Newsletter Category: 2025

There was a time when Regulators steadfastly refused to communicate. In the process, the regulatory philosophy that informed the working of their organisations remained largely unknown to the regulated universe. Lip reading was the best that one could do in the circumstances.

Indescribably good progress has been made, especially in the last few years. Financial sector Regulators are communicating more frequently, and more clearly, enabling those that are interested, to understand the context in which regulations are being written, and the objectives sought to be achieved. There is much more that needs to be done, but the ground covered so far promises hope.

The tenth annual 2-day Corporate Governance Summit, Gatekeepers of Governance, organised by Excellence Enablers on 6-7 November, 2025 was a platform that brought together very senior persons, including Chairpersons, from all the financial sector Regulators. The first sessions on both days had financial sector Regulators. The first day, which saw the participation of Mr. Tuhin Kanta Pandey, Chairperson, SEBI, Mr. M. Nagaraju, Secretary, Department of Financial Services, Ministry of Finance, GoI, Mr. Amitabh Kant, Former Sherpa, GOI, witnessed some plain speaking, while the subject of “Regulation – Shield or Sword?” was being grappled with. In the first session on the second day, the audience was regaled by Mr. Ajay Seth, Chairperson, IRDAI, Mr. J. Swaminathan, Deputy Governor, RBI, Mr. S. Ramann, Chairperson, PFRDA and Mr. Kamlesh C. Varshney, Whole-time member, SEBI, addressing the topic “Regulatory Gaps and Overlaps – Do they Exist?”

Chairperson Pandey set the tone for the deliberations by stating that governance must transcend regulatory checklists to become an internal conviction. For those of us who have for years argued that compliance, comprising checklists, was not the same as governance, which is an article of faith, the Chairperson’s statement was both encouraging, and validating. After setting out the specific governance reforms that SEBI had set in motion in recent times, Chairperson Pandey highlighted the need for smart, cost-effective and innovation friendly regulation. This is critical since innovation as a matter to be encouraged did not appear to have figured in the thinking of most financial sector Regulators in the past. He also focussed on the importance of ethics and the promotion of governance literacy in areas like cyber risk.

Mr. Amitabh Kant emphasised a number of points, some of which had been made in the past, but had not gained traction. He spoke of the need to shift the role of Government and Regulators from control to facilitation and empowerment. It is useful to remember that SEBI’s predecessor in capital market regulation was called the Controller of Capital Issues. Regulatory Impact Assessment, a concept that Excellence Enablers has been advocating for quite some time, was advocated by Mr. Kant, who also argued that rule-making, enforcement and adjudication, when they reside in the same entity, will tend to give rise to conflicts of interest. He recommended that we should follow the “one-in two-out” regulatory approach of the United Kingdom. In our view, the better option would be to have sunset clauses, which will help to take out of the regulatory universe, the prescriptions that are past their sell by date. The Financial Stability and Development Council (FSDC) has decided that all regulations should be reviewed every 5-7 years. Why not have 3-5 years sunset clauses?

Mr. Nagaraju highlighted the improved performance of the public sector banks, and argued that smart risk-based regulations, emphasising enforcement against violators, rather than excessive rules, was the need of the hour. A kneejerk approach to regulation, based on isolated individual episodes of transgression, has been seen to be counterproductive in the conduct of business. Excellence Enablers has argued for long that “better regulation and not more regulations” is the need of the hour.

Chairperson Seth set out, in detail, the objectives of inter-regulatory coordination, while addressing the topic of gaps and overlaps in financial sector regulations. He referred to the good work being done by FSDC, which, it may be added, itself was a creature of inter-regulatory disputes, with the then Finance Minister, Mr. Pranab Mukherjee saying that it had to be set up to resolve the quarrels between 2 financial sector Regulators. Of such episodes are some structural and institutional initiatives born.

Mr. J. Swaminathan was of the view that regulatory gaps and overlaps arise due to rapid changes in business models, technology and vendor chains. While he did set out the reasons that could lead to gaps and overlaps, one which seemed to have been missed out by way of a specific mention was that institutional egos sometimes translated to turf battles. Coordination and cooperation, rather than conflict, is clearly the way to go.

Chairperson Ramann referred to specific instances of regulatory overlaps, and warned about regulatory gaps leading to consumer harm such as mis-selling and procedural weaknesses in provident fund withdrawals. He referred to the regulatory gap in coverage, especially for the vast unserved population, in the area of pensions. One significant omission appears to have been the proliferation of collective investment schemes in the second half of the 1990s, with no Regulator specifically tasked to address them.

Mr. Varshney highlighted overlaps between the SEBI Regulations, and the Companies Act, 2013. For quite some time, commentators have pointed out to specific differences in the provisions in the Companies Act, 2013 and SEBI LODR Regulations. Considering that SEBI deals with only listed entities, there should be no eyebrows raised when the listing requirements propose higher threshold levels as compared to the Companies Act, 2013. One very significant point made by him was that there should be mechanisms to review the performance of the Boards and Regulators to enhance accountability. While a robust Board evaluation process will help to assess the performance of the Boards, it is perhaps time to think in terms of the accountability of Regulators, and the manner in which their performance could be assessed. It is useful to recall that while pointing fingers at the judiciary, it is often said that disproportionate powers reside in unelected persons. Regulators could perhaps take a cue from this, and put in place, evaluation processes to mitigate that criticism as and when it arises.

In the preceding paragraphs, note has been taken of some of the many points made by the Regulators across the financial sector. The story will not be complete if cognisance is not taken of the points made by Governor Sanjay Malhotra on 20^th November, 2025, while delivering the second VKRV Rao Memorial Lecture at the Delhi School of Economics. This lecture should be made prescribed reading for students of financial sector regulation. It captures the fundamentally different framework in which financial sector regulation operates, as compared to other sectoral regulations. One important point is that weaknesses in the financial sector very quickly translate into weaknesses in the real sector, causing a setback to the economy as a whole. Against this background, he argues that the foremost priority and the key objective of RBI is to ensure financial stability in the system. He has set out 5 principles in order to lead to “optimal simplicity”, “regulation that is as simple as possible, but no simpler, to paraphrase Einstein”.

It is not proposed in this newsletter to examine all the 5 principles. The third principle, namely, consultation, is something that merits comment. In his speech, there is an admission, long overdue, that Regulators do not have the monopoly for knowledge. Having made out a case for consultative regulation, he concludes by saying that every major regulation is proposed in draft form for public consultation. Whether draft regulations should be the first point of consultation, or whether the proposed content/ idea of regulation should itself be exposed to public comment, is a matter deserving of attention. He has also touched on the subject of regulatory forbearance versus strict enforcement, and explained that “forbearance should be exceptional, time bound, and transparent. It should not become a substitute for addressing underlying problems.” While this approach cannot be questioned, it is useful to remember that such an approach could, over time, translate to rigidity and dissuade Regulators, for good and stated reasons, from resorting to forbearance in the larger national interest, as opposed to individual interest. Balancing the costs and the benefits of regulations is critical. Why not operationalise Regulatory Impact Assessment?

Towards the end of his lecture he states “Effective regulation certainly requires technical expertise, but also judgment, humility about what Regulators can and cannot achieve, and constant learning”. While this is to be welcomed, one wishes he had also spoken about what Regulators should seek to achieve, rather than what Regulators can achieve.

Sceptics often say that even well-intentioned Regulators do not often walk the talk. The current leadership of financial Regulators will almost certainly prove them wrong.

To read a summary of discussions at the 10^th Gatekeepers of Governance, please click here

On October 08, 2025, the Government of India issued consolidated revised guidelines for appointment of Whole Time Directors (WTDs) in Public Sector Banks (PSBs).  These guidelines supersede all the earlier guidelines issued in this regard, and to that extent, is a welcome move in that one does not have to refer to several documents to ascertain the current position.

The consolidated guidelines pertain to the appointment of Chairman, State Bank of India (SBI), Managing Director(s) (MD) in SBI, MD and CEO of Nationalised banks (NBs), and Executive Directors (EDs) of NBs (whether NBs should be continued to be called NBs after the Government of India has moved from sole owner to majority shareholder is worth thinking about). The manner of appointment of persons to these senior positions in the SBI and in other PSBs has undergone changes from time to time. Before the process of consolidation was initiated, there were 19 NBs (PSBs) after the merger of New Bank of India with Punjab National Bank. The SBI family comprised, in addition to the SBI, 7 Associate banks. Each of the NBs had 1 Chairman cum Managing Director (CMD) and 1 ED. SBI initially had 1 Chairman and 2 MDs, later increased to 4 MDs. In the case of the SBI, the Chairman was, except in 2 cases, a person from within the SBI, the only 2 exceptions being Mr DN Ghosh and Mr Goiporia. It was always believed that given the size and the complexity of the bank, the number of branches within and outside the country, and the preeminent position that the bank occupied, only a candidate, who had served for long years in the bank, would be fit to lead the bank. What is presently contemplated under the consolidated guidelines is to consider only internal candidates from within the SBI. This position is not proposed to be opened to persons from outside the bank. An open question is whether the MD, who comes into the bank in the ‘open vacancy’, should also be considered, after a couple of years, for the Chairman’s position.

The selection process inter alia states that there shall be no marks for Annual Performance Appraisal Reports (APARs), and that candidates shall be awarded marks out of 100 on the basis of performance during interaction with Financial Services Institutions Bureau (FSIB). What this means is that the entire past service record of the official will be ignored, and only what emerges during the interaction with FSIB will be taken into account. It is informally understood that each of these interactions does not last more than one hour. Resultantly, the choice for the top job in India’s banking sector will be determined only by an hour’s conversation with members of the FSIB.

While the APARs will not be taken into account for allocation of marks, there is no indication whether negative observations in the appraisal reports will be taken into account.

As far as educational qualifications go, all that is required is that the candidate must hold a graduate degree of any university or deemed university. Considering that this is a specialised domain, it is fair to ask whether the person holding the top job should not have a CAIIB (Certified Associate of Indian Institute of Bankers) qualification. The guidelines stipulate that consultation with RBI shall be required before the submission of the proposal to the Appointments Committee of the Cabinet. Considering that the RBI has 2 representatives on FSIB, is further consultation with RBI necessary? Can the views of the RBI not be communicated to the FSIB through these 2 representatives?

There is also a provision for the holding of additional charge, which provision inter alia mentions that the additional charge arrangement may be extended initially by 3 months, and then by a period of 6 months, from the date of vacancy, only in the cases where the selection process is underway. This gives rise to the question whether such a provision should at all be necessary, since the date of the impending vacancy is known well in advance, and the selection procedure should be completed before the vacancy arises. For important posts such as these, it might be useful to have the selected candidate serve for a period of 1 month alongside the incumbent, so that the overlapping could lead to continuity of practices and procedures, and ensure that the change is not disruptive. Any provision for extension could lead to a leisurely selection process.

