CORPORATE GOVERNANCE: SATYAM -

ROLES AND RESPONSIBILITIES OF

INDEPENDENT DIRECTORS

Presented By:

Aditya Agrawal (09FT-186)

Lalit Gupta (09FT-075)

Mahalingam S (09FT-079)

Mudit Mishra (09FT-089)

Pranab Saikia (09FT-105)

Rishabh Jain (09FT-118)

 Contents

Contents................................................................................................................ 2
Objective................................................................................................................ 3
Scope..................................................................................................................... 3
Introduction........................................................................................................... 3
Clause 49 of listing agreement by SEBI.................................................................4
Board of Directors...............................................................................................4
Independent Director..........................................................................................5
Need of an independent director...........................................................................6
Current scenario in India........................................................................................6
A case Study: Satyam Computer Services.............................................................7
Independent Directors’ Profile............................................................................8
Roles of an independent director...........................................................................9
Recommendations...............................................................................................10
Companies Bill 2009............................................................................................11
Bibliography.........................................................................................................14
 Objective

The objective of the study is to discuss the meaning and purpose of corporate governance and
its evolution in India. The focus of the study is on the liability of Independent Directors of a company
and how it is followed or complied in Indian corporate system. As all these issues have come into
limelight after the SATYAM fraud was revealed, this study discusses the liability of Independent
Directors with regards to the case

Scope

Corporate Governance as a term comprises of many sections and dimensions. The scope of
the study is limited to the liability of Independent Directors and its interpretation in India. The study
would consider SATYAM as a case study and would discuss the liability of Independent Directors
from the facts that emerged out of SATYAM case.

Introduction

Corporate governance involves a set of relationships between a company’s management, its

board, its shareholders and other stakeholders and also the structure through which objectives of the
company are set, and the means of attaining those objectives and monitoring performance are
determined. The focus of corporate governance in India is to impose disclosures and compliance,
upgrade corporate governance practices and facilitate the integration of Indian business with their
global counterparts. After much debate and controversy, in 2006 Securities and Exchange Board of
India (SEBI) made it mandatory for publicly listed companies to follow the provisions of clause 49 of
the listing agreement.
Company is separate legal entity distinct from its shareholders. The major constituents of a
company are its members, who are the ultimate owners and its directors. It is an important feature of
the company form of business, that there is a gap between the ownership and control over the affairs
of the company. In real sense the members are the owners of a company, but it is being managed by
the directors who are elected representatives of its members, because it is absolutely necessary for it
to have a human agency called as the Company's board of directors. Directors are a group of people
comprising the governing body of a corporation. The shareholders of a corporation hold an election to
choose people who have been nominated to direct or manage the corporation as a board.
The functions of directors involve a fiduciary duty to the corporation. Directors are in
control of others' property and their powers are derived primarily from statute. Directors are
responsible for determining and executing corporate policy. For example, they make decisions
regarding supervision of the entire enterprise and regarding products and services.
Directors are bound by certain duties such as the duty to act within the scope of their authority and to
exercise due care in the performance of their corporate tasks.

Clause 49 of listing agreement by SEBI

The clause 49 of the listing agreement by SEBI deals with corporate governance and lays down
various processes and disclosures to be followed by all the companies. It tells about the board
composition, compensations, committees and management. It lays down that each company has to
submit a quarterly corporate governance report along with a compliance certificate from the auditors
to SEBI. This report should be attached to the annual report as well as the fillings to the stock
exchanges.

Board of Directors

(i) The Board of directors of the company shall have an optimum combination of executive and non-
executive directors with not less than fifty percent of the board of Directors comprising of non-
executive directors.
(ii) Where the Chairman of the Board is a non-executive director, at least one-third of the
Board should comprise of independent directors and in case he is an executive director, at least half of
the Board should comprise of independent directors.
Independent Director

The expression ‘independent director’ shall mean a non-executive director of the company who:
a) Apart from receiving director’s remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its directors, its senior
management or its holding company, its subsidiaries and associates which may
affect independence of the director;
b) is not related to promoters or persons occupying management positions at the board
level or at one level below the board;
c) has not been an executive of the company in the immediately preceding three
financial years;
d) is not a partner or an executive or was not partner or an executive during the
preceding three years, of any of the following:
i) the statutory audit firm or the internal audit firm that is associated with the
company, and
ii) the legal firm(s) and consulting firm(s) that have a material association with
the company.
e) is not a material supplier, service provider or customer or a lessor or lessee of the
company, which may affect independence of the director; and
f) is not a substantial shareholder of the company i.e. owning two percent or more of
the block of voting shares.

