2. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 2
This study lists out cases where Companies have a pecuniary relationship with their
Independent Directors, mostly through the latter’s legal/consulting firms. This pecuniary
relationship extends beyond payment of sitting fees and commission, to payment of fees for
rendering professional advice which is outside the gamut of responsibilities of an Independent
Director.
HIGHLIGHTS OF THE REPORT
The Companies Act, 2013 & Clause 49 have set monetary limits (Rs. 50
Lakh, 10% of revenue of the legal firm, etc.) for such relationships
between Companies and their IDs, breaching which IDs can no more
be classified as ‘independent’.
Howard M. Schilit and Jeremy Perler, in their book “Financial
Shenanigans: How to detect accounting gimmicks & fraud in financial
reports”, highlight such pecuniary relationships as a red flag that
provides a breeding ground for shenanigans by companies.
Pecuniary relationships question the true independence of IDs as the
legal/ consulting firm draw a fee from the company and work for the
company and/or promoters.
The legal/ consulting firm no longer acts as an independent party and
hence the advice given by them can be questioned as the ID (being a
partner in the firm) may influence the advice.
Often these IDs sit on the Audit Committee or even Chair it. This raises
questions on the independence of the most important committee of the
Board which safeguards minority shareholders’ interest.
Companies often don’t disclose the fees paid to these legal/consulting
firms and just state that it is not “material”.
3. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 3
In S&P BSE 200 Index, 21 Companies had such a pecuniary
relationship with their IDs. These 21 Companies had pecuniary
relationships with 25 IDs. Out of these 25 IDs, 15 were members of
which 4 were Chairmen of the Audit Committee.
The 21 Companies include 6 Companies of Nifty-50 Index and 4
Companies of Nifty Next 50 Index.
The study also lists out 34 Companies which are outside the S&P BSE
200 Index.
While most of the pecuniary relationships are through the IDs legal/
consulting firms, there are also cases where the IDs have a direct
lawyer-client relationship with Promoter of the Companies.
InGovern recommends that shareholders vote AGAINST the
appointment/re-appointment of such IDs.
InGovern recommends that regulators view such pecuniary
relationships as related party transactions (RPTs) and the fee paid
should be disclosed as per RPT norms. The MCA/SEBI should change
the regulations to classify such IDs as non-independent directors.
InGovern recommends that if Companies feel necessary to continue
such relationship with ID’s legal/consulting firms while retaining the
IDs on Board, they should reclassify the IDs as non-independent
directors.
4. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 4
PECUNIARY RELATIONSHIPS WITH IDS –
ARE THEY REALLY HARMLESS?
The Companies Act, 2013 as well as Clause 49 of the Listing Agreement emphasize that having
a pecuniary relationship with the company, either through themselves or their firms, affects the
independence of the Independent Directors.
Section 149(6) of the Companies Act, 2013 states,
“An independent director in relation to a company, means a director other than a managing
director or a whole-time director or a nominee director…
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors, during the two immediately preceding
financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company,
its holding, subsidiary or associate company, or their promoters, or directors, amounting to two
per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher
amount as may be prescribed, whichever is lower, during the two immediately preceding
financial years or during the current financial year;”
(e) who, neither himself nor any of his relatives…
(ii) 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) a firm of auditors or company secretaries in practice or cost auditors of the company
or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its
holding, subsidiary or associate company amounting to ten per cent. or more of the
gross turnover of such firm;”
Clause 49 of the Listing Agreement states,
“For the purpose of the clause A, the expression ‘independent director’ shall mean a non-
executive director, other than a nominee director of the company:
c. apart from receiving director's remuneration, has or had no material pecuniary relationship
with the company, its holding, subsidiary or associate company, or their promoters, or
5. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 5
directors, during the two immediately preceding financial years or during the current financial
year;
d. none of whose relatives has or had pecuniary relationship or transaction with the company,
its holding, subsidiary or associate company, or their promoters, or directors, amounting to two
per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher
amount as may be prescribed, whichever is lower, during the two immediately preceding
financial years or during the current financial year;
e. who, neither himself nor any of his relatives…
(ii) 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) a firm of auditors or company secretaries in practice or cost auditors of the company
or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its
holding, subsidiary or associate company amounting to ten per cent or more of the gross
turnover of such firm;”
********************************************
The Act as well as the Listing Agreement, has defined limits over which independence will be
disqualified. These limits are:
a. No direct relationship with the company
b. No relationship with auditors/ company secretaries/ cost auditors associated with the
company
c. No pecuniary relationship through relatives where transaction value exceeds 2% of
income of the company or Rs. 50 lakh, whichever is lower
d. No pecuniary relationship through legal/consulting firm where transaction value
exceeds 10% of total income of the legal/consulting firm.