As far as the positions of the MDs of SBI are considered, it has been provided that 3 positions will be filled from among the internal candidates from PSBs, and 1 position will be filled from among eligible “private candidates”. The catchment area for the positions of MDs is Deputy MDs, with at least 2 years of service as DMD, the EDs of NBs, with at least 2 years service as ED, and the MD and CEO of NBs, with at least 2 years service as MD and CEO in the present posting, with a residual service of 2 years, treating 60 years as the date of superannuation. DMDs with 2 years of service as DMD, are being equated to EDs of NBs, with at least 2 years of service as ED.  Some of the latter category of banks have lesser business than even one of the circles of the SBI, and therefore equating DMDs of SBI with EDs of NBs, in terms of experience, seems inappropriate. Further, by the time a person becomes a Chief General Manager (CGM) in SBI, he/she would have had firsthand experience of all facets of commercial banking. What is more puzzling is that an MD and CEO of an NB should have at least 2 years as MD and CEO in the present posting. What happens if such a candidate has served for more than 2 years as ED, and has been MD and CEO for less than 2 years? Is he/she inferior in terms of experience compared to EDs with 2 years service?

3 of the positions are to be filled from “internal candidates”, as discussed in the preceding paragraph. The fourth position for private candidates envisages selection from among candidates with a minimum of 21 years of experience, with at least 15 years of banking experience, with at least 2 years at the bank Board level, or at least 3 years at the highest level below the bank Board level. Is it to be understood that a person who has been at one level below the Board level of a private bank for a period of 3 years, would be suitable for appointment as MD of SBI, India’s largest bank by several miles.

For candidates from the private sector, clearances from the Intelligence Bureau (IB) are required, whereas for candidates from the PSBs, clearances from the Central Vigilance Commission (CVC) are required. As far as banking is concerned, this might be a new area for IB.

This new process will be put to test very quickly since the guidelines provide that the first vacancy of MD, SBI coming into force from the date of these guidelines shall be treated as an open vacancy.

For the positions of MD and CEO of NBs, DMDs of SBI, with at least 1 year of service as DMDs, are eligible. Also, EDs of NBs, with at least 1 year of service as ED, will be eligible. Here again, an ED with 1 year experience is being equated to a DMD of SBI with 1 year experience. Considering that most of the NBs have 4 EDs, with the workload being distributed among them subject wise, it is useful to ask whether a candidate with 1 year experience as ED would be a good choice to be the MD and CEO of a bank.

We then come to the candidates from the private sector. Here again, 15 years of banking experience, with at least 2 years at the Board level, or 3 years at one level below the Board will render a candidate eligible. The apprehensions expressed in regard to selection for the posts of MDs of SBI will apply mutatis mutandis in these cases.

Selection for the positions of EDs of NBs merit comment. Here again, one position of ED shall be open for all the eligible candidates. Eligible candidates would include persons with a minimum of 12 years of banking experience, including 3 years at the highest level below the Board level. For the 3 positions to be filled from internal candidates, the minimum service prescribed is 4 years as CGM and General Manager (GM) till FY 27-28, and thereafter, as CGM, with 2 years of experience. Whether a CGM with 2 years of service should be compared with a person who has 12 years of banking experience, with 3 years below Board level, is a question that needs to be addressed.

There is a material difference in the selection procedure relating to EDs. It says that for internal candidates, 30 marks will be awarded for APARs for 5 years, whereas, for the open position, there shall be no marks for the APARs.

The FSIB will clearly have its task cut out. Firstly, it will deal with 2 completely different categories of candidates to decide who among them is fit for the senior position that is vacant. Secondly, in the absence of any weightage given to APARs, the choice will depend only on the interaction, which might last for a maximum of one hour. What impact this will have on motivation and morale is a question that cannot be ignored.

The FSIB has members with excellent credentials and track records. Do they have adequate firsthand experience of public sector commercial banking?

In private conversations, and, occasionally, during Q&A sessions, one is often asked “How good are corporate governance standards in India?”. There are also those (the Sun rises in the west category) who believe that the western world practices higher standards of corporate governance. Dealing with this second question is simple. Tucked away in my mind are the names of many celebrated governance failures in the corporate world in the USA and in Europe, and the minute those names are rolled out with unconcealed glee, the conversation comes to an end. The first question merits a detailed response, and for this, it is best to turn to, unarguably, the most comprehensive corporate governance survey that is annually brought out by Excellence Enablers. The Sixth Edition of Survey on Corporate Governance by Excellence Enablers is just out.

It is by now abundantly clear that a properly constituted Board of Directors is the best starting point to ensure good corporate governance. The 6^th Annual Survey on Corporate Governance addresses several aspects of Board composition. In the years FY 22, FY24 and FY 25, there were instances of companies that did not have the minimum number of Board members. If non-compliance starts with Board composition, one cannot expect very much by way of good practices in such companies.

In addition to the arithmetic of Board composition, it is useful to look at diversity on Boards, since it is diversity that expands the areas of exposure and expertise on the Board. Both the Companies Act, 2013 (the Act) and the SEBI LODR Regulations, 2015 (LODR) mandate gender diversity. The Survey brings out that 8 of the top 100 listed entities did not have a Woman Independent Director. What is worse is that this number, which was 3 as on March 31, 2022, has increased to 8 over a period of 3 years. Another element of diversity, namely age diversity, is extremely important, even though it has not been mandated. With increasing focus on AI, and related areas, as well as the pace and nature of change in the economy, and in the corporate world, a case for younger Directors is not required to be made out. As on March 31, 2025, there were 26 Independent Directors (IDs) below the age of 50, and 454 IDs between the ages of 50-75. 12 persons above the age of 76 continued to be on the Board.

As important as the composition of the Board, is the number of meetings of the Board and the committees. For what use is a Board or a committee if it does not meet often enough? 8 of the top 100 listed companies had only 4 Board meetings in FY 25. The corresponding figure was 4 in the previous year. Since the focus of the quarterly Board meetings is financial results, and related matters, it is inconceivable that Boards that meet only 4 times in a year, are able to devote quality time to matters such as strategy, succession planning, and the like. While companies should address this serious deficiency, it might be useful for the Regulators and the law makers to increase the minimum number of meetings from 4 to 6.

The related aspect is the attendance of Directors in Board meetings. In FY 25, there was 100% attendance by Directors in only 12 companies. The corresponding figure in FY 22 was 19. This gives rise to the question whether persons that cannot attend all Board meetings should continue to be on the Board. This question assumes significance in the context of the fact that in FY 25 8 Directors had 0 attendance. These unacceptable numbers are in spite of virtual/ hybrid meetings.

We turn next to the number of meetings of the Audit Committee (AC). As in the case of the Board, as many as 13 ACs had only 4 meetings during FY 25. Interestingly, the figures for FY 22 and FY 23 were also 13, with FY 24 witnessing a drop in the number to 10. Clearly, the trend is unhealthy. The remit of the AC is very large, and it is very clear that an AC meeting only 4 times in a year cannot do justice to several matters which are best addressed in the non-quarterly meetings. Here again, it might be worthwhile for a minimum of 6 meetings in a year to be mandated.

The situation is not any better when it comes to the Nomination and Remuneration Committee (NRC). In FY 25, 9 NRCs met only once during the year, and that too presumably to meet the requirements of law and regulations. Here, the problem seems to be with the prescription that the NRC must meet at least once a year. Given the number of important issues that an NRC is required to attend, it would seem that 4 meetings in a year would be the minimum required to do justice to the remit of the NRC.

Risk management is a matter that has existential implications for the corporates. Surprisingly, the Act does not mandate the setting up of the Risk Management Committee (RMC). This is a gap that SEBI has sought to address by mandating that the Board should appoint an RMC. It is useful to notice the difference between Board committees and Board appointed committees, since the latter can also have, as their members, persons who are not on the Board of Directors. In FY 25, 1 company had only 1 meeting during the year, and 31 companies had the prescribed minimum number of 2 meetings. Considering that risks that a corporate faces have increased in number and complexity, with the impact being of considerable significance, an RMC cannot do justice to its tasks if it meets less than 4 times in a year. 2 meetings per year do not even scratch the surface. The attendance of RMC members is a matter deserving attention. In FY 25, 9 members had nil attendance. Less than 90% of the members had 100% attendance. The identification and mitigation of risks does not seem to rank as one of the major areas warranting attention in some companies.

It is by now well recognised that given the limitations of time, a Board cannot do a deep dive into a number of matters that are within its remit. As of necessity, committees are expected to look into all relevant details in regard to matters that they have to address. In this context, the distribution of committee membership among IDs assumes considerable importance. An ID, who is on all committees, is expected to be overworked if he/she takes the work seriously. As against this, an ID, who is on no committee, will suffer from significant information asymmetry. In FY 25, 37 IDs were on no committee, and 24 IDs were on all 5 committees, the 4 mandated by law and the RMC. Information asymmetry is therefore not only between the executive members of the Board and the IDs, but also inter se among the IDs.

Annual General Meetings (AGMs) also need to be taken more seriously than they are at present. With virtual meetings having been enabled, AGMs have seemingly lost some of their relevance. One area of concern is the time taken between the finalisation of accounts, and the date of the AGM. In FY 25, 82 non-PSUs, held the AGM more than 45 days after the finalisation of accounts. PSUs faired considerably better, with only 4 companies having taken more than 45 days after finalisation of accounts, presumably because in their case, the time taken is reckoned from the completion of CAG audit, to hold their AGMs. In FY 25, 2 companies took 133 days to hold their AGMs. Shareholders experience considerable frustration since they have to wait for the AGMs to approve the declaration of dividends. This is an area where companies need to get their act together.

It is generally believed that no matter how busy a person is he/she should find time to attend the AGM, if he/she is Chairing the Board. The Survey indicates that in AGMs held in FY 24, one Board chair did not find it convenient to attend the AGM. Similarly, quite a few committee chairs also decided to stay away from the AGMs. The AGM being the annual interaction between the shareholders and the Board, there should be absolutely no excuse for any person chairing a Board or a committee to stay away from the AGMs. Part of the problem lies in the fact that only the Chairs of the AC and the Stakeholders Relationship Committee (SRC) are mandated to attend the AGM (even those witnessed a few instances of absence). It is necessary for SEBI to prescribe that Chairs of the Board and all the committees, without exception, should be present during the AGMs, to hear firsthand from the shareholders, their suggestions and concerns.

The institution of IDs has been conceived as a major instrument to ensure corporate governance. Schedule IV of the Act provides that the IDs should hold at least one meeting in a FY without the attendance of non-IDs and members of management. Many companies seem to be interpreting the words ‘at least’ as the appropriate number of meetings to be conducted. In FY 25, 61 companies had only 1 meeting of IDs during the year, and 2 companies had no meeting during the year. LODR, by way of a discretionary requirement, has pointed to the need for at least 2 such meetings in a year. Both the number of meetings, and the seriousness with which such meetings are conducted, require to be given more attention.

Every year, a few IDs resign from the Board for one or more reasons. To ensure an element of honesty in the reasons cited for resignation, SEBI has mandated that the exiting Director should state that in addition to the reason mentioned for resignation, there is no other reason. The Survey throws up a number of interesting conclusions. In FY 25, 64 IDs resigned citing “pre-occupation with other assignments”. One wonders whether they were not aware of their existing workload when accepting Board positions. Inspite of “personal reasons” being discouraged as being non-specific, 9 IDs who left in FY 25, have indicated “personal reasons” as the basis for their resignation. There were also 9 cases where the resignation was on account of “conflict of interest”. It would be useful to examine whether these conflicts existed from the dates the IDs were on the Board, or whether they were conflicts subsequent to the appointment as IDs. The position is not much different when it comes to KMPs because 2 of them have cited “personal reasons” as the grounds for their exit.