Some other requirements are:-

• Nominee directors appointed by an institution which has invested in or lent to the company
shall be deemed to be independent directors.
• Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine
years, on the Board of a company.
• All fees/compensation, if any paid to non-executive directors, including independent directors
shall be fixed by the Board of Directors and shall require previous approval of shareholders in
general meeting. The shareholders’ resolution shall specify the limits for the maximum
number of stock options that can be granted to non-executive directors, including independent
directors, in any financial year and in aggregate.
• Two-thirds of the members of audit committee shall be independent directors with the
chairman as independent director.
 • Minimum of two independent directors should be present in each meeting of audit committee.
• The remuneration committee, which would determine the remuneration packages of the
executive directors may comprise of at least three directors, all of whom should be non-
executive directors, the Chairman of committee being an independent director.

Need of an independent director

The Board is a group of individuals appointed by the owners of the company to run the company in
the interest of the stake holders. The representatives on the Board should run the affairs in a
transparent manner to all its stakeholders. A company is a combination of various stake holders such
as investors, employees, vendors, customers, governments and society at large. The management of
the daily affairs of the company is given to the Board of Directors. It has been observed that the
Boards have taken decisions which were against the interests of the shareholders & stakeholders and
were beneficial to only a select few. This called for independent members on the Board in the process
of adopting fair and transparent business practices.

Current scenario in India

In spite of number of provisions provided in Indian laws to preserve the independence of independent
directors, in reality, majority of the companies look at it only from the compliance point of view and
have made use of number of loop holes to suit it to their needs. In some of the listed companies
independent directors are related to each other. Some listed companies do not appoint new
independent directors after the resignation of old independent directors on the plea that they are
unable to find a suitable person. Some listed companies circumvent the provisions of appointment of
independent directors under the pretext that there are no entry and exit norms of independent
Directors in terms of age, qualification etc. Some listed companies treat nominees of financial
institutions and government as independent Directors. Currently a single independent director can be
simultaneously found to working for more than a dozen companies. Each company generally conducts
close to 10 board meetings an year, 2- 4 audit committee meetings and one remuneration committee
meeting.

Some companies follow a policy of swapping wherein a director from company A works as an
independent director in company B and vice versa. Press reports indicate that in a number of
companies independent directors did not attend a single meeting during the year. Politicians are also
known to interfere in the working of the PSU companies and hence completely tossing around the
idea of independent directors. Even the appointment of directors in PSU’s involves hectic lobbying.
The concept of independent directors being relatively new in India combined with the large number of
listed companies (with numbers increasing each subsequent year) there is also a shortage of credible
independent directors. Annual reports of many companies show that Independent Directors only fulfil
regulatory requirements but in practice act as rubber-stamp of promoters. Press reports indicate that in
a number of companies Independent Directors did not attend a single meeting during the year. In
some companies same Independent Directors continued for more than 15 years. Mr. Vijay Mallya,
chairman, UB Group is on the Boards of about 51 companies; many of these are listed on stock
exchanges. The companies conducted six to ten Board meetings in a year, two to four audit committee
meetings and one remuneration committee. Some of the prominent Independent Directors thus
attended almost 100-150 meetings in a year.

A case Study: Satyam Computer Services

Satyam Computer Services Ltd) was founded in 1987 by B Ramalinga Raju. The company offers
consulting and information technology (IT) services spanning various sectors, and is listed on the
New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock Exchange
(India). In June 2009, the company unveiled its new brand identity “Mahindra Satyam” subsequent to
its takeover by the Mahindra Group’s IT arm, Tech Mahindra.

Facts of the Case:

• Satyam was planning to acquire MAYTAS Properties and MAYTAS Infra.
• Concerns relating to the deal:
o The unrelated diversification.
o Why not to stick to core competencies.
o Why to venture into a risk.
o There was a potential conflict of interest as Satyam’s top executives had stake in the
two companies.
o The quoted acquisition price was much lower than the consultant’s valuation.
• The deal was eventually passed by the board in a board meeting held on 16th December, 2008.
• The deal could not be met because of huge protest from investors and shareholders.
• Three independent directors resigned on 29th December, 2008.

The independent directors of SATYAM were highly distinguished personalities from various fields.
SATYAM won the Golden Peacock Global Award for Excellence in Corporate Governance for 2008
and various others awards. Thus it was expected that the Independent Directors, being people of such
high reputation would perform their duties independently and with the highest levels of honesty, skill
and competence. By doing so the board increased the faith of shareholders on the board. On the other
hand, the independent directors contended that since the company was so highly appreciated for its
governance, they never suspected any foul play took placed and believed the things they were being
told. Thus, the independent directors were acting as mere stamps for the decisions taken by the
executive board. The question which arises here is when each one was so awed by the reputation of
the other party, was the board really independent?

