Disqualification of directors to hurt India Inc CLEAN-UP ACT

The government’s decision to disqualify over 100,000 individuals from taking up directorship at listed companies is likely to disturb the functioning of boards and hurt business sentiment, according to legal experts.

Earlier this month, the Ministry of Corporate Affairs (MCA) had decided to blacklist 300,000 individuals — allegedly associated with shell or noncompliant companies — from taking up board positions. Acting on the MCA’s decision, the National Stock Exchange (NSE) had sent out letters to some companies concerned, asking them whether the disqualified directors should continue on their boards.

While most of the blacklisted individuals were associated with small or defunct companies, the list also included a few marquee names. According to reports, Pawan Goenka of Mahindra & Mahindra, S Narayan of Apollo Tyres, Vinod Kumar Dasari of Ashok Leyland, S Sridhar of DCB Bank, and GV Krishna of Hindustan Petroleum, are also on the list.

“Such a move will disturb the composition of the board of directors prescribed under the Listing Regulations till a successor is appointed with the requisite eligibility criteria. If the disqualified director happens to be an independent one, then it will also have an impact on the performance evaluation of such a director who is also a MCA disqualifies 106,578 directors early September; identifies 210,000 shell firms MCA plans to blacklist 300,000 directors of shell firms Disqualified director can’t serve on any firm’s board for 5 years NSE asks 200 firms to take action against directors named requirement prescribed under the Listing Regulations,” said Yogesh Chande, partner, Shardul Amarchand Mangaldas.

Experts said the MCA’s move to disqualify directors was similar to the one that barred 331 “suspected shell firms” without following principles of natural justice. “This could lead to large-scale legal implications. Being on defunct companies is not sufficient to disqualify a director as holding such a position doesn’t prove any wrongdoing. Such unilateral actions could create chaos,” said Sandeep Parekh, founder, Finsec Law Advisors.

According to the Companies Act, a disqualified director cannot serve on the board of any company for a period of five years. Legal experts said while the rules were clear on appointment or reappointment of such directors, there was uncertainty over removal of a functioning director. “The company law is ambiguous whilst dealing with the issue of automatic removal of a director of a disqualified company from his other directorships. Legally it is clear that such disqualified directors have to vacate directorship in the company concerned and also can’t seek a fresh directorship or re-appointment in any other firm. However, what it does not suggest is a cascading removal from boards of other firms,” said Tejesh Chitlangi, partner, IC Legal.

Experts say the firms can challenge the NSE or the MCA’s decision seeking removal of directors. Till the issue is settled, the companies can impose restrictions on those individuals.

“The companies can keep such directors away from day-to-day board activities. They can be barred from accessing any board agenda or any important policy matters till the issue gets resolved. Meanwhile, the directors can challenge the decision, both in company law tribunal and high court,” says Parekh.

“We confirm that the NSE has sent out letters to companies concerned and has sought clarifications (from the companies) on the subject matter,” a NSE spokesperson said.