This article is authored by Shubham Gupta
Thursday, January 23, 2020
Thursday, January 16, 2020
SEBI swerved on non-interference in Winding Up matters
This article is authored by Shubham Gupta, a 4th year student the Institute of Law, Nirma University.
Introduction
In the recent Adjudication officer (‘AO’) order dated
on 31st December2019, SEBI took a stand that it can proceed with the
adjudication proceedings against a company even though the company is under
liquidation. This stand is inconsistent with the approach adopted by SEBI till
now and is likely to be non-est. in law.
In this matter of Rajadhiraj Industries Ltd., AO had initiated adjudication proceedings against
Rajadhiraj Industries Ltd for non-redressal of investor grievances on SCORES
platforms within the stipulated time, and failure to submit to Action Taken
Report. When SCN notice was issued to the company, and it was found that
company is into closure since 1996, and from MCA records, it was observed that
the company has been provisionally wound up by the order of Indore High Court,
MP. The appointed official liquidator informed AO that the company is under
liquidation, and thus, no legal proceedings can be initiated against it.
Taking U-turn from the existing approach, AO ordered that
it can proceed with the adjudication proceedings- banked on that the adjudication
proceedings as to determine whether the SEBI laws were violated or not and, to
impose penalty. Taking reference to the apex court judgment in SV Kondaskar,
OL v VM Deshpande[1] – ruling
that liquidation court would have full power to demand the penalty from the
liquidator, AO held that adjudication proceedings wouldn’t be hampered by the
appointment of an Official liquidator.
Analysis
At the outset, this order is contrary to stand taken by SEBI till
now. Previously, the position in respect to adjudication proceedings was
different and had a radical inclination towards the halting and prohibiting the institution of any new
proceedings by SEBI without the approval of the appropriate authority. Earlier,
M/s Nova Surgikos Limited, the
similar facts were arrayed with respect to non-redressal of SCORES complaints,
and AO ordered the non-continuation of proceedings owing to the company is
under liquidation. Likewise, in Everonn Education Ltd, yielding to the fact that liquidator has been
appointed to overlook the affairs of the company, AO desisted from a continuation
of the said proceedings owing to non-approval from the court. It was further
reaffirmed in ABG Shipyard Ltd that leave of the appropriate is a sine qua
non for the continuation of the proceeding if the company is under liquidation,
and thus proceedings against the company become not est.
Furthermore, arguably, this order is in direct
conflict to Section 33(5) of IBC and Section 279 of Companies Act, 2013.
Section 33 (5) IBC, 2016 envisages that in case of liquidation order is passed,
no suit or proceeding shall be instituted against or by a corporate debtor
whereas Section 279 CA, 2013 which states that
when a winding-up order is passed, no suits or other legal proceedings
shall be instituted against the concerned company. Under IBC, an only liquidator
with the prior approval shall institute suit against the corporate debtor, not
any other creditor.[2]
In Murgan Oil Industries (P.) Ltd. Re,[3]
the word “suit” or “proceedings” not restricted to any class of creditors, or
plaintiff and, it is wide enough to encompass all to cover all suits and other
legal proceedings who-ever may be plaintiffs.
It is imperative that SEBI has also held that ‘adjudication
proceedings’ are within the purview of ‘other legal proceedings’
under Section 446 of the Companies Act, 1956.[4] Thus,
in no case, SEBI cannot institute or continue any suit or proceedings
against the corporate debtor. Contrastingly, under Section 279 of the
Companies Act leverages institution or continuation of suits or proceeding with
the prior approval of the tribunal. Therefore, the whole purpose of IBC – to
prevent the multiplicity of suits in the multiple forums – is questioned by
this order.
It is to reiterate or reaffirm that, once the court
has taken the assets of a company under its control or has passed an order for
its being wound up, it will not be proper to allow proceedings to be started or
continued against the company.[5]
Thus, the regulatory proceedings by the various regulators would not only
hamper the liquidation process but would intrinsically vitiate corporate
structure in the market.
Conclusion
In the light of above, the appropriate approval under
the Companies act must have taken by SEBI and therefore, it’s profusely against
the spirit of the existing laws. This has again posed a serious question on ‘AO
power to conduct adjudication proceedings. The regulators have been bestowed
power which must be used cautiously and with all due regard to existing norms.
Wednesday, January 15, 2020
Splitting CEO’s Duality role: The landscape to independent Board Leadership ?
This article is authored by Shubham Gupta, a 4th year law student at the Institute of Law, Nirma University.
