ELP Podcast Series: Directors and the Law- An Insider's View

[MUSIC] Hello everyone. I'm Vidhan Bish, Associate at Economic Laws Practice, and I'm joined today by Mr. Sir Jain Silva, who's the founder of Economic Laws Practice. And today we'll be diving into a discussion on directors and the law. And if you are an upcoming independent or non-executive director or thinking about joining a board, I think this conversation is for you. So, welcome sir. >> Thank you Vidhan. I am a co-founder along with many others. Let me start with a little uncomfortable proposition. Most directors don't get into trouble for what they do. They get into trouble for what they allow. Let's just go back in history. We've all grown up with Mahabharat, with Ramayana. You may remember, Bhisham, what was he? He was silent when the dice was rolled and he allowed the game to be played and lost the kingdom. He didn't throw the dice himself, but his presence and inaction allowed the injustice to proceed. Similarly, over the last decade, the Indian boardroom has changed. The Companies Act and an increasingly assertive sebi have quietly redrawn the role of a director. Not from a general advisor, but now to an accountable fiduciary. So, the question is, when things go wrong, the question regulators and courts normally ask, is not was this illegal? The sharper question that boardrooms and regulators ask, is where was the board? So, you can ask me, yeah, as to what the law expect from you. >> Right, so I think the very basic introduction, the listness could get this. What exactly does the law expect from the directors? And does it vary depending on the role? So, very good question, Bhaydan. There is a popular misconception that if you are not in the day-to-day management, your exposure is limited. It sounds reasonable, but that's not how the law works. The law actually doesn't care whether you're executive or non-executive. Both are under sebi and under the companies act. The directors, whether independent or non-executive, owe the same core duties to these stakeholders. And what are they? They act in good faith to exercise due care, skill, diligence, apply independent judgment, not simply endorse management's view, and protect minority shareholders. And now, under 166, even other stakeholders, like employees, creditors, and the environment. There is, however, most lawyers will tell you, there is a golden section which they quote, call section 149, subsection 12. And what it tries to do, it doesn't eradicate, it tries to limit directors' liability to acts that occurred with their knowledge and consent, or where they did not act diligently. But read very, very carefully, that cow out is narrow. If something went through a board process, you were in the room, and you did not ask the obvious questions, you are very much in the zone of liability. A useful way to think about it is, you sign up for the whole movie, not just the scenes you personally directed. That's exactly what I think the law expects from you. Thank you, sir. I think that was a very good description. But, so it's just not misconduct that would lead you in trouble. Apart from obvious misconduct, how do directors usually find themselves in legal and regulatory trouble? There are some very common occurrences, okay? The law today punishes not only misconduct, of course it punishes misconduct, but you never find that so easily. What it does is it punishes you for your inattention and it dresses up that word as trust. The real risk is not dramatic. It's the quiet moments. And what do I mean by when I say the quiet moments? That related party transaction that was so called within limits, it sailed through without probing the benchmarking. There was a whistleblower complaint that was noted, but not really pursued. The board meeting where the papers were thin, the answers thinner, but yet the resolution was unanimous. Those are some of the failures that government is trying to address, whether you look at Satyam, whether you look at ILFS, whether you look at DHFL. In all those cases, the spotlight, where does it eventually turn? It turned to the board and its independent directors. The consistent question was given the volume of red flags and the scale of this problem, how did this pass through any board process audit committee without robust challenge or descent? Even when you look at study some of Sabis orders and I'm not saying they're all right, they rarely accept something where your defense is, I relied on management as a complete defense. They don't accept that. They say, did you insist on information? Did you probe inconsistencies? Did you record your concerns? If the minute show a pattern of mechanical approvals and no questions, that's a problem. Remember in corporate law, unlike maybe internal law, silence is rarely neutral. If the minute say a resolution was passed unanimously and you were present, you are deemed to have agreed unless your descent is clearly recorded. I think that's very insightful, sir. So we hear a lot of these words when we talk about directors, duties, liabilities, compliances. So for those of our listeners who may not be aware of the legal meaning of these words, could you explain what it means in plain English? In simple English, I think you need to remember three words, duty, liability and compliance. The last one to me being very important behavior. So what is duty? Duty is what I told you, what the law expects you to do. Act in good faith, use care, independent judgment, safeguard