In December 2019, three independent directors of the ill-fated PMC Bank – Jagdish Mookey, Mukti Bavisi and Trupti Bane – were arrested.
Mookey was a member of the audit committee, while Bavisi was a member of the loans and advances committee. Bane was a member of the loan recovery and the loans and advances committee.
As they were independent directors, there are several issues that need to be addressed.
The first is that as independent members of the board, they have no part in the day-to-day running of the bank. As a result, should they have been arrested?
Another question that looms is whether they were the right persons for the committee positions they occupied on PMC Bank’s board. And, perhaps more importantly, could they have prevented the fraud that took place?
All these questions lead to the larger issue of the culpability of independent directors.
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Independent directors are appointed to be the representatives of stakeholders and guard their interests. They are expected to, with their knowledge and expertise, inspire and guide the company. They are also supposed to bring an element of objectivity that is not confined to narrow corporate interests.
Now, the Companies Act (2013) holds independent directors liable for any contravention of the legislation’s provisions which have taken place with their knowledge. This ‘knowledge’ is usually derived from discussions in board meetings or board committee meetings.
Protestors gather near PMC bank in Mulund on October 2. Photo: Sukanya Shantha
Because of her position, the independent director is expected to initiate action if she becomes aware of a wrong. Specifically, they are supposed to dissent at board meetings where they don’t agree with a proposal and, equally importantly, have that dissent recorded in the minutes of the meetings.
In some instances, it has further been interpreted by legal experts that even if an independent director does not attend a board meeting but is aware, through the agenda or otherwise, of a matter that would be detrimental to the interests of the company, she should inform the company of her concerns and have that recorded in the minutes. If not and the company suffers, she would be culpable.
It is in this scenario that one should view the incarceration of PMC Bank’s three independent directors.
Jagdish Mookey, a tax practitioner, is 75 years old. Mukti Bavisi is the owner of a steel facility. Trupti Bane is a well-known gynaecologist who works at a public hospital. They have been arrested presumably for not exercising due diligence in approving loans and not being diligent in the recovery of loans. The charges also hint that they may have been complicit in the fraud, but their innocence or guilt will only be known when the law takes its course.
The larger question here is whether they actually had the time or the credit expertise to actually evaluate the loans that they were being sanctioned. At the loans and advances meetings, Bavisi and Bane would be presented with proposals. Would a gynaecologist – or indeed anyone who is not a finance or industry professional – be able to ask the right questions and exercise due diligence?
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After all, even the Reserve Bank of India’s auditors — highly trained professionals who are expected to delve deep into those to whom loans have been given to — were not successful in unearthing the fact that the loans had been initially given to multiple fictitious companies. When these inspectors, who have access to everything and are expected to look under every stone, could not discover the hidden trail, how can directors who have limited time, no real understanding of the nuances of banking and are given minimal information (though they could theoretically claim access to everything) unearth the subterfuge?
In recent years, several scams have rocked the Indian corporate world. In the Satyam scandal, all the independent directors were held accountable and fined. One of the directors, Harvard University professor Krishna Palepu was fined Rs 2.66 crore by a Hyderabad court in 2018. Other luminaries on the board were fined Rs 20,000 each.
In the Satyam episode, all the independent directors were held accountable and fined. Photo: Reuters
The role and possible culpability of the independent directors of IL&FS is currently being examined by the Serious Fraud Investigation Office. When the Yes Bank imbroglio broke, several independent directors hastily resigned. There were resignations of independent directors too after Jet Airways crashed out. At a governance seminar in November 2019, several independent directors voiced serious fears regarding their being held accountable.
I am not for a moment saying that independent directors are above any form of accountability. If they take on the role of independent director and a fraud occurs that could have been prevented if they had asked the right questions, they must be held responsible. They are being paid to be on the board and the shareholders who have elected them have placed their trust in them.
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What I am saying though is that more thought and effort should be made while appointing independent directors. The directors in the loans and advances committee should be finance professionals or bankers with experience and credit experience. The independent directors in an audit committee should be auditors and lawyers. And they must know that they will be held accountable if they are less than diligent. Only then will the scams that have become commonplace will cease.
Apart from this, those being offered these positions should only accept if they believe they can do justice. They cannot accept lucrative positions on prestigious boards and then claim they had wool pulled over their eyes. Or worse, simply throw in the towel the moment a scam breaks out.
Raghu Palat is a banker, chartered accountant and an author.