The government is considering a purge of company board rooms to remove independent directors who haven’t played the oversight role required of them, the latest instance being the debacle at Infrastructure Leasing & Financial Services (IL&FS). The recommendation emerged from an internal review of the Companies Act by the ministry of corporate affairs, a senior official said.
The exercise will involve changes to the Companies Act that will allow the government to evaluate independent directors and then, based on findings, asking the National Company Law Tribunal (NCLT) to dismiss them. Those disqualified under this process won’t be able to hold a board position in any company for five years, according to the proposal.
“The scrutiny will mostly be on the basis of financial integrity, absence of convictions or civil liabilities, competence, good reputation, efficiency and character,” said the official cited above. “The detailed guidelines would be worked out later.” The law currently doesn’t have any provision that allows the government to look into the eligibility of directors although Reserve Bank and Securities & Exchange Board of India stipulate “fit and proper” conditions for persons in those roles. The Companies Act only requires “a person of integrity and” one who “possesses relevant expertise and experience”. If the proposal is accepted, the government will initially implement the regime for companies with a high “public interest” quotient, the official said without elaborating.
“Application under Section 241 for a prescribed class of companies will be filed before the principal bench of NCLT,” said the internal report of the government, which ET has seen.
“If NCLT finds that any person is not fit and proper then such person will be debarred from taking any board positions or any other office connected with the conduct and management of affairs of any company for a period of five years,” the internal report said.
Section 241 of the Companies Act allows minority shareholders to hold majority shareholders to account for mismanagement or actions that are detrimental to public interest.
Debt defaults by IL&FS, which owes a total Rs 91,000 crore, sparked panic in the markets that engulfed other NBFCs. The government was forced to oust the board for failing to detect the brewing crisis and replaced it with its own nominees.
The move to change the Companies Act will act as a corrective, said Pavan Kumar Vijay, managing director of advisory firm Corporate Professionals.
“It will have a significant impact as it will bring more accountability in the position of directors and keep them on their toes as any adverse order will directly impact their credibility. But at the same time it is also important that NCLT takes such decisions on objective parameters,” he said. “Directors will also be vigilant in accepting new positions and existing directors might reevaluate their existing directorships.”
Apart from IL&FS and the companies that have been affected in its wake, the corporate affairs ministry is adopting a tough stance on boards as the bankruptcy process gets to grips with the bad-loan burden at banks, many of which are being forced to take haircuts.
The move is also aimed at the removal of ‘friends of the family’ that promoters sometimes pack their boards with to ensure that their decisions aren’t questioned, a person familiar with the development told ET.
The report has also proposed that assets of entities struck off by the Registrar of Companies under Section 248 should be vested with the government.
“Vesting properties will be given back to the company in case of restoration except for the properties disposed of. In that case the proceeds will be transferred back to the company,” the internal review report recommended.
There is currently no such provision, said Vijay. However, “any proposal to vest properties of the company with the central government does not seem to be appropriate”, he added.