Board evaluation is a matter that has been grudgingly accepted by many Boards. Therefore, they go through this exercise in a mechanical manner, denying the Board and the company the benefit of an evaluation carried out with sufficient seriousness and rigour. What is significant is that 69 companies in FY 25 went in for what has been described as in-house evaluation, implying that this is a process that had to be gone through, and has been gone through. 19 companies have got the process of Board evaluation conducted by external firms. Some PSUs have claimed that they are exempt from the process of Board evaluation. If this is to be a meaningful exercise, it should be mandated that every alternate year, the process of Board evaluation should be entrusted to an external agency, with sufficient firsthand boardroom experience.

There are some discretionary requirements which have been prescribed by SEBI. The Survey, after taking note of these discretionary requirements, has recommended that 2 of them, namely, the separation of posts of Chairperson and MD/ CEO, as well as the reporting of the Internal Auditor directly to the AC, should be made mandatory.

Board members are expected to be inducted for committing quality time and for contributing to the decision-making process in boardrooms. It stands to reason that there should be appropriately compensated. In FY 25, 2 companies did not pay any sitting fees, and 23 of them paid sitting fees between INR 21,000 to INR 50,000. The maximum permitted by law is INR 1 lakh per meeting, and it would be necessary for Boards to seriously consider whether the persons who are contributing productively should get paid the maximum of INR 1 lakh. Many companies pay less for attendance at committee meetings, than at Board meetings. Considering the importance and the workload of the AC and the RMC, it would make sense if the sitting fees for both these committees are at the same level, as for the Board meetings (if that is not the case).

The payment of profit linked commission to Directors is premised on a number of factors, with participation/ attendance/ contribution at meetings being the most significant of them. Considering that participation and attendance can be adequately addressed through payment of sitting fees, it is necessary that profit linked commission should be on the basis of contribution by Board members as established by a robust Board evaluation process. This is not the easiest of exercises, and will meet with considerable resistance. Nevertheless, not resorting to an evaluation-based determination of commission would amount to not placing a premium on performance. While on the subject, the statutory limit for the amount of profit linked commission to be paid to Non-Executive Directors (NEDs) is 1% of the net profits of the company. However, as pointed out in the Survey, what is paid is woefully short of 1% of net profits. With stock options no longer available to IDs, it is imperative for companies to revisit the amount of profit linked commission, so that Directors of acceptable quality are enthused to join Boards, and to stay on.

The Survey is a mirror that enables companies to see how they are performing. An intelligent person looking at the mirror will clean his/her face, to fix blemishes. The less intelligent will clean the mirror. It is for corporates to decide where they choose to belong.

To view our Sixth Edition of Survey on Corporate Governance, please click here.

The requirements of transparency warrant a complete disclosure at the commencement of this newsletter. The facts contained hereinbelow relate to my election as a Non-Executive Non-Independent Director (NENID) for a second term on the Board of a listed entity. However, this newsletter is not about me, but about the role and functioning of Proxy Advisory Firms (PAFs), and their influence and impact on the corporate world.

I was elected as an NENID, with the support of 83.1% of the shareholding voting in favour of my reappointment. This was inspite of negative recommendations by 3 PAFs which strenuously argued that my candidature should not be supported.

Since issues are what need to be focused on, it is appropriate to get to grips with all the objections raised, the responses of the company, and the provisions of law and regulations.

One PAF, while not commenting on my fitness to be appointed as an NENID, chose to reclassify as a Non-Independent Director (NID) an Independent Director (ID), who had been re-elected only a year before, on the ground that the firm that she belonged to received payment for services rendered to the company. This PAF, which is US based, decided on the basis of its own guidelines that “where the payment for services during a year exceeds USD 10,000, the Director concerned will be classified as an NID”. Using this methodology, which is inconsistent the SEBI LODR Regulations and the provisions of law, the PAF decided to categorise a woman ID as an NID. Since she was, and is, the only woman Director on the Board, such reclassification by the PAF resulted in the Board not having, in the opinion of the PAF, any woman ID. Based on this questionable premise, the PAF concerned concluded that the composition of the Board was not in accordance with the regulations, and decided to vote against a second term for an NENID, on the ground that he was a member of the Nomination and Remuneration Committee (NRC). In the opinion of the PAF, he was the senior most member of the NRC. How they arrived at this conclusion is itself questionable. The larger question is whether a person categorised as an ID, consistent with the definitions of law and regulations, can be casually re-categorised by a PAF as an NID. Can the internal guidelines, for what they are the worth, of the PAF, override statutory and regulatory prescriptions? This is not a case of additional prescriptions, but overturning the definition contained in law and regulations. If this is allowed to pass unquestioned, the regulations and laws will lose their meaning and relevance. As for the limit of USD 10,000, it might have been determined based on facts and circumstances obtaining in the USA. There can be no case whatsoever for extrapolating such internal guidelines relating to another jurisdiction, and attempting to torpedo in the process, the re-election prospects of an NENID.

The second PAF recommended against the reappointment of the NENID concerned on the ground that “he failed to discharge his duties in a fair and impartial manner”. In arriving at this conclusion, the PAF relied on the order passed by SEBI in the Settlement proceedings relating to the company in 2022. The PAF conveniently failed to notice that a Settlement Order is based on the premise that the company neither admits nor denies any alleged wrongdoing which has been referred to in the notice issued to the company. If there is no admission of any wrongdoing by the company, and if such non-admission is a basic feature of the Settlement Order, and in fact, the entire Settlement system, it would seem inappropriate to refer to the allegations contained in the notice, and to presume that those allegations had been established. What is also relevant is the fact that this matter was raised by the same PAF in 2022, and notwithstanding a clarification provided at that point in time, the PAF had decided to recommend against supporting the resolution proposing the appointment for the first time of the person concerned as an NENID. Considering that he has been an NENID for the previous 3 years, it is passing strange that a conclusion which had no basis even in 2022, would be reiterated in 2025 in the context of reappointment. It is fanciful for the PAF to conclude that the person concerned failed to discharge his duties in a fair and impartial manner. Such a conclusion questions the basis on which the Settlement Scheme has been implemented. Since it is improper to comment on the Settlement Order, no such attempt is being made.

The third PAF recommended against the appointment of the NENID on the ground that no cooling off period of 1 year was served during his transition from ID to NENID. The term of the person concerned as ID ended in 2022. Regulations do not provide for a cooling off period in the case of persons who are moving from the independent category to the non-independent category. This is unlike the provision of a cooling off period for persons moving from non-independent category to the independent category. The provision of regulations is very clear on this account. If at all there was any merit in the contention of the PAF, it should have been raised in 2022 when the person concerned moved from being independent to being non-independent. Even at that time, there would have been no merit in asking for a cooling off period since the regulations did not contemplate any such requirement. It is strange that after the person concerned had served a 3 year term as NENID, the question of cooling off is being raised, when what is being sought by the company is a second term as an NENID, namely in the same category in which the person served during the 3 preceding years. The PAF has gone on to suggest that not serving a cooling off period may raise questions over the independence of the person during his tenure as an ID. This question has no relevance considering the person has served as an NENID for the preceding 3 years. Even earlier, if there was any such concern, SEBI would have addressed it through appropriate provisions in regulations. In support of the PAF, it must be stated that the firm reiterated “that the proposal is compliant with law” and added that the concern is based on the PAF’s governance policy stance. This again raises the question whether a PAF’s “governance policy stance” should override the provisions of law and regulations. The firm has also fairly stated that the shareholders may take note of the company’s response and the PAF’s comments thereon, and take an informed decision.

There are several other matters in respect of which the PAFs tend to second-guess the Regulators. For example, SEBI prescribes that a person can be a Director on the Board of a maximum of 7 listed entities. It has been noticed in the past that where a person is a Director on 5 such entities, the PAF(s) recommends against the appointment of such a person, thereby second-guessing the Regulator on the number of directorships a person can have in listed entities.

The focus hitherto in this newsletter has been on the stand taken by PAFs and their not being consistent with the provisions of law and regulations. What is equally disturbing is the fact that some corporates tend to go strictly by the advice of PAFs, and do not apply their minds to the resolutions in question. The standard explanation seems to be that they do not have enough time to go into the merits of the resolutions, and therefore go entirely by the recommendations that they have received from the PAFs. This is as clear a case of outsourcing judgement and decision-making, as can exist in the corporate world or elsewhere. At one level, it is also a failure of the corporates to discharge their responsibilities towards their stakeholders by taking informed decisions, rather than by rubberstamping on recommendations which might not be tenable. It is time for the Regulators to step in and assert the primacy of regulations, especially, when they are sought to be undermined by recommendations made on the basis of internal policy guidelines of individual PAFs.

PAFs in India are said to be regulated under the provisions of SEBI (Research Analyst) Regulations, 2014 (RA Regulations). Those regulations might need to be revisited to address the excesses PAFs sometimes resort to. Also, if such regulation does not extend to PAFs based outside India, it needs to be examined whether recommendations put out by their India-based offices should be brought under these regulations.

In November, 2018, SEBI had setup a Working Group “with respect to issues of Proxy Advisors”. The 6 member Working Group included a representative of one of the PAFs (normally SEBI Committees comprise more than 30 members, with 2 representatives of the PAFs. It is informally understood that the 2 members, by their inputs, significantly influence the content of some of the recommendations that SEBI Committees/ Groups make). The question of a possible conflict of interest in regard to the composition of the Working Group arises when one notices that in a long report, addressing several aspects of the functioning of the PAFs, there was recusal by the PAF member of the Working Group only in regard to one issue, namely, that of “protecting Proxy Advisors from adverse legal action for holding honest opinions which are disliked by companies or individuals”. Clearly the question of conflict of interest did not arise when the Working Group addressed several other aspects relating to the functioning of the PAFs.

Consideration of space prevent a detailed analysis of the Working Group’s report. The entire approach seems to have been to endorse whatever practices and processes were in place at that time, and to lean in favour of the PAFs. Some sentences from the report are reproduced below

1. There should be Chinese walls between PAFs and their consultancy firms.
2. Requiring a Proxy Advisor to disclose the reasons for recommendations may be burdensome. The detailed rationale is usually the primary breadwinner for the Proxy Advisors, and mandating it to be made public would destroy the business model of most of the Proxy Advisors.
3. Disclosing all avenues of income generation would be over-regulation, but a material revenue (say 10% plus) stream should be disclosed publicly.
4. It should be noted that by design the recommendations of Proxy Advisors are generally aligned with the views of the shareholders who pay for such analysis, and on whose behalf they undertake their analysis.

