IICA and ICSI organized a Programme for Familiarization of Independent Directors on June 20, 2020. The programme aimed at orienting Independent Directors about the requirement of conducting due diligence of companies before joining the board of a company. The programme also discussed with the participants about the requirement of detailed checking of the financial statements, being vigilant about the red flags and not to rely blindly on the auditors of a company.
The programme started with the Inaugural address of the Vice President of ICSI, CS Nagendra Rao. He oriented Independent Directors about their roles, rights and duties in a company board. He also appreciated the efforts of IICA for the initiative of instituting Independent Directors databank and by organizing the programme for Independent Directors.
The Coordinator of the program CS Manish Gupta, introduced Dr. Niraj Gupta, Nodal Officer ID databank. Dr Gupta welcomed the participants of the program and also referred Albert Einstein’s statement focusing the requirement of innovation and innovative thinking besides focusing on regulation and compliance related aspects by the Independent Directors.
Taking the programme forward, CS Vijaya Sampat, one of the key speakers to the programme, who is currently an independent director on the Boards of nine companies in sectors like power, pharma, auto components, branded luggage and IT and also the Ombudsperson for the Bharti Airtel group of companies with oversight of the code of conduct, besides the chairperson of the FICCI subcommittee on corporate law, briefed the participants about the need for due diligence of companies before joining as an Independent Director or Independent Women Director. She emphasized that directors need to be conversant about how due diligence has to be done; what is to be done after due diligence; and when should they join as Independent Directors. The key highlights of her address discussing various key aspects of due diligence have been briefly discussed as follows:
- Before joining a company as a director, a professional should see notes to the Balance Sheet and not just rely blindly on auditors. It should also be checked that internal financial control has been followed. Further, it should also be checked that the company has been consistently filing Annual Financial Statements to the Registrar of Companies (ROC) and paying the interest, dividend etc. on a consistent basis otherwise the Independent Directors may be held liable for this and disqualified from acting as a Director in any company for a period of five years as per section 164 (2) of the Companies Act, 2013.
- Aspiring Independent Directors are required to be sure about the type of company they are looking for; who is the owner; whether it is a professionally managed company or not.
- They need to further look into the investments of the company and the type of investors the company presently has; percentage of holdings and whether the investment holding have changed a lot in the past; the Private Equity (PE) investors, their background, in case of an exit, the reasons associated the said exit, the rights of such investors and how these rights have been exercised in the history of the company, especially in last 4 to 5 years.. Another important aspect to look into is the holding of promoters, the shares pledged by them and the public holding in the company.
- While discussing the importance of due diligence, she also stressed on the need to look at the nature of industry, level of competition in market, competitor companies, quality of products etc. It was discussed that there is a strong need to look at the aspects such as the company in consideration is a start up, an old manufacturing company or a technology company (which can have huge ups and downs) before selecting the parameters of placing such a due diligence. The market share of the company also requires due consideration as one of the variable of diligence in addition to other factors as mentioned before.
- Other key parameters of the due diligence, which have been highlighted during the discussion involve :
- Change in auditors in the last few years has to be taken seriously.
- The Structure of corporate control. If there are large numbers of subsidiary companies, there is a need to be more careful.
- Cash flow and funds flow position of the company also requires watchful consideration.
- IDs need to posses adequate understanding towards the financial aspects and ratios such as Debt Service Coverage Ratio, Price Earning (P/E) Ratio, Return on Equity (ROE), Return on Capital Employed (ROCE) etc which helps to get a fair idea about the financial situation of a company.
- Need to read the company policies in the website.
- Funds raised by the companies and how they have been utilized in past. The information could be obtained from the published financial information.
- Any settlements such as advancement of loans / dues pending with the promoters.
- Whether contingent liabilities are properly disclosed in the notes to the accounts. A study of the CARO report could also be considered useful in this regard.
- Further, details of other directors should be looked into. It would be advisable for the aspiring professionals to personally meet with the existing directors / independent directors to have a better understanding of their position about the company in terms of governance processes and board culture.
- Other significant areas to be looked into are whether the Audit Committee meets Auditors without the presence of managers. Also, Corporate Social Responsibility (CSR) Committee has to be looked into carefully as to whether they spend on related parties which is practiced by many companies and also whether the Remuneration paid to directors is fair.
Taking the programme further, CS Vijaya Sampat also highlighted following Red Flags which the Independent Directors have to keep in mind:
- Whether the company has received any show cause notice.
- Whether the company has huge litigations and arbitration proceedings pending against it and is not showing them under contingent liabilities.
- Whether the company has received any notice from the Regulators such as SEBI, RBI etc.
- Whether the company has failed to fulfill its compliance requirements.
- Whether the Audit Report is Qualified or is it a Clean one.
- Whether the key managerial issues are highlighted.
- And, lastly, the Independent Directors also need to ponder as to why the company needs them.
With an objective to engage with the participants more effectively, the program conducted a question-answer session. The questions were addressed by the invited speakers -Dr. Niraj Gupta, IICA; Mr JN Gupta MD, Shareholders Empowerment Services and CS Ranjeet Pandey, Council Member and Immediate Past President, ICSI.
The programme concluded with the Valedictory address by CS Ashish Garg, President, ICSI. In his address he drew upon the references from Ramayana and Mahabharata, for emphasizing the importance of Independent Directors and their vigil mechanism in improving the standards of corporate governance practices in the country.
