COMMITTEES THAT DON’T MEET

Context: When a Risk Management Committee neither meets regularly, nor addresses risk, there is disaster waiting to happen, as in the case of this large unlisted NBFC. Should processes that have been put in place be completely ignored on the journey of expansionism?

  • After a major NBFC defaulted on repayment of its financial obligations, its ratings were downgraded by rating agencies.
  • The Government of India intervened after successive defaults by the Company, and its group level companies, and took over control of the Group. It also appointed a new Board of Directors.
  • Subsequently, RBI undertook a special audit of the Company and found serious violations such as under-reporting of bad loans, over-rating of the group’s capital adequacy ratio, poor compliance culture etc.
  • The inspection report of RBI inter alia stated that
    • The Company lacked rigorous risk management rules, and no risk management measures were being followed.
    • The key committees of the Board had not convened any meeting for years.
    • Risk Management Committee (RMC) and Investment Review Committee (IRC) had not met for about three years, with the last meeting being in 2015. This was despite the fact that the Company’s financial position had deteriorated, and it was moving towards defaulting on its debt obligations.
    • The Company had not disclosed its non-performing assets (NPAs) for around 4 years, and wide divergences were observed between the reported and assessed positions of assets' classification and provisions.
    • Credit risk and linkage with liquidity risk was never identified in credit and investment decisions. Business strategies of the group were never deliberated from the risk perspective.
    • In the absence of the meeting of IRC, the investment related proposals were continued to be approved by the Committee of Directors. There was no system of monitoring and reviewing the investment at periodical intervals.
    • In response to this, one of the senior Directors alleged in media that these meetings were not necessary since risk was discussed in Board meetings.
    • In 2015, RMC comprised 2 Independent Directors, Joint Managing Director and CEO of the Company, and 1 Nominee Director from Life Insurance Corporation (LIC). In 2017, LIC’s nominee on the Board, and consequently on the RMC, had been replaced by another Nominee Director from LIC. The new Nominee Director was also the Chairperson of the Company for a brief period.

LEGALITY AND PROPRIETY

Context: Fit and proper is not an empty phrase when it comes to Corporate Governance, as can be seen in the case of this large FMCG company. Hiding behind technicalities is never the best response to the issue of reputational risk. Was the Board’s decision appropriate?

  • A Promoter-Non Executive Director (NED) of an FMCG company was given a two-year prison sentence for possession of cannabis (drugs) in Japan, although the execution of the sentence was suspended for a period of five years.
  • In response to a clarification sought by the Stock Exchanges, the Company stated that it had, at the instance of the Independent Directors (IDs), sought a legal opinion over his continuation.
  • There were questions raised by investors too on the suitability of his continuing as a Director, especially since the sentence had only been suspended, and the conviction remained. There were some stakeholders who also stated that the Director should step down on moral grounds.
  • It was alleged that the IDs met the Director one-on-one, without the presence of any other promoter or management person, post the happening.
  • Following a Show Cause Notice from SEBI, the Company entered into a settlement for not making timely public disclosure of this news, including reporting it to the Stock Exchanges. The Company, along with two other listed companies, where the Promoter Director was a Board member, paid a settlement.
  • The Annual report did not mention this incident.
  • The Company finally stated that there was no question of disqualification/ vacation of office of the Director since the matter related to a Court outside the territory of India, and since the sentence has been suspended, and is without effect. It also stated that he would continue to be a Promoter Director as the Company did not involve itself with the personal litigation and affairs of its directors, employees and promoters.
  • The Code of Conduct for NEDs, published on the website of the company, mentioned that “Each director is urged to read this document and take pride in upholding the high standards of corporate and personal behaviour on which the company’s reputation and respectability have been built over the past 86 years”.