There are a few other observations which require to be gone into. The RA Regulations provide that the employees of Proxy Advisors engaged in providing proxy advisory services shall be required to have a minimum qualification of being a graduate in any discipline (emphasis supplied). The Working Group’s report further says that “the Working Group believes that clients conduct extensive due diligence when they review and select their Proxy Advisor(s) and this will ensure that the Proxy Advisor has staff with sufficient skillsets”.

The Working Group has recommended “that except for factual errors, Proxy Advisors should not be mandated to carry views which they don’t subscribe to, and the company has enough resources to publicise a differing view point”. This does not adequately address the question of the damage likely to be done when the reports of the PAFs are with the investors, and there is no way for the corporate to ensure that its views are also available to all the investors before “voting decisions” are taken.

The Working Group has further stated that the Regulator must protect the freedom of Proxy Advisors to express their opinion. “This is important for the future of corporate governance in the country, as corporates with deep pockets may use shareholder money to silence criticism. At the same time, the Regulator must not become a mechanical defender of Proxy Advisors”.

There are instances in which PAFs have made diametrically opposite recommendations in regard to some resolutions. Needless to state, this causes confusion for investors and leads to the question whether there is an ultimate truth in such recommendations, or whether it is a case of “your truth, my truth, and the truth”.

The views expressed hereinabove might be jarring to the ears of the cheerleaders of PAFs. Suffice it to say, that in an important matter such as this, the attempt should be to carve out a legitimate role for PAFs, respecting the primacy of law and regulations, and ensuring that PAFs become a source of information, rather than a disproportionately persuasive influence, rendering voting decisions by corporates as manifestation of non-application of mind.

Even before the market had time to absorb the implications of SEBI’s Interim Order passed against the Jane Street group, the Vedanta Group found itself in the midst of adverse mentions. An admitted short seller, Viceroy Research LLC, on July 9, 2025 put out a publication raising several seemingly significant questions relating to the manner in which Vedanta Resources Limited (VRL) was being run. The burden of Viceroy’s song was that VRL was systematically draining Vedanta Limited (VEDL). Viceroy stated that the situation resembled a ponzi scheme “where VEDL’s stakeholders, which included VRL’s creditors, are the suckers.” They described VRL as a “parasite holding company, with no significant operations of its own, propped up entirely by cash extracted from its dying host, VEDL”.

Subsequent thereto, there have been a number of publications by Viceroy. On July 14, 2025, Viceroy referred to the Annual General Meeting (AGM) of VEDL, which they described as an “Annual General Mockery”. Subsequent publications in July, 2025 have raised a number of significant issues which, if proven right, would reflect not only a poor state of corporate governance in the Group, but also point to issues that shareholders need to take note of. It is relevant to mention that the President of India is a 27.92% shareholder in Hindustan Zinc Limited (HZL), a Vedanta Group company, and the Government has not been heard from on this matter.

Before looking at the barrage of allegations, it will be useful to look at the source. Viceroy is an entity that has had adverse findings against it in more than one jurisdiction, including India. Material which is presently in the public domain is to the effect that Viceroy has a 3 member research team, with at least one of them having been pulled up earlier for indefensible conduct. Further, tucked away in a long disclaimer is an admission that what has been put out are not facts, but opinions. In some parts of one or more reports, there is an indication that the source of some of their information is an anonymous insider, making verification next to impossible.

The credibility of the complainant is a necessary, but not sufficient, ingredient to assess the legitimacy or the relevance of the allegations. That said, it is useful to examine whether Vedanta has responded to these series of allegations in the right manner, having regard to the fact that what exists in India is a disclosure-based regime. Given the seriousness of some of the allegations, it would seem inadequate for a large Group to make an overarching statement that some of these matters had earlier come into the public domain, and that it is a rehash of what is already known, and/or published. It would have served the interests of all stakeholders if at least the major allegations were responded to. Interestingly, some of the responses/ explanations have come out in the report of a Proxy Advisory Firm (PAF), which has compared the structuring and the practices followed by Vedanta with that of some large groups to show that what Vedanta had done was not materially different, and was justified.

On its part, Vedanta has referred to the publication of July 9, 2025 as “false propaganda”, but chose not to address Viceroy’s contentions pointwise. According to Viceroy, even at the AGM, only one of the shareholders reportedly raised questions on VEDL’s brand fees, capex spendings and Related Party Transactions (RPTs). The Vedanta promoter responded by calling Viceroy’s report “motivated”. The CFO reportedly ignored questions about the justification and amount of brand fees, without offering any explanation.

The number of questions raised by Viceroy in its different publications are far too many to be addressed in this newsletter. Necessarily, one has to focus on the more fundamental issues involved.

The AGM is a forum for shareholders to raise legitimate questions regarding the functioning of the company in which they have invested. It is therefore disquieting that at the almost 2 hour AGM which took place, most of the speakers only praised the management and the promoter (not unusual in Indian AGMs). Whether this amounts to passive shareholder behaviour, or is a manifestation of the manner in which promoters display tight control on the proceedings of the AGM, is not entirely clear. But given that Viceroy had raised a number of questions, which were in the public domain, it is passing strange that no shareholder, especially institutional investors, chose to raise any of them. Viceroy’s specific questions related to unsustainable financial structure, brand fees, alleged capex fraud, inflated asset value, corporate governance failures, safeguards to ensure that the company’s functioning is not unduly influenced by the promoters, post demerger financial instability, cross shareholding and RPTs. In particular, there were references made to the standing of the auditors, and the quality of audit. Viceroy alleged that the CFO had claimed that the subsidiaries are audited “around the world by Big-4 auditors.” According to Viceroy, one of the auditors was Rakesh M Agrawal and Associates, who are not known to be in the big league. Another London based auditor, whose service was availed of, had been censured previously for poor controls and failing to flag regulatory breaches. Viceroy has also questioned the Board of VEDL as to whether they formally reviewed the “audit arbitrage strategy of appointing banned, sanctioned or compromised auditors across subsidiaries”. There are also overarching questions such as whether safeguards are in place to ensure that VEDL’s Board acts independently of VRL’s interests, especially given the overlapping management and RPTs.

Considering that the Viceroy exposures have come a few months after the Hindenburg saga, robust defence has been mounted by some supporters of Vedanta to the effect that this is yet another attack by a short seller on a large Indian group, in order to destabilise the Indian market. More to the point, one of the 3 PAFs operating in India have headlined their report as “Vedanta under Short Seller Attack” and given explanations of why the allegations should not be given serious attention. In particular, the PAF has said that in capital intensive sectors, such structures, as exist in the Vedanta Group, are common and legitimate, and in support thereof, given examples of large groups which have similar debt servicing structures. The PAF has pleaded for contextual analysis of short seller reports, and advised that “corporate response to such reports should prioritise transparency, timely communication and factual clarification, rather than defensive posturing”.

The responses by VEDL and HZL to the Stock Exchanges are almost identically worded, with the signatories being different. Further, HZL has referred to the response given by VEDL to the Exchanges. Considering that these are 2 separate listed entities, identically worded responses do not leave a good taste.

What should the Vedanta Group do now? They have received legal advice to the effect that the contents of the reports of Viceroy are defamatory, and that they should initiate appropriate legal action. The advice obtained by the Group from a legal luminary focuses, in considerable detail, on the regulatory regime in India, and the existence of checks and balances, but does not address the specific allegations. It is important from the point of view of the ecosystem that lies, if any, should be called out, and appropriately punished. There cannot be a situation in which an admitted short seller, pleading that what it has put out are opinions, and not facts, gets away with unsubstantiated allegations. However, in addition to initiating appropriate legal action, should the Group choose to do so, it would serve the public interest if Vedanta responds points-wise to some of the more serious allegations that have been made, if only to bury such allegations so that they do not resurface.

The rating agencies which have rated VEDL and HZL have found no reason to revise the ratings that they have accorded. It is reasonable to presume that they would have looked at information now in the public domain, and arrived at appropriate conclusions to the effect that there need not be any impact on the ratings already accorded.

What is disquieting in this entire exercise is that one of the entities, HZL, has a 27.92% shareholding of the President of India. Even if all the allegations are entirely without basis, it would be appropriate for the Government of India to seek information from the companies/ Group on possible explanations in order to establish that the allegations are without basis. In such situations, silence will only lead to uninformed comment and criticism, which is best avoided.

The PAF’s report inter alia mentions that “global regulatory scrutiny of short sellers is increasing, with authorities in the US, UK and South Africa investigating manipulative practices and conflict of interest”. It is necessary for SEBI to commence, if it has not already done so, seeking information and subjecting such information to detailed analysis and scrutiny. If there are manipulative practices that emerge from a regulatory study, action should be initiated forthwith because disruptive practices in the securities market should be put down with an iron hand. At the same time, the benefits that short sellers bring to the table should not be discounted. Clearly, there is a balancing act that the Regulator has to attempt for the system to reap the benefits arising out of short selling, while not turning a blind eye to conflict of interest and manipulation.

Unlike in India, there are jurisdictions where research advisory groups are not within the ambit of regulations. Therefore, there is a possibility that unfounded allegations may be made hoping that if a lot of mud is thrown on an object, something will stick. Regulatory coordination across jurisdictions could perhaps find solution to the problem of making allegations without responsibility.

India’s central bank, the Reserve Bank of India (RBI), has, in its nine decades of existence, emerged as a respected and mature organisation, discharging its varied responsibilities with success and credibility. It has been in charge of monetary policy, banking regulation, foreign exchange management, currency management, and several other activities, including being the banker to banks and to the Union Government. On occasion, there has been criticism on the ground that it has been very conservative, and not kept pace with the changes in the economy, as also with geo-political developments. In recent times, some high-profile casualties in the banking sector have also called into question the ability of the RBI to ensure orderly conduct in a timely manner in the banking sector.

It is in this background that one needs to examine the reported move of the RBI to “intensify its oversight” (emphasis supplied) of boardroom discussions in banks. According to available information, recent events at IndusInd Bank have prompted the RBI to consider issuing specific directives, aimed at enhancing governance standards. RBI’s intervention in boardrooms is expected to be through the medium of Senior Supervisory Managers (SSMs), who are either Deputy General Managers or General Managers in RBI’s Department of Supervision.

Normally, when things go wrong in any corporate entity, the question often asked is “What was the Board doing?”. RBI has also decided to ask this question, possibly later than it ought to have done. IndusInd Bank is not the first instance of the Board of a bank having seemingly underperformed in regard to the expectations from it. Both in the private sector banking space, and in the public sector banking space, there have been a number of existence-threatening developments that banks have had to confront. There have been in the past, measures such as Prompt Corrective Action (PCA), but even these have not been as effective or as timely as they were originally intended to be. The related question which cannot be brushed aside is whether with every failure such as IndusInd Bank, the RBI will come up with a new set of directions, guidelines or regulations. Kneejerk responses are best avoided, especially in the banking space. It is necessary to take a holistic view of the sector and the constituent banks to see whether there are systemic issues that need to be addressed, rather than resort to tactical interventions in individual banks through the medium of the SSMs.

