Monday 3 September 2018

Whether examination for aspiring Independent Directors serves any logical purpose?


Background: Government plans to have examinations for individuals who want to become independent directors (‘IDs’) as part of bolstering the corporate governance framework, according to Union Minister P P Chaudhary. While there are stringent provisions under the Companies Act, 2013 to ensure good governance standards, the roles of IDs has come under the scanner in certain instances of corporate misdoings. Also, at a time when the Government is making efforts to make its role minimal in the affairs of corporates, the role of IDs is more vital. Asserting that the Government is committed to improve the fabric of corporate governance in the country, Chaudhary said strengthening the role of IDs in the affairs of companies is one of the steps in that direction. “The requirement with respect to IDs to have minimum reasonable qualifications and a certification course/ exam are also being considered,” Chaudhary told in an interview. [Key excerpts from ET News story].

Provisions under Companies Act, 2013 & SEBI Listing Regulations: Presently, there is no provision in the Companies Act and SEBI Listing Regulations of an examination for individuals who want to become independent directors.

Databank of independent directors: Section 150 of the Companies Act relates to ‘Manner of selection of IDs and maintenance of databank of IDs’ [effective from April 1, 2014 but not practically implemented]. Pursuant to the provisions, ID may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as IDs, maintained by any body, institute or association, as may be notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors. The responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an ID shall lie with the company making such appointment.

Recommendation of the Kotak Committee on Corporate Governance: The Kotak Committee noted that the Companies Act provides general clauses pertaining to training, induction, etc. of directors and SEBI Listing Regulations requires familiarization of IDs relating to certain specified matters. However, specific provisions on induction training and periodicity of continuous updation are lacking. Based on this background, Kotak Committee recommended: (i) A formal induction should be mandatory for every new ID appointed to the board; and (ii) Formal training, whether external/internal, especially with respect to governance aspects, should be required for every ID once every 5 years, the onus of which shall be on the director. However, such recommendation was not accepted by the SEBI.

Moot question is whether examination for aspiring Independent Directors serves any logical purpose? Considering the examination for aspiring Independent Directors, in my view, the entire thrust is on ‘examination’ and not ‘training’. The outcome of this would be ‘well-qualified IDs’ but not ‘well-trained IDs’ or ‘capable IDs’. The examination would be in MCQ format covering general syllabus relating to law, finance, accounts and management (just guessing, based on on-going trend). However, in practice, an ID has to confront the challenges w.r.t. disclosures, compliances, fiduciary duties, approval process w.r.t related party transactions, appointment of auditors, approval of financial statements, etc.

Considering the dynamic changes in law (Companies Act, Securities Law, IBC, Foreign Exchange Laws, GST, etc.) one-time examination would not serve the real purpose in the long run. The IDs need ‘training’ and not ‘examinations’. The trainings should be from the perspective of the industry specific laws, company’s practice, company’s implementation process, regulatory updates, recent case laws (India and abroad), global practices, peer-practices etc. All these practical and relevant aspects will not be part of the examination which is proposed by the Government.

The Government, in my view, shall re-consider this proposal. The Kotak Committee on Corporate Governance has made some important and relevant recommendations which should be considered by SEBI and MCA.

Sunday 12 August 2018

Whether Related Party Transactions really need a relook?

By Gaurav Pingle, Company Secretary, Pune
(E-mail id: gp@csgauravpingle.com)

Background: Recently, an article was published in Economic Times on the topic of Related Party Transactions (titled, Related Party deals in Companies Act need a relook). The article was in relation to the Annual General Meeting of Tata Sponge Iron Limited wherein the company had proposed 3 resolutions relating to related party transactions for shareholders approval. The company faced defeat on all the 3 resolutions. Out of the 45.5% non-promoter shareholders, only 12.43% participated in the voting; of which 66.76% opposed the resolution. The company faced defeat on all 3 resolutions for approval of RPTs with just 3.77% of the total shareholders opposing it. It can be said that the shareholders holding 3.77% virtually bulldozed the wishes of 96.23%.