Introduction
In 2019, the Indian financial market has confronted many
climacteric corporate issues like IL & FS, DHFL, Tata- Mistry, Infosys,
etc. which appeal for a change in dynamics of corporate governance and
compliance culture. In this regard, regulators and government bodies
relentlessly fosters to adopt better compliance practices across the world. One
of such advent interventions, the capital market regulator, SEBI vouched for
separation of position of chairman and CEOs/ managing directors – which, in
turn would cultivate a corporate democracy.
Separation of position and roles of the chairman of
board and CEOs/Managing directors is assumed on the basis that the management
look over the affairs of the company whereas
the board supervises the management, on behalf of the shareholders of the company.
Essentially, this demand a non-aligned interest between the board and the
management to have effective governance and management.
On
the recent ruffling into the boards of Indian Listed Companies regarding SEBI’s
rules on segregation of roles and position of chairman and executive/managing
director- the hotly debated is again into clamour.[1] This article reinvigorates
the debate over the dual role of CEOs and analyses the empirical literature
available on this subject. In this regard, the author has emphasised two
critical theories of corporate governance- agency theory which advocates for
the separation of dual role; and stewardship theory which asserts the unity of
command in a single person. Lastly, this article suggests the implication on the
Indian Financial Market.
SEBI’s LODR Regulations : A breather for Listed
Companies ?
In
May 2018, The Security and Exchange Board of India (SEBI) brought in an amendment
into Regulation 17, SEBI LODR (Listing and Disclosure Requirements), 2015
envisaging a separation of position of chairman and executive/managing
directors,[2] with the aim to create an
independent board while in the interest of better governance and compliance.
This amendment has been captured on the recommendation of Uday Kotak Committee
on Corporate Governance,[3] and is effective from to 1st
April 2020.
According
to new rules, in 2018, SEBI has mandated that the top 500 listed companies (by
market capitalization) must ensure that the chairman of the board and executive
director are not the same.[4] Until yet 2020, 247
companies have not separated the position of chairman and executive director
including RIL, Hindustan Unilever, etc.[5] This breather has been a
stumbling stone to instil a better proposal for effective compliance. Behind
time, this scenario, of course, ends up the corporations appointing dummy or
titular chairman of the board, where CEOs/MDs will continue to exercise
unfettered control over with some ineffective independent director on the
board. Thus, this proposal may seem not to apply in letter and spirit where
independent leadership has been aimed for.
Kotak Committee
Recommendations: The power Conflict
Kotak Committee has recommended that a division of
power of Chairperson (leader of the board) and CEO (leader of management) would
provide effective supervision of the management and better segregation of
responsibilities and duties. In most European, British, and Canadian businesses
the roles are usually split in an effort to ensure better governance of the
company, and in turn, bring higher returns to investors. However, in certain
jurisdictions like US, this position is differently debated and corporation
have been given discretion to separate the roles. The power conflict to maintain position is
seen to a sparkling debate amongst corporations.
Kotak Committee vogue for following reasons -
a) providing a structural advantage for the board to
act independently;
b) reducing excessive concentration of authority in
a single individual;
c) clarifying the respective roles of the
chairperson and the CEO/MD;
d) ensuring that board tasks are not neglected by a
combined chairperson-CEO/MD due to lack of time;
e) increasing the possibility that the chairperson
and CEO/MD posts will be assumed by individuals possessing the skills and
experience appropriate for those positions;
f) creating a board environment that is more
egalitarian and conducive to debate.
Fostering
Independence and Transparency – A Popular Opinion
Aftermath the result of corporate scandals and the financial crisis, the reformers and, the investors have demanded functional
independence by separating CEOs and Chairman jobs – while from the parlance of
better corporate governance practices. Their argument is braced upon the agency
theory which advocates that the CEO performs the management activities of the
companies, while Chairman of the board looks into matters on behalf of the
shareholders like hiring, compensation, and remuneration, etc., thus require their
separation to instill corporate democracy.[6] Corporate democracy is an intertwined thread of
management and board, and shareholders where the board supervises the management
and report to the shareholders. Therefore, a separation would lead to better
monitoring and oversight. If one person occupies both the roles, there would be
a conflict of interest.
Besides, boards should ensure that the Chairperson
be able to commit sufficient time to carry out his or her duties and
responsibilities effectively. The duties and expected workload will vary
according to the type, scale and, complexity of the organization. This augments
that separation would lead to creating independence and transparency into
the affairs of the company. Also, the best corporate
governance system discourages the concentration of wealth on a single or a few
individuals' hands who are managing the affairs of the company. The Corporate Governance Principles of the
Organization for Economic Cooperation and Development (OECD-2015) also promotes
the separation of the role of CEO and Chairman which will lead to improving
discharging of responsibilities of the board under principle VI –
Responsibilities of the Board Item E.[7]
At
the outset, in India, where large-scale family-promoters run businesses is to
be frowned upon where the transition from generation developed business leadership
been witnessed. In India, severe financial irregularities have been observed in
family-run businesses like in Satyam Scam. Thus, arguably bestowing power to an
individual might lead to no flourishing governance, and maybe the rights of
shareholders would have been prejudiced.
