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THEIR FAILINGS, OUR LEARNINGS

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THE TRUTH WILL OUT

Context:

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

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