Access the complete Section and the Rule in the website www.ca2013.com
“The Companies Act Integrated Ready Reckoner - CAIRR”
6. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 6
Is Pecuniary Relationship necessary at all?
Although, in many instances, the fees/ transaction amounts may not exceed the limits as set out
by the regulations, the very fact that there exists a pecuniary relationship between a Company
and its Independent Director raises serious concerns on the independence of the director. Such a
relationship may adversely influence an Independent Director’s objectivity when it comes to
taking key decisions and also results in conflict of interest of the concerned director.
In their popular book titled, “Financial Shenanigans: How to
detect accounting gimmicks & fraud in financial reports”,
authors Howard M. Schilit and Jeremy Perler highlight
pecuniary relationships of Independent Directors with the
companies as one of the important red flags that provide a
breeding ground for shenanigans.
The authors, citing an example of Mr. Krishna Palepu - who was
an Independent Director on the Board of Satyam while also
providing professional services to the company – state that
receiving remuneration for providing professional services to
the company would cloud an outside director’s objectivity and
appearance of independence. They also emphasize that independent directors should not
be involved in such related-party arrangements, as it may impair their objectivity and the
appearance of independence on important decisions.
Some of the biggest concerns that arise due to such relationships are:
Pecuniary relationships question the true independence of Independent Directors as the
legal/ consulting firm will draw a fee from the company and will be working with the
management.
The legal/ consulting firm no longer acts as an independent party and hence the advice
given by them and any valuation done can be questioned as the ID (being a partner in the
firm) may influence the advice.
Companies often don’t disclose the fees paid to these legal/ consulting firms and just state
that the fee paid is not “material”.
Often these IDs sit on the Audit Committee or even Chair it. This raises questions on the
independence of the most important committee on the Board.
7. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 7
This report lists out companies forming part of S&P BSE 200 Index that have a pecuniary
relationship with their IDs apart from payment of sitting fees and commission.
Points to note…
The study contains companies from S&P BSE 200 index which have a pecuniary
relationship with their IDs apart from payment of sitting fees and commission.
Six companies from the Nifty 50 Index and four companies (i.e., 8%) from Nifty Next 50
Index have had such a relationship with their IDs.
The S&P BSE 200 Index contains 21 companies that have had such a relationship with
their 25 IDs.
The ID with most pecuniary relationships is Mr. R. A. Shah whose firm Crawford Bayley
& Co. acted as a solicitor to the companies. Crawford Bayley & Co. has had pecuniary
relationships with 14 companies where Mr. Shah acted as an Independent Director for
the whole or part of FY15. This included two companies of Nifty 50, one of Nifty Next 50
and five companies overall of S&P BSE 200 Index.
Other IDs with most number of pecuniary relations with their Boards are Mr. Darius E.
Udwadia (Partner of Udwadia Udeshi & Argus Partners), Pradip Kumar Khaitan
(Partner of Khaitan & Co.) and others.
Some of the Directors in this study do not have a direct pecuniary relationship with the
company through their firms. However, they act as a legal advisor to or have
represented the Promoters of the Companies where they serve as an Independent
Director. Such a relationship also questions their independence on the said companies.
8. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 8
Name of the
Company
Name of the ID Name of Firm
Type of
Firm
Audit
Comm
Nifty 50 Companies that have a pecuniary relationship with ID’s legal firm
Ambuja Cements# Haigreve Khaitan Khaitan & Co. Law firm No
Asian Paints* R. A. Shah Crawford Bayley & Co. Solicitors No
Hindalco* C. M. Maniar Crawford Bayley & Co. Solicitors No
Lupin R. A. Shah Crawford Bayley & Co. Solicitors No
M&M Ravindra Kulkarni Khaitan & Co. Law firm Member
Reliance Industries M. L. Bhakta Kanga & Co. Solicitors No
Nifty Next 50 Companies that have a pecuniary relationship with ID’s legal firm
Colgate Palmolive R. A. Shah Crawford Bayley & Co. Solicitors Chairman
Exide Industries Mona Ninad Desai AH Parpia & Co. Solicitors Member
Glenmark Pharma Sridhar Gorthi Trilegal Solicitors Member
Siemens@ Darius C. Shroff Crawford Bayley & Co. Solicitors No
Other S&P BSE 200 Index Companies that have a pecuniary relationship with ID/ ID’s firm
ABB India# Darius E Udwadia
Udwadia Udeshi &
Argus Partners
Law firm Member
ABB India# Renu Sud Karnad Lafarge India Pvt. Ltd. Pvt Cos. Member
9. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 9
Name of the
Company
Name of the ID Name of Firm
Type of
Firm
Audit
Comm
Apollo Tyres Pallavi Shroff
Amarchand &
Mangaldas & Suresh A
Shroff & Co.
Solicitors No
Apollo Tyres Akshay Chudasama J. Sagar Associates Solicitors Member
Century Textile and
Industries
Yazdi P. Dandiwala
Mulla & Mulla & Cragie
Blunt & Caroe
Solicitors Chairman
CESC Pradip Kumar Khaitan Khaitan & Co. Law firm No
DLF Rajiv Krishan Luthra
Luthra & Luthra Law
Offices
Law firm No
DLF K.N. Memani (Name not disclosed) Chairman
Emami Pradip Kumar Khaitan Khaitan & Co. Law firm No
Jindal Steel & Power Haigreve Khaitan Khaitan & Co. Law firm Member
P&G Hygiene and
Health Care@
R. A. Shah Crawford Bayley & Co. Solicitors Chairman
P&G Hygiene and
Health Care@
B. S. Mehta Bansi S. Mehta & Co. CA Firm Member
Reliance Power D. J. Kakalia
Mulla & Mulla & Cragie
Blunt & Caroe
Solicitors Member
Torrent
Pharmaceuticals
Haigreve Khaitan Khaitan & Co. Law firm Member
Wockhardt* R. A. Shah Crawford Bayley & Co. Solicitors Member
* The Person served as an Independent Director on the Board for a part of FY15
# FY14 annual reports of these companies have been referred to since FY15 annual reports aren’t available yet
@ These companies had made disclosures of pecuniary relationships with their IDs in their annual report of FY11.
Since then, no such disclosures have been made.
10. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 10
We also include a list of other companies outside the S&P BSE 200 which engage their IDs in
such a relationship. Please note that the below is not an exhaustive list.
Name of the
Company
Name of the ID Name of Firm
Type of
Firm
Audit
Comm
Abbott India R. A. Shah Crawford Bayley & Co. Solicitors Member
Alok Industries Ashok Rajani (Name not disclosed) Pvt Entity Member
AstraZeneca Pharma
India
Darius E. Udwadia
Udwadia Udeshi and
Argus Partners
Law Firm Member
BASF India R. A. Shah Crawford Bayley & Co. Solicitors Member
Bhansali Engineering
Polymers
B. S. Bhesania
Mulla & Mulla & Cragie
Blunt & Caroe
Solicitors Member
Bharat Bijlee Prakash V. Mehta
Malvi Ranchoddas &
Co.
Solicitors Member
Bombay Burmah
Trading Corp
Darius E. Udwadia
Udwadia Udeshi and
Argus Partners
Law Firm Member
Bombay Dyeing And
Mfg. Co.
