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NRI's 70% shares of the Indian company
was reduced to less than 30% within 3 years A non-resident Indian and his wife had invested in 70% shares of the Dale & Carrington Investment (P) Ltd Vs in 1994. In three years, their shareholding was reduced to less than 30%. The managing director, initially a minority shareholder, had augmented his shareholding by further issue of share capital to himself, without any disclosure to the others. The defence said there was no obligation to offer any part of the proposed share capital to all shareholders. The Articles of Association of the company gave absolute right to the Board to issue further share capital, relevant statutory provisions requiring a special resolution of shareholders not being applicable to a private company. The Company Law Board, while allowing the aggrieved shareholder’s petition, tried to resolve the situation commercially, giving both parties exit options. The high court in appeal took a more serious view, decrying the act of the MD as a fraudulent one. The Supreme Court held that in matters of issue of additional shares, the directors have a fiduciary duty to do it in a proper way. While Section 81 of the Act did not apply to private companies, directors have to make a complete disclosure to shareholders. The requirement is not statutory, but to prevent misuse of power, more so applicable in a private company, where the members are like partners or family members. Accordingly, the Supreme Court upheld the high court’s order. Ultimately, absence of statutory fetters does not necessarily imply complete flexibility in the management of a company. Nor does it dilute the importance of fiduciary obligations. Inde-pendence in directors cannot be inculcated by devising arm’s length relationships — there have to be winds of change blowing in corporate behaviour and policy —and the private companies should not regard themselves as exceptions. Sometimes, the aura associated with basic statutory definitions
tends to defocus the legal purpose and intent. Take the term “director”
in relation to a limited company, and how their role and powers have
been the subject of judicial interpretations, high-powered committees
and the mantra of corporate governance. In recent years, the Sarbanes-Oxley,
the Higgs and our own Naresh Chandra committee reports, have provided
their expositions on independent directors. The draft Companies Bill,
2004, has defined the term to mean non-executive directors of the company
who do not have any material pecuniary relationship or transaction with
the company, its management, promoters etc. and possess certain attributes
to be prescribed by the central government from time to time. What are these special attributes and why are they essential? Certainly integrity, professional qualifications, financial literacy, and above all, an ethical mindset. An independent director has to be unfettered by vested interests. He should not act as a proxy of the promoter management, and be the conscience keeper of minority investors, protector of creditors’ interests and ensure transparency in corporate practices. This is only a restatement of the concept of fiduciary duty, which every director owes the company and its shareholders. A series of judicial pronouncements have been made on this issue by our courts. Directors are expected to display utmost good faith, care, and diligence as agents of the company. They should also not use the company’s money, property or goodwill to derive any personal benefit. The premium is on the “no conflict” rule which renders a fiduciary liable to account for any such benefit, whether there is conflict of interest or not. Any provision in a shareholder’s agreement, which requires the board nominees of a group to vote in a particular manner will not be countenanced by Indian courts. The author is a partner in Rajinder Narain & Co, a Delhi-based law firm
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