Independent Directors’ Profile

Mangalam Srinivasan

Dr. Mangalam Srinivasan was appointed to the board of directors in July 1991 as an independent
director. She is a management consultant and a visiting professor at several U.S. universities. Dr.
Mangalam Srinivasan holds a Ph.D. in technology from George Washington University, a Master of
Business Administration degree (international finance and organization) from the University of
Hawaii, a Master of Arts degree (English) from Presidency College, Madras University and was an
Advanced Special Scholar (astronomy and physics) at the University of Maryland. Currently, Dr.
Mangalam Srinivasan is an advisor to the Kennedy School of Government, Harvard University,
Massachusetts where she is a distinguished fellow. She is a member of the board of directors of
Technology Frontiers (I) Pvt Ltd.

Vinod K Dham

As a pioneer in the technology industry, Vinod (Vin) Dham is the acknowledged “Father of the
Pentium” microprocessor. He successfully executed on his previous fund, NewPath Ventures, and is
building NEA-IndoUS Ventures on similar principles. Prior to NewPath Ventures, Vinod was the
Chairman, President and Chief Executive Officer of Silicon Spice Inc., which was acquired by
Broadcom Corporation.In 1993, Vin was named as one of the top 25 executives in the computer
industry in America. In 1999, he was named as one of the top 100 most influential Asian Americans
of the decade. In 2000, Vin was appointed to serve on the US President’s Advisory Commission on
Asian Americans and Pacific Islanders. Vin has co-authored numerous technical papers and patents.

Krishna G. Palepu

Professor Palepu is the Ross Graham Walker Professor of Business Administration and Senior
Associate Dean for International Development at the Harvard Business School. Prior to assuming his
current administrative position, Professor Palepu held other positions at Harvard Business School,
including Senior Associate Dean, Director of Research, and Chair, Accounting and Control Unit. He
is currently a member of the board of directors of Dr. Reddy's Laboratories Limited, an Indian
company listed on the New York Stock Exchange. Dr. Reddy's Laboratories is a global, vertically
integrated pharmaceutical company. Professor Palepu is also a director of BTM Corporation, a
management solutions provider focused on converging business with technology.

M Rammohan Rao

Prof. M Rammohan Rao, Dean, Indian School of Business was appointed to the board of directors on
July 29, 2005 as an independent director. Mr. Rao is recognized internationally for his research and
teaching capabilities. As a Research Fellow, Mr. Rao was associated with the International Institute of
Management, Science Center, Berlin, Germany, and the International Center for Management
Sciences, Center for Operations Research and Econometrics, University Catholique de Louvain,
Belgium. He has also conducted research at the Operations Research Group, United States Steel
Corporation, Applied Research Laboratory, Monroeville, Pennsylvania. Mr. Rao has a PhD in
Industrial Administration from the Graduate School of Industrial Administration, Carnegie-Mellon
University, Pittsburgh, Pennsylvania, USA. He has completed two Masters Degrees - Master of
Science in Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania, and
Master of Engineering (Industrial), Cornell University, New York. Mr. Rao has won several
prestigious awards conferred on him by leading institutions across the world. Mr. Rao also sits on the
Boards of Krishna Fabrications Pvt. Ltd., MosChip Semiconductor Technology Ltd., APIDC Venture
Capital, Bharat Electronics Limited and Mazagon Docks Limited.

Roles of an independent director

The Indian law does not have any specific provision regarding the duties of an independent director.
Although clause 49 of the Listing Agreement makes provisions regarding independent Directors, one
does not find any specific provision regarding the duties and obligations of an independent Director.
The role of independent director is that of a conscience keeper. Generally an independent director is
expected to perform the fiduciary duties and the duty to exercise care and skill. They represent
divergent viewpoints on issues brought before them. They exercise independent judgment on the
issues of strategy, performance and standards of conduct. They should have the courage to ask the
uncomfortable questions. They should be able to resist the influences, luring and pressures faced by
them. They should be independent in their judgment on the issues of strategy, performance and
resources, including key appointments and standards of conduct. They also ensure that proper and
effective monitoring system exists in the company. He must act honestly with a degree of diligence
and skill. Broadly the responsibilities of an independent director should include the -
a) Duty to exercise powers in accordance with the company’s constitution
b) Duty to promote the success of the company
c) Duty to exercise independent judgment
d) Duty to exercise reasonable care, skill and diligence
e) Duty to avoid conflicts of interest
f) Duty not to accept benefits from third parties
g) Duty to declare interest in proposed transactions or arrangements with the
company.
h) Duty to protect the interests of minority share holders