What does “intensifying of the oversight of the boardroom discussions mean”? The first item which the SSMs are expected to go into is whether all the relevant subjects have been included in the agenda, and whether they have been adequately discussed in Board meetings. The number of items that RBI has, from time to time, stipulated for discussions and/or decisions by a bank Board will require several hours if they are to be meaningfully gone into. The SSMs are expected to see how much time is spent on individual topics. Is there a norm going to be prescribed for the time to be spent for different types of topics? Is there a likelihood that the entire meeting will become a box-ticking exercise, with inadequate time for more important topics, so as to leave enough time for other topics that might be contextually less relevant in the pecking order.

The proposed move reflects a complete lack of confidence in the Boards of Directors of banks. Discrepancies, if any, between the audio recordings of Board meetings and the written minutes are to be gone into. What happens if there is no requirement for a recorded meeting, with all Directors being physically present at the venue? Some topics will merit detailed discussions, with divergent views being expressed. Often all of these views cannot be captured in the minutes of the meeting. While the minutes cannot be a skeletal record of decisions, it should also not be a transcript of every word said at the meeting. The purpose of the minutes is to capture the flavour of discussions, and the decisions arrived at during the meeting. What happens if something that is a part of the audio recording does not figure in the minutes because it is not considered significant enough? Will it then be the judgement of the Board, as against the judgement of SSMs, who might want more of the discussions captured in the minutes?

Available information states that the RBI is looking into the functioning of Board-level “sub-committees”. Why these committees are called sub-committees is not clear since both the law and regulations provide for Board committees, and not for sub-committees. A sub-committee by definition is a subset of a committee, and cannot arrogate to itself the status of a Board committee. This however is the lesser problem. The real issue is that the participation of individual members is to be looked into. This would mean that everything which is in the minutes has to be attributed to one or more Directors. Considering that the Board is a collective entity, expected to function in a cohesive manner, will the recording of minutes by attribution be the appropriate course? Further, while some members may hold forth in detail on some topics, others might either indicate a brief agreement, or say nothing at all if their thoughts are in sync with that of the Director who has expressed himself/herself. Will the silent Director be frowned upon for not pitching in with his/her valuable opinions? Those that have studied Boards in some detail know that there are 2 types of Directors in the boardroom. The first kind are the Directors who speak when they have something to say. The second, and clearly the disruptive element in the boardroom, are Directors who have to say something on every subject. Will the assessment of individual Directors depend on how much they spoke in the boardroom, because that would amount to undervaluing the sane and relatively silent voices, while endorsing the loud and needlessly articulate Directors on the Board.

The SSMs are also expected to examine how dissenting views are handled. The rush to dissent is a fatal flaw in boardroom discussions. Dissent should be the last step. It should be preceded by deliberations, discussions, debate and discourse. It is only when there are irreconcilable positions, that dissent gets expressed. Divergent views during discussions do not constitute dissent. It would be unfortunate if Regulators nudge Directors to dissent because that would undermine the decision-making ability of the Boards.

A circular of May 14, 2015 eliminated the traditional calendar of reviews, a standard checklist of 21 agenda items for Board meetings. The RBI had then noted that such a checklist led to too much time being consumed by routine matters, and preventing Boards from spending time on strategic and financial matters. Banks were urged to set their own Board agenda, and meeting frequency. It is an appropriate moment for RBI to reflect on whether Board agendas are presently crowded by items stipulated by the RBI, negating the well-intentioned stand taken in May, 2015.

There is also a reference to a committee headed by a private sector banker in 2014 advocating a sharper focus on 7 key governance areas. It would be interesting to see whether the private sector banks, which have had near existential challenges since then, had complied with this prescription. Pointing a finger at public sector banks alone is not going to improve governance quality in the banking sector.

It is time to revisit some conceptual aspects. The Board of Directors is at the apex of the decision-making process in any corporate entity. This should apply equally to banks as well as to other sectors. Having a duly constituted Board, it is necessary to task that Board with the responsibilities normally attached to Boards, namely, superintendence, direction and control. Some of the prescriptions over time by the RBI have led to Boards, or at least some members of the Board, being tasked with operational responsibilities, which are inconsistent with their roles as Board members. If the functions of the Board and the management are merged, intentionally or otherwise, the ability of the Board to guide and counsel the management will be severely impacted.

While on the subject, it is useful for the RBI and the Government to examine whether all the committees that have been set up from time to time in the banks, especially in the public sector banks, are necessary. There is clear evidence of overlap of functions between committees. Further, the limited number of Directors on the Board cannot contribute to the extent necessary if they are on a large number of committees, some of whom have identical membership.

If the distrust of Board members is premised on a few instances of their being caught napping, is it necessary to prescribe a sector-wise scrutiny by outsiders such as SSMs? Can persons who are not a part of the Board decide how Boards should perform when their interaction with Boards is not on a continuing basis, and their firsthand experience of commercial banking, as also of being Directors is minimal, if not non-existent? There was a time when middle level officers were deputed to public sector banks for a couple of years to get an understanding of commercial banking before they were given positions in the Departments of Supervision and Regulation. It might be worthwhile to consider deputing the SSMs for 2 years to public sector banks so that they have experience of what commercial banking is all about. If SSMs are required to ensure that bank Boards practise good governance, it would be legitimate to ask what the Government and the RBI nominees are/were doing on those Boards. Do the constituencies which send them to the Board not expect that their representatives will ensure that Boards discuss what needs to be discussed, and arrive at decisions that are legitimate? To ensure this the first step would be to ensure such nominees attend Board meetings regularly.

The 2015 circular was a positive and a productive intervention in the way bank Boards should decide the agenda and conduct their affairs. 10 years later (2025), it might be worthwhile to go back to the 2015 circular and breathe some contextually new life into it so that bank Boards function with a sense of ownership and responsibility, and do not have to be handheld or spoon fed while discharging the responsibilities.

Depositions in writing do not capture the demeanour of the witness in the witness box. Will the next step be to get SSMs to attend Board meetings so that they not only assess the contributions of Directors to discussions, but also get to know how they said what they said?

Tailpiece
A recent news item states that across 12 public sector banks, only 115 out of 190 sanctioned Board-level positions have been filled. Should we not begin by getting Boards properly composed, before looking at boardroom discussions?

In the list of major obstacles to corporate governance, conflict of interest and asymmetry of information are joint winners. Our focus in this newsletter is on conflict of interest.

Those that follow the developments relating to SEBI are aware that conflict of interest has been centre stage in most conversations in the last few months. The perception, and also the allegations, that the Chairperson of SEBI placed herself in avoidable situations of conflict have done very little to provide a sense of comfort to the stakeholders of the corporate governance ecosystem. It is not for us to determine, in the context of inadequate evidence, whether there has been any serious omission or wrongdoing.

Given that allegations of conflict of interest have adversely impacted the reputation of SEBI, it was only to be expected that the new Chairperson would take this up as a high priority item. Consistent with that expectation, SEBI has appointed a 6 member committee, comprising very senior and very experienced persons, to put in place a comprehensive code to grapple with the various manifestations of conflict of interest, and the possible solutions thereto.

Following the setting up of this high-powered committee, a view has been expressed that this being a relatively simple and direct matter, there was no need to appoint such a high-powered expert committee. Some have even said that this amounted to a sledge hammer approach to kill a fly. Nothing could be further from the truth. The reputation of the organisation will depend significantly on issues of conflict of interest being dealt with comprehensively and conclusively.

There are a few aspects that need to be addressed. The first of these is a clear appreciation of when conflict of interest exists or might exist. The code will be required to address existing conflicts, and possible future conflicts, so that the latter can be prevented.

One problem which needs to be tackled is the manner in which the shareholding  or the ownership of properties by persons appointed as Members of the SEBI Board needs to be handled. It is reasonable to presume that whether a person is from the Government/ public sector or from the private sector, he/she could be expected to have some shares in his/her name or in the names of immediate family members. This situation would also arise in regard to properties owned by Members of the SEBI Board, and the manner in which they are dealt with subsequently.

It cannot be anyone’s case that a person appointed to the SEBI Board cannot have, as on the date of appointment, any financial or physical asset. In a disclosure-based regime, the logical expectation is that both at the time of appointment, and every year thereafter, the person concerned has to disclose the nature and extent of his/her interest in different asset classes, which could possibly place him/her in a situation of conflict. Existing conduct rules in the Government, and in SEBI itself, provide for both initial disclosure and periodic disclosures.

The related question is to which authority such disclosures should be made. All Members of the Board, whether they are Whole-time Members or Part-time Members are appointees of the Union Government, such appointments being made in accordance with the provisions of the SEBI Act. The logical corollary is that such disclosures for Whole-time and Part-time Members of the Board should be made to the appropriate Ministry or department in the Government of India. Making these disclosures to SEBI, as is understood to be the present practice, does not seem appropriate. This is so because there is no authority within SEBI which is superior to, or at the same level of, the Chairperson and the Whole-time Members, and therefore to presume that such disclosures would be objectively analysed and acted upon, rather than filed routinely, is a big ask. Also, since such disclosures are not in the public domain, there will always be questions of whether a disclosure was made, and if so, what that disclosure revealed regarding possible conflicts of interest. In parallel, with the disclosure to the Government of India, there could be for purposes of record, disclosures being made to SEBI, so that these can be easily accessed should any controversy arise in future.

There is also the related matter of how these assets should be dealt with when a person continues to occupy the office of Member of the SEBI Board. One approach which has been tried in some other jurisdictions, and has been found to be satisfactory, is for the shareholding to be parked in a blind Trust, with the person concerned having no authority to take buy or sell decisions regarding those shares. A blind Trust is a convenient instrument to house the shares of the persons who are likely to be in conflict should they choose to exercise buy or sell decisions.

As far as immovable property is concerned, the sale or lease of such property should be after a person has obtained the requisite approval from within the organisation for such sale or lease. Absent this safety mechanism, nothing would prevent a Member on the Board from leasing his/her property to a person who is active in the securities market, and is likely to offer a favourable price. However, there cannot be a negative conclusion necessarily drawn if a Member had leased out a property prior to his/her appointment, whether to a securities market participant or otherwise. All that is required is for an appropriate disclosure to be made at the time of appointment.

Recusal is a mechanism often used by persons in authority to address existing or potential conflict. There have been several instances of Judges who have recused themselves from dealing with cases on account of having dealt with matters earlier, before appointment as a Judge, or having found himself/herself conflicted because of subsequent developments. That said, recusal is not a device to be resorted to in a casual manner, in order to avoid being placed in a situation of having to decide a particular matter.

Given the nature of the organisation, and the expertise required, it is fair to expect that there would be, at any point of time, one to two members from the banking community who have handled credit decisions relating to entities which are also listed on the exchanges. Having dealt with the entities by way of grant of credit facilities, while the person was in his/her earlier position, it is not unnatural to expect persons to point a finger at such Members stating that they were ab initio conflicted, while dealing with the matter. One approach, which might not satisfy everyone, is for prescribing a certain time period during which the Member concerned should not, in a previous avatar, have dealt with that entity. Much the better option would be for the Member concerned to recuse himself/herself, notwithstanding the period of time which has elapsed, so that no finger can be pointed at the Member concerned, and resultantly at SEBI. Since there are 4 Whole-time Members in SEBI, it is possible to find 1-2 of them who would not have dealt with the entity earlier, and therefore will be clearly seen to be free from any previous or continuing conflict. What is important in such matters is to communicate to the larger ecosystem that every iota of doubt has been addressed by putting in place a watertight mechanism to ensure the absence of conflict.