Provisions under Companies Act, 2013 & SEBI Listing Regulations: Under the extant provisions of the Companies Act, 2013, a related party is prohibited from voting on the resolution as a shareholder where the related party is party to the contract. Whereas, under SEBI Listing Regulations all the related parties are prohibited from voting, irrespective whether the shareholder is a related party or not.

Presently, under the Companies Act, 2013 (section 184), every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed. Such director shall not participate in the meeting of the board of directors.

Under the Companies Act, 2013 (section 184), where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

Analysis: After notification of the Companies Act, 2013 and introduction of the SEBI Listing Regulations, related party transactions have been at the center stage of corporate governance arena. The crux of the entire issue is – Whether prohibition on voting by related parties is constitutionally valid? In my view, such prohibition amounts to depriving a person of his right to vote and it is a well settled principle of the company law that depriving a voting right is depriving the property, since vote is property. The shareholders vote is a right of property, and prima facie may be exercised by a shareholder as he thinks fit in his own interest. A member can exercise this right even in a manner adverse to what others may think the interest of the company, provided his vote is bona fide and contrary to public policy. It is settled in company law that right to vote attached to a share is property. In my view, neither Companies Act, 2013 nor SEBI Listing Regulations shall take away such right of a shareholder (whether as a promoter or non-promoter, whether related party or not).

I am of the opinion that the Companies Act, 2013 and SEBI Listing Regulations shall enhance the disclosure requirements for such related party transactions. Such disclosures can be part of Explanatory Statement to the Notice of the general meeting. The law may also direct the companies to give a public notice / advertisement of such related party transactions. The law may also direct the board of directors to provide a declaration that such related party transaction is in the interest of the company with requisite reasoning. The declaration may also contain a provision that all the necessary disclosures by the directors have been made to the shareholders. In my view, not all RPTs are against the interest of the company. Some RPTs may be a requirement of the company to focus on its core business activity. Better disclosures and transparency by the board of directors will also eliminate the possibility (which is now a reality as well!) of majority shareholders being at the mercy of minority shareholders.

In my book on Related Party Transactions, in one of the Chapters, I have compared the RPTs provisions under the Companies Act, 2013 and SEBI’s Listing Regulations. There are 26 comparative points on the provisions relating to RPTs. The other RPT provisions includes scope of related party, type of specified transaction, ‘pricing parameter’, reference of ‘ordinary course of its business’, Audit Committee’s approval, recommendation to the board of directors where RPT is not approved by Audit Committee, ratification of RPTs by Audit Committee, material RPTs, trigger point for shareholders’ approval, provisions relating to royalty payment, annual disclosures, etc. The regulators shall harmonize the said provisions which will ultimately address the real issues in RPTs.

Book on RPTs can be purchased from: Flipkart & Amazon .

Thursday 9 August 2018

Milkha Singh, The Race of My Life






Milkha Singh, popularly known the Flying Sikh, is an inspirational story of India’s most iconic male athlete. Bhaag Milkha Bhaag is a biographical film that depicted his early life and career. The book ‘The Race of My Life’ is an autobiography of the Flying Sikh. I feel that the book is more inspirational than the movie. This write-up / blog is a review of the book ‘The Race of My Life’. It captures the real life of Milkha Singh, his challenging experiences and inspiring moments. Wherever necessary I have given the excerpts of his life-time experience, which no one can explain better than him. It is a 150 page book divided into 20 Chapters. He has explained the pre-independence era, partition time which had a very significant impact in his life, his life before and his life after army, his experiences as an athlete and most importantly his PASSION for running! The book is beyond a ‘self-help book’. It is a must read for any person who wants to achieve any goal in life. The book will definitely establish self-belief in a person.

The Foreword for the book is written by Shri Rakeysh Omprakash Mehra (Director, Bhaag Milkha Bhaag) and Introduction to the book is written by Milkha Singh’s son – Jeev.

