[Samurai]

Why did Byju's independent directors resign en masse? The Ken's NutGraf newsletter gave a clue.

It is because of a flaw in India's Company Act 2013, which holds independent non-executive directors liable for the fraud committed by executives and promoters.

https://www.moneycontrol.com/news/op...s-9214551.html

Even today, in the event of a default by a company, notices are sent to all directors of the relevant entity, without taking into account whether they are executive, non-executive, or independent. There is no fact-finding exercise. They are all presumed guilty, and proceeded against as a matter of general course. Often times, we have come across directors who have resigned from the board being sent notices. This usually happens when the entity from which the director has resigned has failed to file the relevant form for resignation with the ROC. Unfortunately, the directors are left unprotected, and open themselves up to prosecution. Legal proceedings are challenging financially, and mentally for all individuals.

[srh]

Originally Posted by Samurai

It is because of a flaw in India's Company Act 2013, which holds independent non-executive directors liable for the fraud committed by executives and promoters. [/url]

Wonder how that can be a flaw. They are sitting on the board in a fiduciary duty representing unrepresented shareholders & other stakeholders who shouldn't face tyranny of the promoters/ management. So when they are happy getting the sitting fees and perquisites, they are there to do a job. If they can't do their job, they face consequences. Its not that someone forced them to be independent directors.

While most focus on the loss to shareholders, there are others who face consequences of the actions of errant promoters/ management - lessors, vendors, creditors, employees etc. The independent directors are also expected to safeguard their interests

And obviously, no reason to feel for the PEs/ VCs. The lost I have seen, most of them are not there to build sustainable business. They are in the game of pump and dump.

[Samurai]

Originally Posted by srh

So when they are happy getting the sitting fees and perquisites, they are there to do a job. If they can't do their job, they face consequences. Its not that someone forced them to be independent directors.

Really? So you are not really following the situation with Byju's?

If the executive directors are not sharing information with the board, and not listening to the independent directors, what exactly they are supposed to do? Still be criminally responsible?

[androdev]

It’s not a flaw in the law. They are liable only if they have the knowledge of the wrong doings and didn’t do what’s expected of them. Some more small print exists but essentially they are not liable if they have been kept in the dark.

[shankar.balan]

Originally Posted by androdev

It’s not a flaw in the law. They are liable only if they have the knowledge of the wrong doings and didn’t do what’s expected of them. Some more small print exists but essentially they are not liable if they have been kept in the dark.

This is a very thin line which enables them to hide behind legal flim flam. Can they honestly say that these ‘Independent Directors’ were totally clueless about the misdemeanours of the Company Execs?
They were happy to partake of juicy morsels from the gravy train as long as that lasted. And the moment some warning bells sounded they were quick to jump ship - the analogy of rats deserting a sinking ship comes immediately to mind.
Never mind the legalese. What about their moral compass? Assuming of course that they had one to start with. In most of these new age instances they are distanced from the moral aspect as Pluto is from Earth.

[Samurai]

Originally Posted by androdev

It’s not a flaw in the law.

Originally Posted by shankar.balan

This is a very thin line which enables them to hide behind legal flim flam.

You guys are totally discounting one thing. It is very easy to get into break numerous regulations without any deliberate intention. I have never been a non-executive director, but even as executive director it is easy break regulations without having a clue. That is how government regulations are crafted. Heads they win, Tails you lose.

Most of the time companies get into legal trouble not because of deliberate intentions, but because the CAs make mistakes due to ignorance or indifference. Most executive teams focus on revenue generation and financing, and leave the compliance to CAs since it requires accountancy/legal knowledge. When those CAs botch up, guess who is left holding the bag? The executive team, who had delegated the compliance to CAs because they didn't understand it. I have been in the situation few times. Now you are saying even non-executive directors should join this fun party.

[srh]

Originally Posted by Samurai

Really? So you are not really following the situation with Byju's?

If the executive directors are not sharing information with the board, and not listening to the independent directors, what exactly they are supposed to do? Still be criminally responsible?

The board has committees especially the audit committee which can get information from anyone in the company. When the whole world knows about the 'almost fraudulent' accounting practices followed by Byju's for at least 8 quarters now, its specious logic to say that independent directors (or even auditors) did not have information about it. They chose to sit tight either as willing accomplices or under the fear that any action on their part would jeopardize the value of the PE/VC investments. It is only when the situation got out of control, they jumped ship and are now on a PR Spree about how the promoters 'duped' them. Question remains whether they were/are really 'independent' & 'honest'.

Originally Posted by Samurai

I have never been a non-executive director, but even as executive director it is easy break regulations without having a clue. That is how government regulations are crafted. Heads they win, Tails you lose.