The question also arises whether the code of conduct should be so detailed as to provide for every possible contingency. Alternatively should the principles contained therein be such as to lead to the right conclusion regarding the avoidance of conflict? Overprescription is never an ideal situation. If there are far too many procedural elements in the code of conduct, it is possible to conclude that the interpretation and the application of such provisions would themselves lead to doubts. Alternatively, some provisions might be missed by persons who are tasked to ensure that there is no conflict of interest attached to any Member of the Board. The length of the code is no guarantee of its provisions being observed in practice. It is useful to remember that Enron’s code of conduct ran to 64 pages.

The 6 member committee is understood to have commenced its deliberations, and its interactions with persons, who in the opinion of the committee, could enrich the process of putting in place a satisfactory code of conduct. The committee would be well advised not to get into avoidable details, and to lay down the principles and the practices and procedures that must be followed while addressing possible conflicts of interests. What is equally important is for every disclosure being made to be properly documented, and to be preserved for a sufficiently long period, say 8-10 years. The fact that there is an appropriate mechanism to deal with conflicts of interest would dissuade those who often make allegations, without having any shred of evidence in their possession. The credibility of the organisation is equally contingent on its ability to decide matters quickly and effectively. A code of conduct that is unduly prescriptive could adversely impact the process of expeditious decision-making. We should not lose sight of the fact that SEBI is tasked not only to protect the interests of investors, but also to ensure the development of the markets, which can happen only if business can be conducted without too many procedural obstacles. If ease of doing business is a stated objective, there cannot be a regulatory framework which, on account of excessive prescription, stands in the way of expeditious decision-making. Motivation levels in the organisation would also suffer. The possibility of attracting talent from outside will also be adversely impacted if the perception is that there are far too many compliances and procedures to be handled while one is on the Board of a regulatory organisation.

Very recently, the Chairperson of SEBI is quoted as having said that there were no disclosures of any kind in the recent past. This is disquieting to say the least. Perhaps what was intended to be stated was that there was no information adequately shared with the outside universe on whether appropriate disclosures had been made, and if so, by whom, and to which authority. The fact that when allegations were made, there was no serious effort from the organisation to dispel the doubts and suspicions, also did not help in the cause of preserving and protecting SEBI’s reputation.

It is understood that the proposed code of conduct will also seek to address aspects of conflict of interest relating to persons below the Board level. Since these are SEBI appointees, and not Government appointees, the procedure to be followed need not be identical. It would be preferable to have 2 separate codes of conduct, one for SEBI employees, and one for Government appointees on the Board of SEBI. This will, besides avoiding a sense of clutter, and giving rise to one voluminous document, ensure that the focus is on what needs to be done, by whom, at what time, and in what manner.

SEBI is the Regulator of the securities market in India. With the economy growing at a significant pace, the Indian markets will also reach levels that have not been seen before, In the circumstances, it is of paramount importance to ensure that the credibility of the securities market Regulator is preserved and protected. The consultative exercise, which is presently on, should hopefully lead to the framing of a code of conduct which ensures proper behaviour, while not standing in the way of decision-making, leading to development.

Post script –  Even as this newsletter was being put to bed, came the news of the Lokpal having held that the allegations made before it against the previous Chairperson have not been established.

There are always more fish in the sea, than ever come out of it, say the scriptures. After passing a large number of orders dealing with delinquent behaviour in the market, and imposing penalties designed to keep undesirable persons out of the market, SEBI must be wondering how many more persons that take liberties with law and regulations have to be apprehended and dealt with. Gensol Engineering Limited (GEL) is a case in point. Ordinarily, persons that wish to enrich themselves at the expense of companies, or even society, resort to devious methods that are not obviously challenging the legal system. In GEL, we have a case where the promoters have thrown caution to the winds, and not tried too hard to stay out of the gaze of the Regulator. Some of their activities are serious transgressions that reflect a complete disregard for regulation and for Regulators.

In his detailed interim order dated April 15, 2025, the Whole-time Member (WTM) of SEBI has analysed the various liberties taken by the 3 notice receivers, and laid bare the brazen manner in which the greed of the promoters has brought the company to grief. The order takes note of the impressive growth of the company in the initial years in terms of financial performance, as also in the increase in the number of shareholders from 155 in 2020 to 1,09,872 as on March 31, 2025. After 4 years of being listed on the BSE SME Platform, the company migrated to the main board on BSE and NSE in 2023. Shortly thereafter the shenanigans seem to have surfaced.

The list of fraudulent acts committed by the promoters and the company makes very thought-provoking and worrisome reading. To begin with, there was falsification and misrepresentation of documents. Having borrowed from several sources, including 2 public sector lenders, the company promptly commenced the process of serial defaults. At the same time, they kept their healthy credit rating alive by producing forged conduct letters, purportedly issued by Indian Renewable Energy Development Agency (IREDA) and Power Finance Corporation (PFC), to the effect that GEL was regular in its debt servicing. When the rating agencies reached out to these 2 lenders, they came to know that no such letters had been issued, and that the documents produced by the company to the rating agencies were forged. This brings to mind a similar instance of fraudulent behaviour in a celebrated IT company nearly 2 decades ago, when the letters certifying bank balances produced to the statutory auditors came from the Chairman’s office, and not from the banks. This is not a case of delayed disclosure, incomplete disclosure or wrong disclosure. It is the articulation of a blatant falsehood, with intention to mislead the rating agencies.

In his detailed interim order, the WTM of SEBI has meticulously brought out the web of companies that had been used for routing of the funds received from the bank, for the ultimate benefit of the 2 promoters. The web of companies would have done great credit to a hardworking spider.

In an interesting observation, SEBI seems to have noted that the promoters were treating the company like a sole proprietorship, and not like a listed entity. There came into being a number of Related Parties with the sole purpose of being vehicles for illegitimate routing of funds. Before the credits were received in some of these companies, the bank balances were abysmally low, and this should have raised questions in the minds of those that got to know of the transactions. Funds that were meant for acquisition of vehicles were used for personal benefits, including the acquisition of a costly residential property in Gurgaon, initially in the name of the mother of one of the promoters, and thereafter in the name of a company.

This is a case where the greed of the promoters led to the grief of the company and its various stakeholders. The lessons that can be drawn from this unsavoury episode are far too many to be captured in a newsletter. Our focus therefore is on the various dramatis personae involved.

To begin with, there are 2 promoters who thoroughly misconducted themselves by throwing caution to the winds, and cocking a snook at legal and regulatory provisions. There was no single avenue that they left unexplored. Even CSR funds were diverted to the personal accounts of the 2 co-founders. There were quite a few cases of transfer of company money to close relatives. The claim that there was a manufacturing facility in Pune turned out to be baseless since the NSE official who visited the alleged manufacturing premises found 2-3 labourers and, on enquiry, found an electricity bill, that reflected consumption of an amount much smaller than what a manufacturing unit would have consumed. Similarly, the Related Party BluSmart Mobility Private Limited received far less vehicles than what had been originally indicated to be made available. The funds paid to another Related Party for procuring the vehicles was much more than the cost of vehicles that were delivered. It would appear that in every transaction, with every Related Party, money had been siphoned off, and no eyebrows were raised by any of those to whom these should have been obvious red flags.

The role of the lending agencies is also not free from suspicion. It is a known fact that a genuine borrower, wishing to borrow a much smaller sum of money for legitimate business purposes, is led on a merry go round chase with forms, processes and collateral requirements obstructing the speedy disbursement of loans. Yet, on the other hand, institutions seem to have parted with funds, without doing the right kind of checks, and without resorting to stringent post lending monitoring procedures. Proactive steps by the lenders should ordinarily have resulted in these irregularities coming to surface earlier.

Then there are the Independent Directors (IDs). How all these transactions either escaped their attention, or were studiedly ignored, is a matter that investigative agencies will have to address sooner rather than later. While the role of IDs in such situations is to be decided with reference to Section 149(12) of the Companies Act, 2013, there is no defence available in case of irregularities that were so many, and so pronounced, as to remain unnoticed. While the provision in the Companies Act, 2013 makes Non-Executive Directors responsible only for matters that they get to know through a formal Board process, there is the requirement of acting diligently. The available facts do not lead to the conclusion that the IDs had acted diligently, since this was not one dubious transaction, but a series of blatant violations of the law and the regulations.

It is interesting to note that one day after SEBI’s orders dated April 15, 2025, 3 IDs resigned citing different reasons for resignation. The portions of the resignation letters reproduced below tell their own tale, and do not merit detailed analysis or comment.

1 ID sent his resignation by mail at 7.49am on April 16, 2025 stating “I am aware that my decision comes at a time when the company is facing a difficult time. However, my professional commitments at Patna are coming in the way of my contributing to the company in a useful manner. I sincerely feel that a more experienced person in my place is required on the Board as an ID to steer the company through in these difficult times.” Having stated the above reasons for exiting the Board less than a full day after SEB’s orders, the Director concerned also stated “my admiration for your leadership and resilience remains unwavering.”

Another ID stated by his resignation letter of April 16, 2025 sent at 1.37am that “Recent developments and news in the media has pained me immensely.” He left the Board because “the way things have unfolded and come to light, I am not in a position to continue as ID.” He wished the very best for the company, the shareholders and other stakeholders.

The third ID, who resigned on April 16, 2025 at 4.18pm stated that in July/ August of 2024, he had “tried reaching you” to seek clarity on the debt position of the company, and had also offered assistance to reduce the interest cost through a debt restructure route. “While you had messaged me that you would call back, it never progressed. I had also spoken to Mr Parmar on 2-3 occasions and asked him for a meeting with the CFO, which never seemed to materialise.” He had indicated in 2024 his intention to resign, but was told to hold on till the IPO of a Related Party was successfully concluded. He further stated that his present employment restricts him from taking up an ID role in companies. Having stated that he did not hear back from the Chairman, and from the Company Secretary, Mr Parmar, for several months, he indicated that he would like to thank the Chairman for giving him the opportunity to serve on the Board and added that he was “grateful for the support extended to me by fellow Board members and the management during my tenure as ID.”  Presumably the support extended by management included not responding to his messages, and not getting back to him on the issues raised by him.

Given that there were a number of Related Parties, and transactions with all of them, it is not clear whether the Audit Committee of the company studied these transactions from the angle of the transactions being in the ordinary course of business and at arms length. Clearly, these were seemingly disregarded as matters of no concern.

During the entire process of promoters playing ducks and drakes with company finances, the investors were continuously misinformed. Even after the irregularities came to public notice, the promoters sold a portion of their stakes without public disclosures, blindsiding the investor community. Further, as SEBI has observed, even the proposed share split was a ruse to mislead the minority investors.