R. A. Shah Crawford Bayley & Co. Solicitors Member
Century Enka@ Bansi S. Mehta Bansi S. Mehta & Co. CA Firm Member
Century Enka* R. A. Shah Crawford Bayley & Co. Solicitors Member
Chowgule
Steamships
Ravindra Kulkarni Khaitan & Co Law Firm No
Clariant Chemicals* R. A. Shah Crawford Bayley & Co. Solicitors Chairman
Elantas Beck India# Suresh Talwar
Talwar Thakore &
Associates
Solicitors Member
Electrosteel Castings Pradip Kumar Khaitan Khaitan & Co Law Firm Member
Entertainment
Network India
Ravindra Kulkarni Khaitan & Co Law Firm Member
Gillanders Arbuthnot
& Company*
Pradip Kumar Khaitan Khaitan & Co Law Firm No
Gillanders Arbuthnot
& Company
Sucharita Basu De Khaitan & Co Law Firm Member
Godfrey Phillips
India*
C. M. Maniar Crawford Bayley & Co. Solicitors Member
Godfrey Phillips
India
Lalit Bhasin Bhasin & Co. Law Firm Chairman
Godfrey Phillips
India
R. A. Shah Crawford Bayley & Co. Solicitors Member
11. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 11
Name of the
Company
Name of the ID Name of Firm
Type of
Firm
Audit
Comm
Graphite India Pradip Kumar Khaitan Khaitan & Co Law Firm No
Gujarat Alkalies &
Chemicals
Pallavi Shroff
Amarchand &
Mangaldas & Suresh A
Shroff & Co.
Solicitors Member
Hathway Cable &
Datacom
Sridhar Gorthi Trilegal Solicitors Chairman
Hindustan
Construction Co.
D. M. Popat
Mulla & Mulla & Cragie
Blunt & Caroe
Solicitors Member
India Glycols Pradip Kumar Khaitan Khaitan & Co Law Firm Member
Ingersoll-Rand India Darius C. Shroff Crawford Bayley & Co. Solicitors Member
Ingersoll-Rand India Hemraj C. Asher Crawford Bayley & Co. Solicitors Chairman
ITD Cementation
India#
Darius E. Udwadia
Udwadia Udeshi and
Argus Partners
Law Firm Member
JM Financial Darius E. Udwadia
Udwadia Udeshi and
Argus Partners
Law Firm No
MPS Darius E. Udwadia
Udwadia Udeshi and
Argus Partners
Law Firm Member
Pfizer India R. A. Shah Crawford Bayley & Co. Solicitors Chairman
Ravalgaon Sugar
Farm
Yazdi P. Dandiwala
Mulla & Mulla & Cragie
Blunt & Caroe
Solicitors Member
RPG Life Sciences* R. A. Shah Crawford Bayley & Co. Solicitors No
Saregama* Pradip Kumar Khaitan Khaitan & Co Law Firm No
Schrader Duncan* R. A. Shah Crawford Bayley & Co. Solicitors No
Trident Pallavi Shroff
Amarchand &
Mangaldas & Suresh A
Shroff & Co.
Solicitors No
Visa Steel* Pradip Kumar Khaitan Khaitan & Co Law Firm No
Wabco India Darius E. Udwadia
Udwadia Udeshi and
Argus Partners
Law Firm Member
Zuari Agro Chemicals Marco Wadia Crawford Bayley & Co. Solicitors Chairman
* The Person served as an Independent Director on the Board for a part of FY15
# FY14 annual reports of these companies have been referred to since FY15 annual reports aren’t available yet
@ These companies had made disclosures of pecuniary relationships with their IDs in their annual report of FY11.
Since then, no such disclosures have been made
12. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 12
Other Observations
1. Siemens: Mr. Darius C. Shroff, ID is a Senior Partner at Crawford Bayley & Co. The annual
report of 2011 of Siemens stated that Crawford Bayley & Co. had a professional relationship
with Siemens during the year. There is no such statement in subsequent annual reports of
Siemens.
2. Emami: Mr. Pradip Kumar Khaitan, ID is a Senior Partner at Khaitan & Co. Although the
annual report of Emami doesn’t list Khaitan & Co. as a solicitor or legal advisor, the firm has
acted as a legal adviser for Emami for an acquisition during this current financial year.