the interests of the company, minority shareholders, etc. What is the liability? Liabilities, what happens if you don't do your duty. Under the Companies Act and in some other cases and under other laws that may be relevant to that particular company and the sector in which it is operating, they can, you can face penalties, disgagement and in the rarest of cases, imprisonment. But one thing that gets hit before a final order arrives is your reputation. Your reputation will almost certainly take a hit. When I come to the last, why did I say it's the most important? Because behavior is now how you close the gap between duty and liability in real life. It's how you read board papers, how you respond to discomfort, how you use all these committees or dates, stakeholders, NRC and how you document what you did, what does this mean on a practical level without? You scrutinize related party transactions, ask for the underlying valuation, benchmarking fairness opinions and the alternatives. Every good company has this and to my experience, they have already been through this process, but it's good for you to see it, just good governance. Whenever you get a whistleblower, complaints, don't take it lightly. Cyber incidents, regulatory notices, don't treat them just as operational irritants. They have bored level risk issues. There is a risk register, pay attention to that and see how you address it. And lastly, I think this is becoming more and more important, is test the financial controls and risk management systems. They're not just to be noted, test them, type in again, test them. And that's when you'll find that either you are on a good wicket or you need something that needs fixing. That's some very good and strong advisor. So if you have to sum up all these findings and give up five practical habits that a director should build to both protect themselves and also to genuinely add value to the bold, what would those be, sir? See, somebody will always approach you. It is very rare that a director goes to a company. and say, "Please make me a director." I think that's not the right way to do things. When you are approached to your diligence, you read the annual reports. See if there are audit of qualifications, related party disclosures, any major litigations. If you don't feel that there is enough transparency, it's not going to get better when you join. So be careful of that. Fix the basics. Ensure the law is trident, but you must ensure that you have complete information in a timely manner. You can't expect to read 150 pages three days before the board meeting and understand everything. And I would say use AI to the extent it gives you the privacy and the ability of speed. Use minutes as your shield. Why do I say as your shield? Because if you ask hard questions, if you give only conditional approval, if you dissent it, make sure it's accurately minited. There's no harm in dissenting. There's no harm in asking the hard questions. In fact, most good promoters expect you to bring that value to a board meeting. They want to ask, they want you to ask the tough questions, which they may have ignored or they may have a CEO you know, and the relationship between someone who's there full time versus you coming four, five, six times a year is slightly different. You can afford to have that hard question and answer session. Treat your DNO policy insurance. Don't treat it as a footnote. Use it. It's a lifeline. People have been scarred. Look at all those independent directors who have lost a lot of their reputation. Pain. Huge fees incurred huge expenses only to get them in cleared. If they had a good DNO insurance policy, maybe this would have been less of a headache. So check that policy and my practical advice is run it between two or three other insurance brokers so that they tell you exactly what's not covered because what's not covered becomes the important bit that you need to try and bridge. And sometimes your duty is to say no, this cannot go through on this basis. Go back, redo it and come back to me after all these questions are answered and we'll really look at it. We're not saying no. So have that confidence and record those reasons. And I suppose the one question that you have to ask which is which is more of conditioning and it comes with experience. You are not out there to become obstructed. You are there to be affected. You have to be supportive towards the companies doing but not just compliant, not taken for granted. And you have to be independent but not irrelevant. So coming back to our story of mythology of Amarad Ramayana, try and be the Krishna who's advising her to try and be that kind of advisor. If there's one thing I would take away from this episode to be wait to the next is that the law will judge you not only by what you knew but by what you should have known but chose not to ask about. Your greatest asset in the boardroom is not your CD or your network or your network or your past title. Many have that. It is your willingness to pause a meeting and ask an uncomfortable question and to have that question properly recorded and answered. If you're prepared to invest that time, promoters will love you for that. Put your reputation on the line and be both coach and whistle. When needed, then being a director can be one of the most meaningful roles of your professional life. Thank you for listening and with that, to all our listeners, viewers, whoever they are, stay curious, stay diligent and we'll see you in the next episode.