Does Separation ensure Independency?
The
critics of this concept believe that mere separating a role or position
wouldn’t ensure independence, both theoretically and empirically.[8] Arguably, having an
independent chair does not necessarily seem to have an independent mindset, and
in any case, a wise-CEO would have discussed disagreement with Chairman prior
to going into a meeting. This would lead an anomalous result which is to be
perceived by separating the roles. In one of the studies conducted in US
Companies, despite a large number of separations between the position of CEO
and Chairman of the board, it has been observed that only 16% of people have
been observed as true independent chairman.[9] Thus, there is a shred of
weak evidence[10]
that independence and effective governance would increase. However, in
total, 13 studies have been conducted, to determine whether separation
would lead to independent board leadership and effective governance. Out of 13,
ten inclined to show that separation has either positive or no effect on the
performance of company or firm,[11] and only two have shown a
negative consequence of it.
Admittedly,
they have advocated stewardship or administrative theory which argues that the
benefits of separating the chairman and CEO roles are not free from any blot
and would suffer from a ‘unity of command’ in an individual which is essential
for effective management and decision making. It advocates that the person must
have clear and unambiguous authority, to which management can effectively
report the affairs of the company. The same has been recently relied on by Rishabh
Premji, the chairman of Wipro who had requested to remain on the executive
position.[12]
However, the board of Wipro has stated that ‘We will compile with SEBI
Regulations’.
Analysis
: Implications of Indian Financial System
According
to one of the studies,[13] that apart from the structural
attribute of the boards, the behaviour of the boardroom - what actually happens
in the boardroom reflects the effectiveness of leadership. Thus, we must focus
on behavioural studies of the board, rather a clinging separation between the
roles. The specific industry knowledge of separate chairs, their leadership
skills, and how they shape board process has received scant attention, and the
pay-off must be to incorporate all these factors. The structural attribute of the board
like managing dissent, conducive boardroom discussion and facilitating the synergy between board and management must be incorporated in policy or
regulations.
In
Companies Act, 2013, there is no clear line of segregation of roles and
responsibilities of CEO and Chairman and Companies have given leverage to
decide the roles and responsibilities according to their framework based on
their organizational setup and size of the company. If the CEO-Chairman
relationship is strong, which in turn provides company benefits from having
twice as much from the talent at the top, each having distinct leadership
roles. Combining the roles does have its advantages, such as giving the CEO
multiple perspectives on the company as a result of their multiple roles, and
empowering them to act with determination. This, however, avows a leeway into
CEO’s act may lead to a way for corruption and scandal. However, the
enduring problem is with the implementation – as Corporation hasn’t implemented
it and likely to appoint mere dummy/titular chairman of the board with some
ineffective independent director.
In
India, the listed companies are being seen to be powered by a single shepherd
that i.e. CEO. Corporation may unlikely to implement the law in letter and
spirit, which again pose a peppering question: Does Independent Board
Leadership exists? Thus, the regulator must seek to create an additional
qualification for the appointment of chairman and relationship with the
existing CEOs to implement the law in its letter and spirit.
Conclusion
From
the standpoint of organizational prosperity, it is pertinent that companies to
be managed effectively for long-term, and to create a sustainable value for
shareholders. Separating the two positions strengthens the overall integrity of
the company and encourages an environment of teamwork, communication and mutual
respect.
[7] OECD (2015), G20/OECD Principles of Corporate
Governance, OECD
Publishing, Paris. http://dx.doi.org/10.1787/9789264236882-en
[8] Roshima H. Said, Zuraini Yaacob, Norasmila Awang, Jurina Ismail,
Kamaruzaman Jusoff, “Chief Executive Officer duality and company performance: A
case of Malaysian companies,” Interdisciplinary Journal of
Contemporary Research in Business, 1(6), 2009, 120-142 at 124.
[10] B. Ram Baliga, R. Charles Moyer & Ramesh S. Rao, “CEO
Duality and Firm Performance: What’s the Fuss?” Strategic Management
Journal, 17, 1996, 41-53.
[11] CEO Duality, Succession,
Capabilities and Agency Theory: Commentary and Research Agenda Author(s): Dawn
Harris and Constance E. Helfat Source: Strategic Management Journal, Vol. 19,
No. 9 (Sep., 1998), pp. 901-904 Published by: Wiley Stable URL: https://www.jstor.org/stable/3094091
Accessed: 06-01-2020 13:08 UTC
[12] Wipro's Rishad Premji may lose
executive chairman role due to new rules, Economic Times, Jan 2, 2020.
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