Tag Archives: company

Independent Directors- Are they Independent in their Judgements?

Independent Directors (ID) bring objectivity and an independent opinion to the decisions made by the directors of the company. IDs play a supervisory role and take into account the interests of shareholders, creditors, employees and other stakeholders in general. While IDs generally do not take part in the day-to-day functioning, their acumen should be such that they ask the right set of questions to ensure that the decisions made by the directors are in the best interest of the company, so that concentration of power or special influence can be adequately balanced and in the best interest of the company. IDs will have to take an active interest in the decision-making process not only in the meeting of the Board but also generally take steps to ensure that the interests of all stakeholders are protected.

Kumar Mangalam Birla committee report opines that “Independent Directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, its management, or its subsidiary, which in the judgment of the Board may affect their independence of judgment”.

Appointment of IDs is mandatory to all public listed companies and unlisted public companies who have (i) share capital more than Rs. 10 crores (ii) turnover of more than Rs.100 crores (iii) total outstanding loans, debentures, deposits is more than Rs 50 crores. In case of private limited companies, where institutional investors or venture capital investors have investments, they usually opt for an independent director to be on the Board.

The Companies Act, 2013 entrusted the governance to the Board of Directors and the Audit Committee for detection and prevention of fraud. The directorship is a fiduciary position and each person on the Board are exposed to many liabilities, not only under Companies Act but under various other legislation. Considering the fact that the IDs being nonexecutives on Board, they themselves cannot play an effective role even though they have a full commitment to ethical practices. Therefore, the executive directors shall have to be proactive and transparent in decision making and it is expected that IDs are informed about all facts, activities, and ongoings, beyond a structured/mandatory sharing of financials and mandatory board meeting agenda items.

IDs once appointed shall be equally responsible for wrongdoings in the Company. Therefore, before taking any directorship, the IDs may pose certain questions to the Company as provided herein below:

(i) Check on conflict of interest, whether such IDs has any pecuniary relationship with the Company directly or indirectly; (ii) The expectations of the Board from ID; (iii) Board Process on decision making, flow of information to its directors etc; (iv) Compliance status under various statutes as may be applicable to the company; (v) Risk and controls in relation to business and measures taken to mitigate such risks; (vi) Adaptability of the promoters towards suggestions of the Board. The expectation is that the executives shall run the show and non-executive board shall act as advisors; (vii) Check on whether the directors have the Directors and Officers Liability insurance policy.

A prima facie question that usually arises prior to taking an ID position is the liabilities. You can access our handbook on Directors here: https://drive.google.com/file//0BytybNhvfzRcb0JfRUFGQVpmaDQ/view?usp=sharing Eligibility Criteria to be an Independent Director

Independent Director shall be a person:`

  • who is not an executive director or nominee director;
  • who shall possess appropriate skills, experience, and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
  • who is or was not a promoter of the Company or its holding, subsidiary company or associate company and shall not be related to any of these persons;
  • who including his relatives has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, in last two preceding financial years or during the current financial year;
  • who holds together with his relatives two percent. or more of the total voting power of the company;
  • who, neither himself nor any of his relatives—
    • holds or has held the position of a key managerial personnel or is or has been an employee of the company or its holding, subsidiary or associate company in any of the three financial years preceding the financial year;
    • 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, to:
      • a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
      • any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten percent. or more of the gross turnover of such firm;
  • holds together with his relatives two per cent. or more of the total voting power of the company; or
  • is a Chief Executive or director, by whatever name called, of any non-profit organization that receives twenty-five percent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two percent. or more of the total voting power of the company; or

Are they really Independent in their Judgements?

Most of the Companies in India are family run business, where a majority of the decisions are taken by the promoters (without consulting any other non-executive directors). Further, these promoters hold a majority of the shares in the company, thereby the interest of these promoters are influenced in every such decision. Though, under law the shareholders appoint the independent director, but the process of selection of the independent director, is the existing directors who nominate the independent candidates for the post of the independent non-executive director, that too in consultation with the promoters and the shareholders accepts the nomination on the basis of the recommendation of the Board.

So, the very appointment is dependent on the recommendation being provided by the promoters, it would be hard to explain that the IDs do in fact exercise complete independence.

Despite many fallouts in the real world on the transparency of board’s decisions in their presence, IDs are the only hope to uplift the discipline/ transparency, provided their independence is not being compromised and decisions are taken professionally. If they are no more independent then their appointment in a company will have limited benefit as IDs. (of course, their business acumen and domain expertise is always of value).

