the Directors not only get to hear first-hand the views of the Governor and the Deputy Governor, but have the opportunity to raise questions directly. Since there is no public record of the issues that the Directors might have raised, we will confine our attention only to the two speeches that set the tone for discussions.

While taking note of the strong and stable position in which the banking sector finds itself, the Governor cautioned that it is in such times that complacency might set in. In that context, he exhorted the Directors on the Boards of banks to discharge their responsibilities, giving special attention to the protection of the money of depositors.

The overriding concern that any keen observer of the Indian banking sector, especially the public sector banks, might have is whether the Directors presently on the Boards can, and will, measure up to these challenges. The expectation that the Board, being at the apex of decision-making, should set a clear direction for the management, is rooted in sound Corporate Governance theory. This is premised on the fact that Directors are chosen to be on bank Boards based on what the Governor described as “a balanced combination of skills, diversity and expertise”. Having regard to the selection process, in which bank managements or the Boards were not involved, it would take considerable optimism for any person to believe that the skills, diversity and expertise required for a person to be on a bank Board actually exist, if not wholly, at least in part, among those who have been appointed. Unless bank Boards are appropriately constituted, with the right kind of persons being brought on them, it would seem unreasonable to expect that they would deliver in regard to the tasks identified for them by the Governor.

Speaking of the independence of the Independent Directors (IDs), the Governor has very clearly articulated what his expectations are. He observes “it is necessary that ‘independent’ directors are truly independent; that is, independent not only of the management but also of controlling shareholders while discharging their duties”. In the public sector banks, the controlling shareholder is the Government of India. There is not enough evidence to show that IDs on bank Boards will disregard the overriding influence that the Government of India, by virtue of its majority shareholding, brings to bear on the functioning of banks.

Speaking of the role of the Chairpersons, the Governor has observed that they “should encourage open and honest discussions, which, at times, can be critical of the proposals recommended by the management”. The Governor also states that “fostering an environment where dissenting views can be freely expressed and discussed is what will ensure objectivity”. One wishes he had used the words “different views” or “divergent views”, and not “dissenting views”, since some Directors might be inclined to read into this sentence the suggestion that dissent should be frequently expressed and recorded. The impact that this can have on the cohesiveness of the Board, does not require elaboration. Cohesive Boards are necessarily collusive Boards.

Speaking of the MD and CEO, he has expressed the view that the “dominance of CEOs in Board discussions and decision making” has been noticed on occasions. While indicating clearly that situations, in which the Boards are not asserting themselves, should not be allowed to develop, he goes on to state that there are also situations where “the CEO is inhibited from doing his duties”. This concern can be addressed if the respective roles of the Chairperson and the MD are clearly understood by both of them, and by the rest of the Board, and the management. It is lack of role clarity that often gives rise to situations of passive coexistence or active aggression. The ideal Board-management relationship should be one of constructive tension, and if that is understood, appreciated and practised, the apprehensions expressed in this context by the Governor will get addressed.

Referring to the quality of information made available to the Board, the Governor has expressed concern on “gaps and material inaccuracies” in Board notes. He has also identified the delayed circulation of agenda papers as a contributing factor to the underperformance of the Board. These are matters in regard to which the Board should assert itself. If the information is incomplete or incorrect, the Board should point it out to the management, so that instances of that kind do not recur. There is also a need for senior management to be trained in the manner in which agenda notes should be crafted to make them aids to decision-making by the Board. Referring to “only powerpoint presentations being circulated as agenda notes”, the Governor rightly observes that “powerpoint presentations are like a guided tour, and Directors should clearly look beyond a guided tour”. In concluding thus, the Governor has been charitable to bank managements because often the powerpoint presentations are not sent out in advance, and are seen by Board members only when they are actually presented. Considering that making effective and meaningful powerpoint presentations is not a strength manifested by many of the managements, this too is an area that merits significant training inputs. This author has often stated, by amending Lord Acton’s statement that “power corrupts, and powerpoints corrupt absolutely”. Many Directors are prisoners of powerpoint presentations, and the more colourful they are, the more their attention gets diverted from the content of the presentations.