In the half-page Prologue, Milkha Singh stated that “When I reflect upon my life I clear see how my passion for running has dominated my life. The images that flash through my mind are those of me running … running …. Running…
·                    Sprinting from one shady patch to another to escape the blistering heat of the sun on my journey to school,
·                    Feeling the massacre on that fearsome night when most of my family was slaughtered
·                    Racing trains for fun,
·                    Outrunning the police when I was caught stealing in Shahdara,
·                    Leaving everyone behind in my first race as an army jawan so that I could get an extra glass ofmilk,
·                    Surging past my competitors in Tokyo when I was declared Asia’s Best Athlete,
·                    Running in Pakistan and being held as ‘The Flying Sikh’,
Each of these moments brings back bittersweet memories as they represent the different stages of my life, a life that has been kept afloat by my intense determination to triumph in my chosen vocation.”

The Prologue really moved me and made me more serious about reading the book at one go. J

Faith on his Coach
(Morale boosting attitude and clever strategies that Dr. Howard gave me, equipped me with the confidence that I badly needed)

In almost all chapters on his running, Milkha Singh has touched upon the contribution of his coaches in his career. He has explained the way his coaches mentally prepared him for every match. The American Coach, Dr Howard had accompanied the Indian Team[1]. About Dr. Howard, Milkha Singh has stated that “He was an outstanding trainer, who was very well acquainted with international training patterns and techniques. He was also very astute and could easily judge the strengths and weaknesses of the other athletes. For an entire day he mentored me, giving me pointers on what to expect. More than anything he was trying rid me of my inferiority complex and instill self belief. I had convinced myself that there was no way that I could be among the six finalists, let alone win a gold medal. What chance did I have against superbly fit professionals Malcolm Spence from South Africa, George Kerr from Jamaica, Keven Gosper from Australia, Terry Tobacco from Canada and John Salisbury from England.
However, because of Dr. Howard’s motivation and advice, I won heat after heat and effortlessly reached the finals. The night before the race, Dr. Howard reiterated the tips he had drilled into me. He revealed that Spence had more stamina than speed, and that I should stick to me own style of running the 400 mts. race, i.e. to start in top gear. He emphasized that I must not start slowly, that I must maintain my speed for first 300 meters, and then give it my all in the last 100 mts. He said that if I ran first 300 mts. at full speed, Spence would do the same, although that was not his running strategy.
The morale boosting attitude and clever strategies Howard gave me, equipped me with the confidence that I badly needed. I started believing that I could be the best. Another constant motivation was a burning desire to do well for the country – I was well aware that my good performance would lead to the glory of India.”

Life-time title ‘The Flying Sikh’
(Athlete running before you is Milkha Singh. He does not run, he flies! His victory will be recorded in Pakistan’s history)

Soon after the National Games at New Delhi, India received an invitation from Pakistan Government for the Indo-Pak Sports Meet. About this visit, Milkha Singh stated that “What an ironic twist of fate. I was returning to the land where I was born, where I had lost my home and most of my family in the inhuman savagery that followed Partition”. Milkha Singh didn’t want to go, but Pandit Nehru intervened, saying that this visit was for the honour of country and that Milkha Singh was going there as an ambassador of India.

Just before the race at Pakistan, Milkha Singh has described the entire event, as “There was pin drop silence as we stood at the starting line waiting for the race to begin. The silence was oppressive. The starter, dressed in white shirt and trousers, a red overall, white peaked cap and black shoes, stood on a table behind us. He shouted, ‘On you marks’, fired the gun and the race begun. The audience suddenly awoke and began to chant: ‘Pakistan Zindabad: Abdul Khaliq Zindabad.’ Khaliq was ahead of me but I caught up before we had completed the first 100 mts. We were shoulder to shoulder then surprisingly, Khaliq seems to slacken and I surged ahead as if on wings. I finished the 200 mts. about 10 yards ahead of Khaliq, clocking 20.7 seconds that equaled the world record. My coach, Ranbir Singh, the manager and all my team members leapt to their feet in jubilation. I was embraced, thumped on the back and then lifted on to their shoulder as they expressed their happiness both vocally and physically …. After the race, I ran a victory lap of the stadium, while loud speakers announced: ‘The athlete running before you is Milkha Singh. He does not run, he flies! His victory will be recorded in Pakistan’s history and we confer the title of ‘Flying Sikh’ on him’. It was General Ayub Khan who coined the titled ‘Flying Sikh’, when he had congratulated me, saying ‘Tum daude nahi, Udhey ho’ – You do not run, but fly! As I passed in front of the woman section the ladies lifted their burqas from their faces so that they could have a closer look at me – an incident that was widely reported in the Pakistani press. And so, with this victory I became the Flying Sikh. A title that soon became synonymous with my name all over the word.