Dodgy revenue recognition practices, non payment of statutory dues like EPF, related party transactions are not some esoteric regulations which can be broken out of error. These are very much willful. People in position know about them. Some are party to them while some others ignore them.

[binand]

Originally Posted by Samurai

If the executive directors are not sharing information with the board, and not listening to the independent directors, what exactly they are supposed to do? Still be criminally responsible?

Don't they have the option to quit, citing these reasons and asserting they are unable to perform their fiduciary duties under such circumstances?

[Samurai]

Originally Posted by srh

The board has committees especially the audit committee which can get information from anyone in the company.

Ok, looks like you have first hand experience in being a non-executive director. You never faced any stonewalling from the audit committees when you asked for any information? How were you sure you had full visibility to everything?

Originally Posted by binand

Don't they have the option to quit, citing these reasons and asserting they are unable to perform their fiduciary duties under such circumstances?

They do, and that is why Byju's non-executive directors quit despite representing significant investor interest. Otherwise, the government will make even them the target of the investigation.

[binand]

Originally Posted by Samurai

They do, and that is why Byju's independent directors quit despite representing significant investor interest. Otherwise, the government will make even them the target of the investigation.

Maybe I am fundamentally misunderstanding something here. If a director represents "significant investor interest" then that director is not really independent, are they?

[Samurai]

Originally Posted by binand

Maybe I am fundamentally misunderstanding something here. If a director represents "significant investor interest" then that director is not really independent, are they?

In this case he is non-executive.

[airguitar]

Now this : https://techcrunch.com/2023/08/08/mi...ev-smartphone/

I mean, I could iron my shirts with their mobile phones after a few mins of usage. Really getting into EVs ?

[shankar.balan]

Originally Posted by Samurai

The executive team, who had delegated the compliance to CAs because they didn't understand it. I have been in the situation few times. Now you are saying even non-executive directors should join this fun party.

Youre saying the CA who misinterpreted things out of ignorance or indifference ought to be culpable. I agree. Look what happened with Enron and Arthur Andersen.

I am also saying that these Non Executive Directors and Executive Directors cannot disclaim all knowledge of wrongdoing. It is fundamentally incorrect because after all they are supposed be guiding and mentoring the company and helping the investors and shareholders succeed.

Is this wrong to expect? Personally I’m just looking at it from a normal honest moral stand point. Not getting into ‘points of law’.

[Samurai]

Originally Posted by shankar.balan

Youre saying the CA who misinterpreted things out of ignorance or indifference ought to be culpable. I agree. Look what happened with Enron and Arthur Andersen.

That's the only example, isn't? What happened to the auditors in case of Satyam?

Originally Posted by shankar.balan

I am also saying that these Non Executive Directors and Executive Directors cannot disclaim all knowledge of wrongdoing.

Didn't Byju's auditor Deloitte resign saying they are getting no information from the company? If a company doesn't reveal information to Auditors, to what extent they would hide information from non-executive directors?

If the company is stonewalling on information, what are the options available for the non-executive directors without going to the press?

Originally Posted by shankar.balan

Is this wrong to expect? Personally I’m just looking at it from a normal honest moral stand point. Not getting into ‘points of law’.

Presumed guilty before evidence is available is what is the problem. If the evidence leads to the collusion of non-executive directors, then make them liable. But if the non-executive directors were helpless do anything, then I wonder why they are liable. Is being a helpless witness to a crime is considered collusion?

[Lalvaz]

Originally Posted by Samurai

It is because of a flaw in India's Company Act 2013, which holds independent non-executive directors liable for the fraud committed by executives and promoters. [/url]

Firstly, The independent directors in this instance were from a law firm (and hence legally knowledgeable) and were representing Akash, which was a subsidiary of Byju's.

Secondly, the world over, non executive directors have a fiduciary responsibility of ensuring good governance. The non-executive directors are expected to oversee the performance of the executive directors and the management. They are typically held equally accountable to such regulatory provisions, such as tax laws as the executive directors.

Thirdly, since you have pronounced it as a flaw in the Company's Act, I'm curious as to what would you propose? Would you propose an amendment to the act, totally absolving all non executive directors for any acts of fraud and connivance? If thats the case, then who would ensure that non promoter shareholders interests are protected from dishonest promoters? And how would the non executive directors justify their remuneration? What would be their roles and responsibilities?

BTW, this "flaw" is not only in India. In other countries too, non executive directors are legally liable. See links below. Maybe they are all flawed.

https://www.scmp.com/business/compan...ctors-detained
https://www.nairaland.com/315059/non...-bank-arrested
https://www.businesstimes.com.sg/com...et-s30000-each