For effective oversight of senior management, the Governor notes that their performance and compensation should be evaluated. The present inhouse attempts at evaluation fall significantly short of being a value-adding exercise. Compensation, in any event, is so meagre that it is unlikely to attract the best persons to the bank Boards. Therefore, there is the opportunity for those who are “willing, but not able” to seek to occupy Board positions, a development that will be to the serious detriment of a performing bank Board. The related point which the Governor makes is that “a compensation structure which does not distinguish between prudent risk taking and excessive risk taking often results in a culture of indifference towards risk taking”.  In an environment in which errors of commission are punished, and errors of omission are ignored, it would be difficult to move the average Director away from the relative safety of not participating in, or contributing to, decision-making. Unless a climate is created in which honest decision-making is encouraged, banks will continue to suffer suboptimal contributions by the Board as a collective. Risk taking is central to the business of banking, and bankers ought to be emboldened, empowered, encouraged and incentivised.

Concern has been expressed in regard to instances where the integrity of financial statements has been compromised, and “so called smart accounting methods were adopted to artificially boost the financial performance of the bank”. The question necessarily arises whether practitioners of such “smart accounting methods” were held accountable, and whether auditors were questioned as to why they chose to look the other way when these methods were resorted to. The NFRA’s circular of June 26, 2023, reminding statutory auditors that they should exercise professional scepticism, is a timely wake-up call.

In conclusion, the Governor has stated “Governance frameworks can be pictured as a complex mesh of nuts and bolts holding the financial pillars of capital, assets, deposits and investments in place and keeping the structure of the bank upright”. If the expectation is that the Boards, as presently constituted, will deliver on this count, it is a very big ask.

In his speech at the same conference, the Deputy Governor has referred to steps taken by the RBI from time to time, based on reports of various committees setup by the RBI to improve governance in banks. One particular comment made by him is reproduced below because it gives rise to a major question.  “The governance framework set out by the Board should ensure that the three lines of defence do the job as expected – much like in the game of football, where the forwards, the midfielder and the defenders should collectively keep the ball in play and ensure that the supervisor as a goalkeeper is not engaged”. With great respect, the analogy could cause problems. If these three sets of players keep the ball in play, no goals would be scored, and we could end up having boring goalless draws. What is even more significant is that he has envisaged the supervisor as a goalkeeper, who is not to be troubled. If the RBI, as a supervisor, is not to be troubled in its role as a goalkeeper, the question arises whether the RBI as a Regulator is the referee on the football field, armed with remedial powers, and the ability and more importantly, the willingness to blow the whistle at the right time.

The major ills of public sector banks are at least partly owed to the number of enactments, rules and regulations which apply to them. Around 30 years ago, the then banking Secretary, Dr Venugopal Reddy (autocorrect sometimes gets it right by spelling Venugopal as venerable) recommended that there should be only two laws for the banking sector, one dealing with the ownership function, and the other dealing with the conduct of business. In a sense this anticipated the problem that the Companies Act, 2013 sought to address by providing that wherever there are sector specific enactments, they will, in the event of inconsistency, prevail over the provisions of the Companies Act, 2013. This has led to non-applicability of important sections of the Companies Act, 2013 to the banking sector, and has also resulted in exemptions being granted in regard to important matters such as Board evaluation. Even the composition of the Board is not in sync with the provisions of the Companies Act, 2013, and for banks which are listed entities, the prescriptive arrangements get somewhat lighter. Having brought governance centre stage, the RBI should ideally push for the Companies Act, 2013, and the Banking Regulation Act, 1949 being the only two enactments relating to banking.

Meanwhile, SEBI has amended the SEBI LODR Regulations for the 34th time.

