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RBI audit of IL&FS group makes independent directors jittery

MUMBAI: The Reserve Bank of India (RBI) has recently concluded an audit of IL&FS and may send notices to the company’s board and management if lapses found, two people with direct knowledge of the matter said.

Though the results of the audit are not known, independent directors in some of the IL&FS group companies are seeking legal counsel, fearing they may have to pay a price for the alleged excesses and mismanagement of the company over the years.

“An RBI audit was conducted a few days ago. If lapses are found on part of the company, RBI will send the directors notices, could fine them or could penalise them by banning them from accepting roles in other companies,” said one of the persons cited above.

RBI did not reply to an email seeking comment.

Besides the management which is already under the dock, independent directors are also under the scanner for their alleged failure to stall or raise questions on some decisions taken by the company under the Companies Act of 2013, legal experts said. Independent directors now fear that questions will also be asked against them.

One independent director from IL&FS told ET he was not aware of the extent of the crisis since he was not privy to the daily operations of the company.

“There is only as much an independent director can be involved in a company. There are some situations outside the control of management or board that takes institutions by surprise,” he said.

However, not many are buying that justification. A former banker, who had business dealings with IL&FS, said everybody outside the organisation was aware of the internal concerns in ILFS. “The directors must surely have got wind of that and should have kept their ears to the ground and raised it in board meetings,” this banker told ET.

The hasty exit of independent directors on board of IL&FS has stirred up a hornet’s nest on their lack of fiduciary responsibilities. The concerns of independent directors also come at a time when many public sector bank executives have been put behind bars for poor loan sanction decisions.

Legal experts said while the Companies Act prescribes civil and criminal liability for directors, it does not make any distinction for independent directors and even such directors can be held to be ‘officers in default’.

“Besides the blanket civil and criminal liabilities under the Companies Act, the directors can be liable to face class action suit under sections 245 and 246 of Companies Act, inspection and investigation under sections 206 to 229 of Companies Act and criminal misappropriation under Section 403 of Indian Penal Code and criminal breach of trust under Section of 405,” said Rajesh Narain Gupta, partner at law firm S&G Associates.

“The independent directors have a fiduciary responsibility towards the company and, by law, the independent directors may face civil and criminal liability for their acts and omissions,” he said.

Audit of IL&FS Group Worries Independent Directors

There have been a plethora of cases where the Supreme Court of India and various high courts have laid down a certain criteria before imputing the liability on the directors of the company. The only defence available to directors are that the contravention had taken place without their knowledge or consent and also that they had acted with due diligence.

In a recent Supreme Court judgement, independent directors of Jaiprakash Associates were restrained from transferring any personal assets. In Sunil Bharti Mittal Vs. CBI, the Supreme Court held that an individual can be held liable for an offence by the company if there is sufficient evidence of the individual’s role coupled with criminal intent or where the statute itself stipulates the liability of directors and other officials, such as under the Prevention of Money Laundering Act, 2002.

The pattern of resignation of independent directors in the aftermath of a IL&FS crisis reflects the fear that has gripped them.

“Being associated with a defaulter company comes in the way of the director’s qualification to serve as an independent director elsewhere. Continuing with a defaulter company, the director runs the risk of his personal assets being frozen,” said a Mumbai-based senior executive, who serves as independent director on several boards.

Harsh Mariwala, chairman of Marico, said the role of independent directors is not just being present at quarterly results and they ought to demand specific information from the management on a regular basis to tackle any looming crisis. “Did they ask tough questions at board meetings? They can only step off if the management has hidden facts from them,” he said.

Manish Jain, managing partner at JLJ Law Offices, said independent directors have a fiduciary responsibility towards the company and they may face criminal consequences only in respect of such acts of omission or commission by a company which had occurred with their knowledge, attributable through board processes and with their consent or connivance or where they had not acted diligently.

“In these circumstances, it is difficult to fix the accountability of independent director. The independence of the director is a tricky area where it is not the government/MCA/Sebi or any other statutory authority, who appoints the independent director but it is the board of directors and the shareholders of the company who appoint the same,” he said.

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