Once an Athlete, Always an Athlete:
(Coach has the power and influence to build a sportsperson’s stamina, prowess and self-confidence)

In this Chapter, Milkha Singh has touched upon the sports industry and selection criteria at a national and international level. He has raised and addressed few critical issues in the selection process. He has mentioned about the international level of coaching, sports infrastructure and scientific training methods. He has given a reference of the productivity of National Institute of Sports. Importantly, he has discussed about the accountability in sports industry. This Chapter will be very relevant and interesting for the coaches, sports management students and sportsman.

Milkha Singh has stated that “How very different this systematic approach is from the lackadaisical manner in which we try to develop our sports people. Selection in India are adhoc, often dictated by political diktats, or through personal contacts and connections. What India needs today is a firm goal to aspire towards, and what could be more prestigious than aiming for an Olympic gold? Success in the Olympic should be our ambition but to achieve that end, we international level coaching, and for that, I would strongly recommend emulating the Chinese, right from creating a world class sports  infrastructure to spotting and grooming kids with talent. We need to overhaul our selection process and training methodology and chose on the most talented young boys and girls who show promise and have the potential to produce results. Give them professional guidance, give scientific training methods, discipline them if their standards fall, and above all, inspire and motivate them. What needs to be instill in them right from beginning is: toil hard to increase efficiency, stamina and strength, be resolute in thought, word and deed, and most important of all take pride in your performance.

But no sportsman can achieve results without an equally dedicated and committed coach. Thousands of coaches graduate from the National Institute of Sports (NIS) every year, but what has been their contribution to the development of our sports people? Unlike China, they are not held accountable if their trainees do not produce the expected results. The sad truth is that no can question them, neither the government who employs them nor the association who sponsor them, not even their students whose careers depends upon them. As a result, they have grown complacent in their jobs.”

He has compared the present sports industry scenario and coaches with his own time. He has once again appreciated the contribution of his coaches from his journey from Milkha Singh to Flying Sikh. In the book, he has stated that “The lethargy or apathetic coach can only impede the growth and progress of an athlete. If there were no Gurudev Singh, Ranbir Singh or Doctor Howart when I first started running, would I have ever achieved the success I did? No. And I will reiterate what I have always said that it is only the coach who has the power and influence to build a sportsperson’s stamina, prowess and self-confidence.”

The politics of sports
(No other sport gets the kind of exaggerated coverage that the cricket does)

In this Chapter, Milkha Singh has candidly discussed about the reasons why sports standards are declining in last few decades. He has very rightly criticized cricket. In this Chapter, he has mentioned that in India, if a sportsperson (other than cricketer) wins or breaks a record then the attention will focus on them only for a short while. He has stated that Media can change this scenario and encourage other sports in every possible way.

Milkha Singh stated that “Another reason why sports standards are declining is that over the last few decades, cricket has over shadowed every other sport in India. Open any newspaper, put on the television, and what first grabs the persons attention are the screaming headlines and images of star cricketers in action. No other sport gets the kind of exaggerated coverage that the cricket does. Besides, there is a constant cycle of cricket – test matches, one dayers, IPL and what not – taking place throughout the year, so many events that there seems to be very little respite between one match and the next. Compelling images, swashbuckling exploits, glamorous lifestyles, and most important, the money are the lures that attract young children towards the game.
Just a handful youngsters are interested in any other sports. Even if a sportsperson wins or breaks a record in any other game, be it athletics¸ hockey, boxing, wrestling, shooting, tennis or badminton, attention will focus on them only for a short while. For example, our medalist at the 2012 London Olympics, including Saina Nehwal, Sushil Kumar, M.C. Mary Kom, were greatly feted for their success when they returned. But then the attention was back to cricket once again. I think the media should help encourage other sports in every possible way.”

As mentioned earlier, this book is a must read. The book will surely instill self belief. J


[1] Reference: British Empire and Commonwealth Games, 1954. Chapter 10 – ‘Come on Singh’, Page 70