3. Jindal Steel & Power: Mr. Pradip Kumar Khaitan, ID is a Senior Partner at Khaitan & Co.
Although the firm has no pecuniary relationship with the company, it has acted as a legal
advisor to the promoter of the company in the recent past.
4. P&G Hygiene & Healthcare: Mr. R. A. Shah, ID is a Senior Partner at Crawford Bayley & Co.
and Mr. B. S. Mehta is the Chief Mentor of Bansi S. Mehta & Co. The annual report of 2011
of P&G disclosed the professional relationships between the company with these firms.
There is no such statement in subsequent annual reports of P&G.
5. Reliance Power: Mr. D. J. Kakalia, ID is a Partner at Mulla & Mulla & Craigie Blunt & Caroe.
Although the firm has no pecuniary relationship with the company, it has acted as a legal
advisor to the promoter of the company in the recent past.
6. Century Enka: Mr. Bansi S. Mehta, ID is the Chief Mentor of Bansi S. Mehta & Co. The
annual report of 2011 of Century Enka disclosed the professional relationship between the
company with the firm. There is no such statement in subsequent annual reports of Century
Enka.
13. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 13
Independent Directors with pecuniary relationship with multiple companies
There are many Independent Directors who were in such a relationship, through their firms,
with not one but multiple companies. Some of these Directors had such relationship with their
companies in almost, if not all, the companies on whose Boards they served as an Independent
Director in whole/part of FY15.
A list of a few such directors are:
Name R. A. Shah
Firm Crawford Bayley & Co.
Companies where such Pecuniary Relationship existed: 14
Asian Paints* Lupin
Colgate Palmolive Procter & Gamble Hygiene and Health Care@
Wockhardt* Godfrey Phillips India
Abbott India Pfizer India
BASF India RPG Life Sciences*
Bombay Dyeing and Mfg. Co. Schrader Duncan*
Century Enka* Clariant Chemicals*
* Served as an Independent Director on the Board for a part of FY15
Name Pradip Kumar Khaitan
Firm Khaitan & Co.
Companies where such Pecuniary Relationship existed: 8
CESC Emami
Electrosteel Castings India Glycols
Gillanders Arbuthnot & Company* Saregama*
Graphite India Visa Steel*
* Served as an Independent Director on the Board for a part of FY15
Name Darius E Udwadia
Firm Udwadia Udeshi & Argus Partners
Companies where such Pecuniary Relationship existed: 7
ABB India JM Financial
AstraZeneca Pharma India MPS
Bombay Burmah Trading Corp Wabco India
ITD Cementation India
14. PECUNIARY RELATIONSHIPS WITH ID – HARMLESS?
JANUARY 2016 PAGE 14
Name Ravindra Kulkarni
Firm Khaitan & Co.
Companies where such Pecuniary Relationship existed: 3
M&M Chowgule Steamships
Entertainment Network India
Name Haigreve Khaitan
Firm Khaitan & Co.
Companies where such Pecuniary Relationship existed: 3
Ambuja Cements Jindal Steel & Power
Torrent Pharmaceuticals
Name Pallavi Shroff
Firm Amarchand & Mangaldas & Suresh A Shroff & Co.
Companies where such Pecuniary Relationship existed: 3
Apollo Tyres Gujarat Alkalies & Chemicals
Trident
Conclusion
We understand the directors stated in this study are persons of vast knowledge, experience and
reputation. We also understand that the companies benefit immensely from these directors’
presence on their Board. However, pecuniary relationships, apart from sitting fees and
commissions, severely violates the independence of the concerned Independent Director.
Hence, it is recommended that companies should enter into no professional relationship with
either their Independent Directors or the legal/consulting firms where the Independent
Directors are owner/partners/employees, etc. In case companies think it is necessary to retain
the professional services of the firm as well as the concerned directors, the Independent
Directors should be classified as Non-Independent Directors. The regulations should also be
changed by MCA/SEBI to classify these relationships as RPTs and with greater disclosures.