As firm believers in the continuity and certainty of laws and regulations, we have often tended to ask the following questions whenever any amendments have been proposed or have surfaced. Was this amendment necessary? Will it solve the problems that it seeks to address, or will it create additional problems in search of solutions?

The SEBI LODR (Second amendment) Regulations, 2023 is a case in point. While it addresses several aspects of some of the Regulations, the focus in this assessment has been on some of the more important issues.

Regulation 2(ra) seeks to define “mainstream media”. The definition is so exhaustive as to give rise to the question whether there is any such thing as non-mainstream media, or in other words, whether all media, other than social media, is mainstream media.

A new insertion, Regulation 6(1A) provides for the manner in which any vacancy in the office of the Compliance Officer shall be filled. The outer date for filling the vacancy is 3 months from the date of such vacancy. What is significant is that the proviso to the new Regulation states that “such vacancy shall not be filled by appointing a person in interim capacity, unless such appointment is made in accordance with the laws applicable in case of a fresh appointment to such office and the obligations under such laws are made applicable to such person”.  The choice before the listed entity is clear. Either leave the vacancy unfilled for a period not exceeding 3 months, or find a suitable candidate with all the appropriate qualifications to be regularly appointed, and appoint him/her in an interim capacity. This proviso does not address the possibility that there might not be another person in that listed entity who is suitably qualified and can assume such office. Would it not be a preferable option to have a relatively suitable person from within the company appointed on an interim basis, rather than to leave the position of Compliance Officer vacant for 3 months?

Regulation 26A regarding vacancies in respect of certain Key Managerial Personnel suffers from the same problematic choice. Would It be preferrable to leave vacancies in the office of Chief Executive Officer, Managing Director, Whole-time Director or Manager vacant for a period not exceeding 3 months, or would the interest of stakeholders and the company be better served by appointing in an interim capacity, the most suitable of the available persons, even if he/she does not tick all the boxes?

Regulation 30(4) has been expanded to indicate the basis for determination of materiality. The new insertion provides that where the criteria specified in subclauses a, b and c are not applicable, an event or information may be treated as being material if in the opinion of the Board, the event or information is considered material. What then is the purpose of listing three sets of criteria in order to determine materiality?

A new insertion, in the same regulation, states, by way of a proviso, that a policy for determination of materiality shall not dilute any requirement specified under the provisions of these Regulations. It is not easy to comprehend how a policy formulated by a company can override the provisions of any Regulations.

The icing on the cake is the requirement that the top 100 listed entities wef October 1, 2023, and thereafter the top 250 entities wef Apr 1, 2024, shall confirm, deny or clarify any reported event or information in the mainstream media, which is not general in nature, and which indicates that RUMOURS (emphasis supplied) of an impending specific material event or information are circulating amongst the investing public. Before looking at the specifics, it might be useful to recall that Shakespeare’s definition of a rumour is “a pipe blown by surmises, jealousies and conjectures”. Are these the kind of rumours that ought to be given disproportionate importance, leading to detailed rebuttals or confirmations? What, if any, would be the implications in regard to leakage of unpublished price sensitive information (UPSI), leading to premature disclosures? One instance from a few years ago will help to illustrate the concern. During a conference relating to the telecom industry, very senior functionaries of two telecon giants coincidentally stepped out of the conference room at nearly the same time, and exchanged pleasantries, while heading for the coffee counter. A television channel speculated on whether that brief conversation signalled the beginning of a possible merger between the two entities. This author had occasion to ask the concerned television correspondent whether there was any basis whatsoever to the rumour, and the response was laughable, to say the least. It was on the following lines – “Should such a merger happen in the future, please remember you saw it first on my channel”. If this is the responsibility attached to floating rumours, there would not seem to be enough justification for corporates to bend over backwards to confirm, deny, explain, contradict or rebut them. Like everything else, will increasing disclosure requirements take us to a point where the possibility of damage is far more than the benefit sought to be achieved? As has been mentioned earlier, while sunlight is the best disinfectant, sunburn would be harmful.

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