Audit quality is one of the aspects that needs to be carefully examined. With forgery, misrepresentation, fraud, accounting irregularities, and the like, it seems difficult to believe that the auditors had no inkling of the nature of activities being undertaken by the company. A few observations regarding audit are contextual. As per the Annual Report for FY 24, the Audit Committee had 5 meetings. Internal audit was outsourced,  and it did not directly report to the Audit Committee. The statutory auditor was paid non-audit fee of Rs 6.5 lakhs, in addition to a fee of Rs 12 lakhs. Interestingly, both the statutory auditor and the secretarial auditor gave clean reports. These are likely to be some of the issues that get covered by the probe by the Ministry of Corporate Affairs, and the ongoing proceedings in SEBI.

There is no gatekeeper who emerges with credit in these series of transactions. The auditors and the Directors clearly seem to have fallen short of expectations. Lenders would need to do a thorough analysis to discover how the company was able to take them for a ride, and to resort to stratagems such as forging letters, and certifying the company’s conduct as a borrower making repayments in time.

It is said that one swallow does not make a summer. It is dangerous to get into the comfort zone that this is an isolated incidence of corporate fraud. It is important for SEBI to quickly complete the proceedings, and to pass final orders, which will send a clear signal to the stakeholders and the market that it has no room for persons who misconduct themselves so blatantly and brazenly. As has been observed in another context, no person or institution is entirely useless. This company and its promoters serve as an example of entities and individuals who have no business to be in the market. The reputation of the corporate ecosystem will suffer if the action taken is not speedy or sufficiently deterrent.

With the commencement of a new financial year, and with a new SEBI Chairperson in place, the context is appropriate for Boards to look at what they should be doing in the months and years ahead. To get companies away from the normal practice of incrementalism, and be on the road less travelled, Excellence Enablers organised a roundtable with participants of diverse experience and expertise, to come up with action points, milestones and methodology. What follows is an attempt to focus on some of the more significant suggestions.

While it is well understood that appropriate composition of the Board is the starting point of getting the company to move in the right direction, it is rarely that the specifics of this objective get addressed. What is often overlooked is the need to factor in what the company presently does, and what it wants to do in the future. Given contextual clarity, it will become easier to decide on the kind of persons who ought to be inducted on the Board. While some of them will have significant domain knowledge, and some others might be helpful in domain neutral suggestions for improved performance, the lowest common denominator should be that Directors should act independently, and be unafraid to express their views in a constructive manner. In this exercise, Nomination and Remuneration Committees (NRCs) should be actively engaged in identifying the gaps to be filled in Board composition, and creating the appropriate universe from which the right persons could be selected. NRCs should not be seen as mindlessly endorsing the views of the management on the selection of Directors.

It is often heard that the availability of good Directors is limited. Nothing could be further from the truth. If the net is spread wide, instead of focussing on a narrow catchment area as in the past, potentially good Directors could be identified, and brought on board. The possibility of engaging external specialist firms should not be brushed aside. Over time, Boards have become manifestations of gerontocracy. This should be consciously addressed by selecting younger persons, who might have knowledge, that is more contextually relevant to the company.

Suboptimal performance by Boards is often a function of absence of role clarity. Directors, especially those who have in the recent past held executive positions, are more inclined to get into management territory, forgetting that execution and operations are not the functions of the Board. The Board should act as a sounding board for management, and not get involved in the nitty gritty of individual transactions.

The related point to be remembered is that Boards do not run companies. Running companies is the responsibility of management. The Board’s function is to ensure that the managements run the companies well. Unfortunately, even Regulators, on occasion, task Boards with functions that belong entirely to management, and in the process, reduce the time available to the Board to discharge its basic functions of superintendence, direction and control.

One problem that has been mentioned in the recent past is the inadequate preparedness of senior management persons moving to Board level positions. It is erroneously believed that such persons, having been in the company for several years, hit the ground running when they get onto Boards. The transformation in roles will require handholding to ensure that the newly appointed Directors are schooled in the responsibilities and functions at the Board level.

Many Boards consistently underperform because of their extraordinary focus on the past, without setting apart enough time for discussions on the future. Spending disproportionate time on looking at the performance of the previous quarter or the previous year, makes Board meetings resemble the meetings of pathology departments, since the quarter or the year has gone by, and apart from throwing up some lessons, will have little contribution to what the company should be doing in the months and years ahead.

Related to this is the question of setting a value-adding agenda. It should not be left entirely to the management comprising the Company Secretary and the CEO, with an occasional input from the Chair of the Board, to design the agenda for the forthcoming meeting. Good Boards have recognised that the agenda must be set “with the Board”, and not “for the Board”. Boards must also focus on the timely flow of complete and correct information, so that decisions are not taken based on ill-informed discussions arising from inadequate information.

There are some specific areas that Boards have not focussed on adequately. To begin with, there is rarely, if ever, a review of the existing business model, and the changes that might be required for the company to remain relevant and ahead of competition. If the business model is taken as cast in stone, change, if any, would at best be incremental, and will not be fundamental.

Succession planning is often spoken about, but adequate time is not invested in this exercise by the Board or the NRC. It cannot be that only when a vacancy arises, even if it is a vacancy that should have been anticipated, the exercise commences by looking for suitable candidates within or outside the company. Successors should be identified and kept in a state of readiness to seamlessly move to the higher assignment that a vacancy gives rise to.

Diversity Equity and Inclusion (DEI) again is more spoken of than actually discussed or actioned. Much the same is the treatment accorded to ESG, with lack of clarity on which committee(s) of the Board should handle which aspects of ESG. Climate change is yet another item that gets bandied about in conversations, but rarely makes it to the Board agenda as a specific item. With floods, cyclones, earthquakes and the like affecting the physical infrastructure and the conduct of business of companies, inadequate time is being allotted in boardroom discussions to preventive measures, and the business continuity plans, that ought to kick in when a major event is about to take place. Much the same could be said about cyber security and the absence of AI and technology applications in the Board agenda.

In a competitive environment, it is necessary for companies to innovate on a continuing basis, lest they get overtaken by obsolescence or irrelevance. While there is token acknowledgement for the need for innovation as well as R&D, the overriding approach seems to be to treat these as expenditure items, and not as investments.

No company is an island unto itself. It is necessary to keep track of, and even anticipate, the changes in the global economy, so that when such changes take place, the company is not caught napping.

The spread and reach of social media, with its negative connotations, is a matter that does not seem to have attracted the attention of the Board or any of the Board committees. While social media policies might exist, they do not capture the entirety of the phenomenon. Resultantly, with negative posts in social media going viral, companies do not seem to be ready to respond in time, and to undertake damage control. Boards need to appreciate that the ecosystem has a disproportionate presence of social media, and it can be ignored only at the expense of the company.

Strategy is yet another matter which gets talked about, but not adequately addressed by Boards. While some companies follow the practice of having an offsite meeting for strategy, the agenda for such meetings often comprises several other items, which reduces the time available for meaningful discussions on strategy. Strategy being co-created by the management and the Board, it is essential that it becomes the central agenda, if not the only agenda item, for meetings that are described as strategy meetings. Such meetings, in addition to helping to craft and refine strategy, also enable the Board members to get a visibility of senior management persons, to assess their capability and competence for being moved to positions of higher responsibilities. This would also encapsulate the mentoring role that Board Directors have, even if such a role is not articulated in laws and regulations.

Given the responsibilities of Directors, no justice can be done to their role if they only attend the meetings of the Board and its committees. It is of paramount importance for Directors to interact with management persons between meeting dates, so that they not only get updated on a continuing basis, but are also able to help with advice and assistance where necessary.

The need for right-contenting the Board has been discussed. What should not be lost sight of is that Board members should be willing to serve on different Board committees, especially because the committees constitute the place where in-depth discussions take place. To address the possibility of asymmetry of information between committee members and Directors who are not on some committees, there should be a policy of inviting such Directors to be present during the committee meetings, so that they get to hear firsthand the issues that are being discussed. While the non-members might get some insights from the briefings by the committee Chairs, it does not adequately bridge the information gap between committee members, and persons who are not members of the committees.

In some companies, though the practice is mercifully not widespread, decisions of the committees are taken as final, with the Board either not considering them, or routinely endorsing them, without application of mind. This is inconsistent with the position that Board committees, no matter how well they are constituted, and irrespective of the time that they invest, are not a replacement of or a substitute for the Board. It should be possible for the Boards to revisit the recommendations and/or decisions of the committees, and make such modifications as the Board in its collective wisdom might consider desirable.

One forum which has not been taken advantage of, presumably because of the context and the cavalier treatment given by Schedule IV, is the separate meeting of Independent Directors (IDs). One meeting every year, limited to undertaking the process of Board evaluation, is a hopeless underutilisation of the forum. Progressive companies have put in place a practice where before every Board meeting, the IDs discuss matters on the agenda, as well as other matters that are relevant. This meeting functions as a clearing house of ideas. Giving it stepmotherly treatment is equivalent to scoring a self-goal.

Boards have also reluctantly recognised that a robust external Board evaluation exercise is far more value-adding than the routine box ticking exercise that in-house Board evaluation exercises have descended to. To rule out external evaluation on the ground that it has a cost element, is to be extremely shortsighted, and to shut the door on a value-adding exercise. Experience has shown that where external evaluation is undertaken, the areas for improvement are more easily identified, and acted upon, unlike in the case of internal evaluation, where the exercise becomes one of legitimising present practices.

Companies, especially Public Sector Undertakings, often have the problem of the owner/ promoter not being able to distinguish between ownership and management. If a Board is constituted with the right kind of members, it stands to reason that the Board should be trusted to function in a manner consistent with the interest of all shareholders. Continuous interference, and disproportionate influence being exerted on the functioning of the Board, will disincentivise and demotivate the Board, and reduce Board members to rubberstamps.

The tasks are clear and nearly everyone talks about them. What remains is the ability and the willingness to walk the talk.

Speaking at a function to launch the industry standards on minimum information to be provided to Audit Committees (ACs) for approval of Related Party Transactions (RPTs), the SEBI Chairperson is reported to have said that she would have no problem throwing the entire SEBI LODR Regulations, 2015 (LODR) into the bin if provisions for RPTs were retained. The minimum information that the 3 apex chambers have finalised as the industry standards, leaves one wondering whether the extremely detailed information to be provided to the AC will lead to RPTs also being thrown into the bin, in due course.

Along with Regulations relating to Prohibition of Insider Trading, RPTs constitute the area in which changes and refinements have been introduced at frequent intervals. It is almost as if the phenomenon of RPTs is giving sleepless nights to those tasked with regulations. Getting the apex industry fora to be partners in this endeavour will perhaps ensure that neither they, nor their constituents, can complain about the extraordinary level of detail that is sought to be provided to the AC.

RPTs have been provided for in the Companies Act, 2013 (the Act). All that they provide for is that the transactions should be in the ordinary course of business and at arm’s length. It has been left to the ACs of the various corporates to figure out the tests that they will put in place to ensure that these twin requirements are appropriately met. In some cases, the corporates, especially the ACs thereof, have reached out to external agencies to determine whether both these requirements have been suitably addressed.

