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Wary of fraud, independent directors now probe before they leap

Independent directors fear that they may be implicated in a fraud even in cases where they have no visibility as independent directors are increasingly held personally liable for actions of promoters and management, experts said. Many even take le...

Nov 23, 2019, 07.38 AM IST
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MUMBAI: An independent director who serves on the board of a major insurance company and a bank recently received an offer to join the board of one of India’s largest infrastructure companies.

He rejected it, after taking opinion from a lawyer and checking out a basic due diligence report on the sector. “There were a few red flags that I was not comfortable with, and it’s not worth the risk for Rs 10 lakh per annum,” he told ET.

A former senior partner of a multinational recently stepped down from the board of a non-banking finance company after taking the opinion of an outside expert. “I wouldn’t accept a gems and jewellery client for our audit business when I was working with the firm (his former employer),” he said. “So, when I found the NBFC where I was serving as independent director has substantial exposure to the sector, it was a definite red flag.” He asked a small firm to run through publicly available finances of the NBFC and give an opinion. Worried that they may be sitting on a potential corporate fraud time bomb, independent directors are increasingly reaching out to lawyers, forensic experts and audit experts to find out more about the companies and their financials.

The fear is that they may be implicated in a fraud even in cases where they have no visibility as independent directors are increasingly held personally liable for actions of promoters and management, experts said. Many even take legal opinion before taking a stand at board meetings as a safeguard, they said.

“Many independent directors want to weigh in every decision and reach out to obtain legal opinion to know if they can be implicated by law on the basis of the stand they take or do not take in a board decision,” said Zulfiquar Memon, managing partner a law firm MZM Legal.

With a government-appointed panel coming out with the amended Companies Act with absolutely no relaxations for independent directors, more resignations are likely after the estimated 291 from Nifty 500 firms in January-September, as ET reported on November 20.

Sudip Mahapatra, partner at law firm S&R Associates, said most people do reputational due diligence and general checks before they choose to be on the board of a company as an independent director.

“Now, with the changing regulatory and business environment, most people are Independent directors prefer firms that are reputed, MNC subsidiaries or where they know promoters choosing to be on the board of either reputed professionally-managed companies, subsidiaries of MNCs, or a company where they know the promoter personally for a long time,” he said. “This is one of the ways to mitigate any potential future risk of being on the wrong side of the law.”

There is fear that independent directors could face legal brunt even in cases where they were unable to point out some red flags in a company that has faced a fraud, insiders said.

Talking to ET on condition of anonymity a former independent director on the board of an IL&FS company said, “They (management) came out with detailed reports before board meetings; they were so systematic, and all numbers ticked all boxes. We also had the comfort that government held stake in the company through LIC and SBI and that government nominated board members were present when decisions were taken.”

Yet, this board member, along with several others, has been named by the Serious Fraud Investigation Office in the charge sheet.

“Everyone is wise in hindsight,” he said. “But trust me, there was no way for us (independent) directors to crosscheck allegations levelled by agencies back then.”
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