Even if one or two of them are independent of their judgment and takes a fair and prudent view, they may be compromised by the decision of the majority. So, in some sense, are the independent directors actually dependents? This is a very strong question and we believe that the way the legislation is proposing for appointment and remuneration of the independent directors, should be re-evaluated.

Author: Ashwin Bhat, is a Junior Partner at NovoJuris Legal

P2P LENDING IN INDIA: OLD ROADS NEW RULES

P2P LENDING IN INDIA: OLD ROADS NEW RULES

Introduction

Peer to Peer (“P2P”) lending platforms (the “Platforms”) aims to provide individuals and entities with an alternative source for fulfilling their capital requirements. Whether it is for obtaining capital to run a business, financing to complete a personal project, or to obtain a loan for any other purpose, these Platforms allow borrowers and lenders to meet and transact on mutually acceptable terms.The Platform itself typically assists the process by listing lenders and their terms and conditions, verifying the identity and initial creditworthiness of the borrowers, disbursing the loans/tranches, collecting loan repayments etc.For these services, both the borrowers and lenders pay the Platform a commission.

Most Platforms follow a ‘reverse auction model’, where the lenders bid with their own terms and conditions for a borrower’s loan proposal, and the borrower has the freedom to choose between the various bids.This gives borrowers who would typically struggle to get loans from banks/NBFCs with a variety of options. Further, the other advantage of the Platforms is that borrowers can now stay away from money lenders/the unorganized sector, as the Platform verifies all lenders and provides a streamlined and regulated process for obtaining loans. Finally, in most cases, the interest rates on loans obtained on the Platforms is also lower than what individual money lenders would usually charge.

Since the popularity of P2P Platforms in India has grown in the recent past, they remained unregulated till recently. However, with the growth of the fintech industry and the multiple use cases/benefits of these Platforms, the RBI released a consultation paper on regulating P2P Platforms, in 2016. On receipt of feedback and comments from the public and all stakeholders, the RBI released its Master Direction –Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (the “Directions”)– recently to officially regulate and monitor P2P Platforms. Thus, it is pertinent to understand and analyse the regulations laid down by the Directions:

Registration

The Directions provide that only corporate entities registered as a ‘company’can operate and engage in the business of P2P lending. Companies operating existing Platforms will have to obtain a certificate of Registration (“CoR”) from the RBI within a period of 3 months from the date of publication of the Directions.Additionally, the Directions provide for minimum capitalisation requirements, which need to be met before obtaining registration. This requirement is INR 2,00,00,000 (Rupees Two crore only), which is in line with the requirement for all NBFC’s in accordance with Section 45-IA of the Reserve Bank of India Act, 1934.

The Directions also provide the criteria on which registration will be determined.This includes ensuring that the Platform has the necessary technological and managerial resources, a robust IT system, fit and proper directors, a viable business plan etc. On being satisfied with an application, the RBI will first give an in-principle approval for setting up and operating a prospective NBFC-P2P platform. Within 12 months from the in-principle approval, the company must develop its technology platform as per the RBIs satisfaction, and also submit all other legal documentation as may be requested.

For a platform acting as a mere marketplace for the meeting of lenders and borrowers (one that does not provide any of the additional services described above), the capitalisation requirements contained in the Directions seem a little harsh. Additionally, the requirement may prevent start-ups from entering this space entirely, which will adversely affect innovation in this space.We recommend that the threshold should be revised downwards and can be made incremental with each year of an entity’s operations, to ensure that only companies that are growing continue to retain their license/registration.

Permitted Activities

As per the Directions, the Platforms can perform the following activities/services:

  1. Mere Aggregator

The Platform can act as a mere aggregator, intermediary or marketplace to facilitate the meeting of lenders and borrowers. While they can participate in the lending/borrowing process in certain ways (described below), and cannot raise deposits in any capacity.

  1. Principle, Return and Guarantees

The Platform cannot guarantee the return of a loan to any lender or provide guarantees of no loss. This will ensure that all lenders signing up on the Platform do so at their own risk, and will hopefully bring about transparency by reducing instances of false advertisement/lending in the name of the Platform.

  1. Nature of the Loan

The Platform can allow lenders to offer only unsecured loans. This was the original idea behind P2P Platforms, and it allows customers with little/no security to avail of loans as well.

  1. Associated Businesses

The Platform shall not cross-sell any product except for loan specific insurance products.

