Is Corporate Governance a mere mirage

SEBI’s regulations for Independent Directors are still wider. Even a material supplier, service provider, lessor or lessee to the company, irrespective of the value involved, is disqualified from being appointed as an Independent Director of the Company.


By Sarvesh Mathur

The proposal for approval of appointment of Mr. Deepak Kapoor, former Chairman of Pricewaterhousecoopers India (pwc) as an Independent Director of Tata Steel had already come in from severe criticism from no less than Mr. J.N. Gupta, former Executive Director, Securities and Exchange Board of India (SEBI).

Mr. Gupta was quoted saying that, “In our advisory note, we have asked shareholders to reject either of the appointment as there seems to be a conflict of interest if both proposals go through at once. Kapoor will disqualify as an independent director under section 149(6) of the Companies Act, if PwC is appointed as its auditor.” Mr. Gupta, further said that both Kapoor and PwC’s appointments together “does not reflect good governance practice by the Tatas.” The “mere presence” of Kapoor on the board of Tata Steel “may have an adverse impact on the audit process and may give rise to ethical issues,” he had added.

Yet, the appointment of Mr. Deepak Kapoor was approved in the annual general meeting (AGM) of Tata Steel held on August 8, 2017. In the same AGM, the appointment of Price Waterhouse & Co Chartered Accountants LLP (Audit firm) was also approved. Is it conceivable that TATAs, known for their high “value systems”, grossly erred in making the two appointments ? The facts, unfortunately, suggest so.

As per the Notice of AGM, Mr. Kapoor met the criteria for independence as provided for in Section 149(6) of the Companies Act, 2013 and had also given a declaration to that effect.

Is it possible that Mr. Deepak Kapoor gave a wrong declaration to Tata Steel?
The real question boils down to whether provisions of Section 149(6)(e)(ii) were violated.

This section provides, amongst others, that an Independent Director shall mean such a person who, neither himself nor any of his relatives is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed of a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company. The intention behind this disqualification is extremely important and abundantly clear : no person, who or whose relatives were employed by the auditors of the company during the last 3 years could be appointed as its Independent Director. Cooling period of 3 years was stipulated to avoid any potential conflict of interest.

Before I analyse any further, I must put a caveat; the analysis is as per my understanding of the law, is meant purely for the larger public interest and is not in any way whatsoever meant to reflect on the competence or otherwise of any individual or entity involved. A technical correction must also be made. The Audit firm appointed in the AGM is not Pwc but Price Waterhouse & Co Chartered Accountants LLP. The legal distinction needs to be appreciated.

Deepak Kapoor had been with Pwc India for 30 years and had initially served as an Audit partner. He went on to serve as the Chairman of Pwc India from 1st January 2011 upto 31 December 2016. Prior to this, he had served as the Managing Director of Pwc India for nearly 4 years since February 2007. The vital questions which arise are that what is Pwc India comprised of and what was Mr. Kapoor’s authority and control over its different constituents?

For the benefit of everyone, Pwc India refers to the network of a private limited company by the name of Pricewaterhousecoopers Private Limited (pwcpl) that renders Advisory services and more than 10-12 audit firms. All these supposedly separate legal entities use the same brand name, i.e., Pwc. It needs no emphasis that by being at the helm of affairs of Pwc India for nearly 12 years Mr. Deepak Kapoor had significant influence and control over the entire network including all the audit firms, including the one appointed as the Auditor of Tata Steel in the said AGM, although he was on the rolls of Pwcpl only.

SEBI’s regulations for Independent Directors are still wider. Even a material supplier, service provider, lessor or lessee to the company, irrespective of the value involved, is disqualified from being appointed as an Independent Director of the Company.

The intention of the lawmakers while formulating the law is invariably considered by the Courts to arrive at the right interpretation for any specific provision. The lawmakers probably thought that they have extensively and elaborately covered all situations that could result in conflict of interest. Apparently, they under-estimated or overlooked the ingenuity of some. What the Pwc India network stands for may not be known to all. However, Mr. Kapoor surely knew all about it. Did he make adequate and comprehensive disclosures to the Tata Steel Board ?

Schedule IV of the Companies Act, 2013 states, amongst others, that an Independent Director shall uphold ethical standards of integrity and probity, refrain from taking any action that would lead to loss of his independence, must immediately inform the Board where circumstances arise which would make him lose his independence and assist the company in implementing best corporate governance practices. How has Mr. Deepak Kapoor fared on these parameters is best left to be adjudged by the public and the Regulators.

The intention of the law makers and the spirit of the law is further reinforced in the Rules under the Act for the rotation of Auditors. The said rules clearly state that “same network” includes the firms operating or functioning hitherto or in future under the same brand name, trade name or common control.

It is abundantly clear from the above that Mr. Deepak Kapoor was ineligible for appointment as the Independent Director of Tata Steel.

Tata Steel’s Chairman, Mr. N Chandrasekaran, while defending Kapoor’s appointment, was quoted by the media saying that Kapoor will not be inducted into the audit committee till the cooling period is over. Was Mr. Chandrasekaran not briefed properly that the embargo on the appointment of Deepak Kapoor extended to the past 3 years and not even a year had expired !

Corporate governance is going beyond the letter and mandate of the law. Adherence to best practices should not only be claimed but be demonstrated. Did the venerable house of TATAs violate the letter and the spirit of the law on two counts ? Are these the standards of Corporate Governance that we can be proud of ? Will this not set a bad and dangerous precedent to the detriment of public interest ? Will SEBI ensure immediate remedial action? Will we ever get the answers. But one thing is clear. Public some janti hai !

Sarvesh Mathur is a senior finance professional, who has earlier worked as CFO of Tata Telecom Ltd, PricewaterhouseCoopers (Pwc) India etc. He is currently a practicing Company Secretary.

DISCLAIMER : Views expressed above are the author’s own.

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