Over the years, especially in the recent past, RPTs have acquired a negative connotation. One is reminded of a conversation several decades ago with the then-Director CBI, a good man, who is no longer in our midst, who claimed that all non-performing assets (NPAs) were frauds, and was unwilling to concede that there could be other reasons for an asset turning into an NPA. RPTs, viewed through a similar suspicious lens, also seem to qualify as necessarily avoidable and irregular. The fact that RPTs have been specifically provided for in the Act and in LODR should lend some legitimacy to the conclusion that they do belong in the sphere of business activities.

It is useful to revisit the basics. The first requirement is that a transaction should be in the ordinary course of business. For example, it is not open to entities of a large conglomerate to place orders for several thousand vehicles, which are not needed, only to bail out an automobile company, which belongs to that group. By all accounts, this is clearly not a transaction in the ordinary course of business.

The other requirement is that the transaction should be at arm’s length. While arm’s length has not been defined in the Act, recourse can be had to taxation provisions. Simply stated, arm’s length pricing would involve ensuring that the Related Party (RP) does not get a price that is advantageous, as compared to the price at which goods and services are provided to, or received from, an unrelated party.

It is now time to turn to minimum information as set out in the industry standards. Over 32 pages, with tabular statements, replete with micro details, the minimum information to be provided for review by the AC and the shareholders for approval of RPTs has been stipulated. Some of the provisions therein merit special comment. To begin with, there is an applicability matrix which sets out the threshold, the approvals required, and the disclosure requirement. There are 6 explanations attached to this applicability matrix. Moving on, the standards for minimum information provide inter alia that while collecting and collating the information, the management of the listed entity shall take into account certificates from the CEO or CFO or any other Key Managerial Personnel (KMP) of the listed entity, and from every Director of the listed entity, who is a promoter (promoter Director), that the RPTs to be entered into are not prejudicial to the interest of public shareholders, and that the terms and conditions of the RPTs are not unfavourable to the listed entity, when compared to the terms and conditions of similar transactions, when entered into with an unrelated party. It is reasonable to expect that the management of the listed entity will not routinely bring to the AC, transactions which are prejudicial to the interest of public shareholders. It is useful to remember that while examining arm’s length pricing, the AC, even today, looks precisely at whether the transaction is in the interest of the company, and whether the pricing is appropriate, as compared to the pricing for unrelated parties. By way of an additional safeguard, Non-Independent Directors have been kept out of decision-making on RPTs. The minimum standards also provide that if any promoter Director does not provide such a certificate, the same shall be informed to the AC and to the shareholders, if it is a material RPT. It is difficult to envisage the possibility that a promoter Director will not provide such a certificate, since its absence could be fatal to the transaction in question.

In Clause (3) (2) (g), it is provided that in the case of payment of royalty, there should be a comparison with 3 industry peers, where feasible. The manner in which the payment of royalty should be dealt with, if the various alternatives listed for identifying industry peers are not available, leaves one to wonder whether this is an exercise which will involve disproportionate time, without yielding commensurate results. What is interesting is that if no suitable Indian listed or global industry peers are available, the listed entity may refer to the peer group considered by SEBI registered research analysts in their publicly available research reports. In a situation where neither Indian listed nor global industry peers are available, it leaves one to wonder how the SEBI registered analysts could constitute an appropriate peer group.

Clause 4 sets out the multipage format in which information is to be provided to the AC and to the shareholders. A few of the several items of information that are sought to be provided merit comment. In Section A (2), serial no. 5, it has been provided that the nature of the interest, whether direct or indirect, in the RP, should be brought out. This includes elements such as % of shareholding, % of contribution, and % of P&L sharing. Similarly, the % of shareholding of the RP in the listed entity, should also be brought up before the AC.

The financial performance of the RP for the previous 3 years is also to be detailed. These include the standalone turnover of the RP for each of the last 3 FYs, the standalone net worth of the RP for each of the last 3 FYs, and the standalone net profits for each of the last 3 FYs. How these would be relevant for a RP that is in existence, and is in a position to supply the goods or services, is a matter that needs to be thought through. Similarly, history of the previous transactions with the RP for the previous 3 FYs will also be required to be detailed.

In Section B (1), serial no. 7, it has been indicated that a certificate from the CEO or the CFO or any other KMP of the listed entity, and also from promoter Directors of the listed entity should be obtained to confirm that the transactions are not prejudicial to the interests of public shareholders, and that there is arm’s length pricing. This being the central element to determine the appropriateness of an RPT, it is not clear why it has been tucked away in a long tabular statement, along with several other matters. What is interesting is that the management should provide a clear justification for entering into an RPT, demonstrating how the proposed RPT serves the best interests of the entity and its public shareholders.

In Section B (2), serial no. 15, it has been indicated that information regarding the additional cost/ potential loss (remember “presumptive loss”) to the listed entity or the subsidiary in transacting with the RP, compared to the best bid/ quotation received, should be indicated. The AC is to justify the additional cost that the listed entity or the subsidiary has to incur. Indian corporate history is replete with instances of bidders making prima facie unsustainable bids to corporates, in order to get a contract, and then defaulting without any loss of time. Such developments disrupt the smooth business plans and production programmes of the listed entities. A listed entity’s major concern would be that supply of goods and services by its vendors ensures product/ service quality, ability to adhere to timelines, and a non-disruptive supply of goods and services. Therefore, for good reasons, the management of a listed entity might choose to deal with RPs, even if the price involved is marginally higher, than the price offered by the lowest bidder. Some companies have a price band within which they could give a preference to the RP, secure in the knowledge, based on experience, that both product/service quality, and complying with timelines, can be counted on. To expect the AC, in each such case, to justify the non-acceptance of the lowest bid, is to ignore the fact that several ACs will not expose themselves to the risk of seeking to justify transactions with an RP at a higher price. In these challenging times, when Auditors and ACs are subject to increasing scrutiny, including judgement based on hindsight, some ACs might play safe, and prevent the best (as opposed to the lowest cost) transactions from going through. This clearly is not consistent with the conduct of business. The AC is also to comment on the adequacy of bids/ quotations if the number is less than 3. This brings back memories of the sham exercise of 3 quotations being received in some Government departments.

There are additional details required for transactions relating to loans, intercorporate deposits, and advances given by the listed entity or its subsidiaries. One item of information is the rate of interest at which RP is borrowing from its bankers, or the rate at which the RP may be able to borrow, given its credit rating, credit score, and its standing and financial position. Would it not be adequate to provide that the interest rate charged should not be less than what has been charged to an unrelated party?

There is also a provision for information relating to the dividend paid in the last 3 FYs as a % of net profits. The payment of dividend is to be made in accordance with the Dividend Distribution Policy of the company, and the company might well decide, with the understanding of the shareholders, that dividends would be limited, in order to plough back significant surplus, for expansion of business. Therefore, for the AC to comment on reasons for dividend payment being less than royalty payment is to compare 2 elements that belong in different spaces.

The minimum information guidelines also provide for making available information whether any in-house R&D undertaken by the listed entity or its subsidiary will reduce or eliminate the royalty currently paid for any technology or technical knowhow. Additionally, the absolute value of R&D expenditure incurred on such in-house R&D, along with the period required for completing the research to achieve reduction or elimination of royalty shall be disclosed to the AC. The AC is expected to provide comments, including justification, if no expenses were incurred. This provision has several problems. Firstly, there cannot be any compulsion for a company to undertake R&D, and incur expenses. This is a long-term commitment that some companies might like to avoid or postpone. Secondly, the royalty is to be paid presently for technology or technical knowhow. R&D expenditure that might, in a few years, eliminate the need for technology or technical knowhow, is not going to address present day problems. All that the AC should be tasked to do is to decide on whether the expenditure presently being incurred by way of royalty payment is appropriate. Living in the hope of a successful R&D effort several years into the future, does not address the present requirements.

Clause 5 of the minimum information document sets out the information to be provided to shareholders for consideration of RPTs. It stipulates that the notice being sent to the shareholders, seeking approval for any material RPT, shall, in addition to the requirements under the Act, include 9 other items of information. These inter alia include the following.
– Statement of assessment by the AC that relevant disclosures for decision-making were placed before it, and it has determined that the promoters will not benefit from the RPTs, at the expense of public shareholders.
Is it not sufficient that the AC and the Board recommend the transaction to the shareholders for approval, after taking into account all the relevant information.
– Copy of the valuation report or other reports of external party, if any, considered by the AC while approving the RPT. If the external party report is by itself a voluminous document, will the average shareholder have the time and/or the inclination to go through it, and to satisfy herself/himself that the external party’s report satisfactorily addresses issues involved? It is akin to expecting a mutual fund investor to read the whole of a voluminous offer document before investing. Elsewhere in the minimum information guidelines there is a provision that the AC shall go through the report of the external party, and indicate, based on their independent evaluation, whether the basis for evaluation is satisfactory. Why then get an external party, and incur expenditure?

Is this a long procedural prescription to root out RPTs in the foreseeable future? If so, would it not have been preferable to state that RPTs will no longer be allowed, except in rare circumstances? Meanwhile, there is yet another consultation paper suggesting changes to some provisions relating to RPTs.

The previous month has also witnessed a few other developments which cannot be ignored. In one listed entity, following a protracted standoff between the Executive Chairperson and the major shareholder, the former has been finally eased out. Easing out of the Chairperson is not our major concern. Several other things however matter. Firstly, there is the unpreceded spectacle of a resolution being taken to the shareholder to state that the Executive Chairperson retires by rotation, and at the Annual General Meeting (AGM), the Chairperson stating that she is not required to retire by rotation. Was this not a matter that should have been sorted out in the boardroom? Is it for the shareholders to determine whether the Chairperson should retire by rotation, or stay indefinitely?

The role of Independent Directors (IDs) also gives rise to some concerns. They seem to have voted with the Executive Chairperson against the initial bid by the majority shareholder to acquire control of the company, on the ground that the price offered was not appropriate. However, by the time it came to the AGM, they seem to have decided that the Chairperson can be left well alone to fend for herself. No outside observer seems to be questioning the conduct of these IDs.

However, in another case of an entity where 4 IDs resigned in a matter of a few days, after a fraud came to notice, there have been claims for disgorgement of commission and the fees paid to them for attending meetings. In this case, what is amusing is that the 4 Directors resigned around the same time, giving completely different reasons, including old age, pre-occupation, and related matters. Neither old age, nor pre-occupation happens overnight, when a fraud takes place in a company. To that extent, they are accountable for what has happened. However, is this disgorgement time, or should some other penal consequences, such as keeping them out of Boards, be the appropriate course? It is easy to conclude that the IDs were in the know of what was going on, and chose to turn a blind eye, till the matter came into public domain. If that is not the case, will not protection on the lines of Section 149(12) of the Act be available to them? The relevant question would be whether they got to know of the transgressions through a formal Board process, or whether their being diligent would have enabled them to spot the fraud being committed.

Separately, the Reserve Bank of India (RBI) has taken action against a co-operative bank because of a fraud committed by a former senior functionary of the bank. The fraud seems to have been perpetrated over a few years, and has not been one single act of transgression. How is it that annual inspections of RBI did not notice this problem? Questions would again arise whether any accountability ought to be attached for seeming negligence on the part of the regulatory authority that undertook the inspection.

One is increasingly reminded of the saying “When all is said and done, more will be said than done”.

To view the minimum information guidelines, please click here