But it doesn’t mean the independent directors should be held directly liable for any act or omission. It
is not possible for an independent director to check and verify, each and every information presented
by the board. It would defeat the motive of independent directors as it will make it difficult for the
companies to find the right person who is ready to take the risk. Independent directors cannot be
expected to act as investigative agencies. In the absence of grounds for suspicion, a director is
justified in trusting officials to perform duties honestly. The independent directors are not expected to
personally go and check bank balances or the accounts. It is normal for the audit committee and the
independent directors to accept the figures presented by the management. It is the responsibility of the
board and the internal and external audit agencies to sure that the facts and figures presented are
accurate. However if an independent director is directly involved in or responsible for any breach or
violation or has wilfully defaulted or has shown gross negligence towards his duties then he can also
be held liable.

Recommendations

1. A statement from the resigning director should be mandated by regulation so there is

transparency as far as investors and other stakeholders are concerned.

An outcome of the Satyam episode is that it seems to have instilled fear in the minds of
independent directors in India. Media reports say that “more than 500 directors have quit the
BSE-listed company boards since January 1 this year … citing reasons ranging from ill-health
to work pressures”. It is difficult to establish the correct reason. It would be better if
 independent directors are more transparent about the specific reasons for their departure than
to offer the standard lines.

2. SEBI should nominate independent directors. If they have a right to regulate, then surely they
have a right to even suggest the appointment of certain directors.

3. There should be a limit on the no. of companies on whose board a person can be an
independent director. This would make sure that the person spends adequate time in each
board.

E.g.: Mendu Rammohan Rao, an Independent Director on the Satyam Board, was on the
board of 7 companies as Independent Director and on 3 companies’ advisory board.

Companies Bill 2009

Clause 132 provides for the requirement of a minimum number of three directors in the case of a
public company, two directors in the case of a private company, and one director in the case of a One
Person Company; and a maximum of twelve directors, excluding the directors nominated by the
lending institutions. One of the directors shall at least be a person ordinarily resident in India. (182
days in a year). Every listed company should have at least one-third of the total number of directors as
independent directors.

132.
(5) “Independent director”, in relation to a company, means a non-executive director
Of the company, other than a nominee director,—
(a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(b) Who, neither himself nor any of his relatives—
(i) has or had any pecuniary relationship or transaction with the company, its holding, subsidiary or
associate company, or its promoters, or directors amounting to ten per cent. or more of its gross
turnover or total income during the two immediately preceding financial years or during the current
financial year;
(ii) holds or has held any senior management position, position of a key managerial personnel or is or
had been employee of the company in any of the three financial years immediately preceding the
financial year in which he is proposed to be appointed;
(iii) is or has been an employee or a partner, in any of the three financial years immediately preceding
the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;
(iv) holds together with his relatives two per cent or more of the total voting power of the company; or
(v) is a Chief Executive or director, by whatever name called, of any nonprofits organisation that
receives twenty-five per cent. or more of its income from the company, any of its promoters, directors
or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting
power of the company; or
(c) who possesses such other qualifications as may be prescribed.
Explanation.—For the purposes of this section, “nominee director” means a director nominated by
any institution in pursuance of the provisions of any law for the time being in force, or of any
agreement, or appointed by any Government, to represent its shareholding.
(6) An independent director shall not be entitled to any remuneration, other than sitting fee,
reimbursement of expenses for participation in the Board and other meetings and profit-related
commission and stock options as may be approved by the members.

Clause 133 Every proposed director shall furnish his DIN (Director Identification Number), a
declaration that he is not disqualified to become a director and a consent to hold office as director
before he is appointed. Further in case of independent directors, the Board shall give a report in the
General meeting that every independent director appointed fulfils the conditions specified for his
appointment.

Clause 154 sub-clause 3 states that at least one independent director, if any, should be present in the
Board Meetings. If not then any decision taken will have to be ratified by at least one independent
director.

Clause 158 states that the Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority and at least one director having knowledge of financial
management, audit or accounts and the Chairman of an Audit Committee shall be an independent
director.
The Remuneration Committee shall consist of non-executive directors as may be appointed by the
Board out of which at least one shall be an independent director.
The Remuneration Committee shall determine the company’s policies relating to the remuneration of
the directors, including the remuneration and other perquisites of the directors, key managerial
personnel and such other employees as may be decided by the board.
Bibliography

1. http://mca.gov.in/Ministry/acts_bills.html
2. http://www.nfcgindia.org/library.htm
3. CLA plus - Corporate & Business Law Encyclopedia
4. www.moneycontrol.com
5. http://www.satyam.com/about/awards_achievements.asp
6. www.thehindubusinessline.com
7. www.financialexpress.com
8. http://www.sebi.gov.in