  1. Financial don’ts for the Platform
  • The Platform cannot hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans. This ensures that no money from any of the transaction on the Platform can be compromised by the Platform provider’s own financial standing as an entity;
  • The Platform cannot permit the international flow of funds. With this restriction, foreign lenders and/or borrowers have been excluded from participating directly on the Platforms in India, unless they hold a bank account within India.
  1. Duties of the Platform
  • The Platforms are required to conduct a due-diligence on all participants in the Platform. This includes a credit risk assessment and risk profiling of all borrowers registering on the Platform. This information is also required to be disclosed to the lenders, and it helps in creating a transparent environment on the Platform;
  • Platforms can render services for recovery of loans originated on the Platform;
  • Platforms can undertake the documentation of loan agreements; and
  • Platforms can provide assistance in disbursement and repayments of loans.

Prudential Requirements

  1. Permissible Thresholds of Lending and Borrowing

Any registered lender or borrower cannot lend or borrow more than INR 10,00,000/- (Rupees Ten Lakhs only) across all registered and authorised P2P Platforms. Further, no single lender can lend more than INR 50,000/- (Rupees Fifty Thousand only) to any single borrower across all Platforms. While these thresholds may seem conservative at first, considering the nascent stage of the P2P lending industry we believe that these limits are appropriate. The Platforms were anyway meant to facilitate small, unsecured loans from individual lenders, and if demand rises the limits can be revised in the future.

  1. Maturity Period: No loan provided via a Platform can have a maturity period of more than 36 (thirty-six) months. This seems apt, given the loan value is also capped at a number that is not very high.

Operational Guidelines

The Platform is required to have and implement a policy approved by the Board of Directors of the Company (the “Board”) regarding the eligibility criteria for participants, pricing of their services, and detailed rules for matching lenders with borrowers on an equitable and non-discriminatory manner, and other matters concerning the operation of the Platform. Additionally, any and all liabilities regarding the collection, storage and protection of personal data by the Platform will have to be borne by the Platform itself, even if any of these functions are outsourced to third-party service providers.

The Platforms are also required to maintain 2 escrow accounts for the transfer of funds – one for funds from lenders and the other one for funds collected from borrowers.Cash transactions are prohibited, which will help in accounting for all money being transacted via a particular Platform.

Enhanced Transparency and Disclosure Requirements

Previously, the scant availability of information regarding a borrowers’ credit history and defaults made the sheltering of defaulters easy. The Directions are aimed at rectifying this situation.They seek to introduce transparency and information symmetry between the borrowers and lenders, while simultaneously protecting the privacy of the data belonging to both parties.

  1. Disclosure to the Lenders:

Prior to accepting any loan arrangement on a Platform, the lenders should be made aware of the personal identity of the borrower, the loan amount, the credit score determined by the Platform and other details regarding the borrower.This ensures that the lenders can be made an informed decision regarding engaging with any borrower.

  1. Disclosure to the Borrower:

Borrowers are made aware of fewer details than the lender – they are informed about the lender’s proposal, repayment terms and interest rate, but are not informed of the lender’s personal identity, contact information and other personal information. This seems logical, as the borrower’s decision regarding the lender’s proposal should be based purely on the commercial terms offered, and not on the details of the particular lender.

  1. Public Disclosures:

The Platform is required to publish on its website the overview of the credit assessment methodology and factors considered; data protection and privacy measures; dispute settlement mechanism; portfolio performance including a share of non-performing assets monthly and segregation by age; and its broad business model.This is intended to give any individual/entity looking to register on the Platform the opportunity to make an informed decision.

Data Security and IT Framework

Considering the volume of personal data collected, stored and analysed on the Platform, ensuring a robust IT and data security framework is one of the foremost necessities. In light of this, the Directions lay down some robust standards:

  1. All Platforms are required to have “adequate safeguards” in their IT systems to protect against unauthorized access, destruction, modification, utilization etc. of the data. While the Directions do not lay down any specific minimum standard for maintaining these safeguards since the Platforms deal with personal data it can be assumed that they fall within the stipulations of the IT Reasonable Security Practice Rules, 2011;
  2. All Platforms are required to have a Board approved Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of the Platform;
  3. The Platform has to carry out a yearly information system audit, as well adhere to all requirements under the Master Direction on Information Technology Framework for the NBFC Sector, June 8, 2017.

Conclusion

With India marching towards the aim of being a paperless, cashless and consent-secured data sharing economy, these Directions are expected to open up new avenues for obtaining capital for individuals and small businesses, while simultaneously maintaining transparency and accountability in the process.Perhaps the only clause missing from the Directions is one on penalties, describing the repercussions if a Platform fails to adhere to any of the given guidelines. Yet overall, the Directions seem to be apt for P2P Platforms and well-thought through, especially considering that the industry around such Platforms is still nascent in India. As these Platforms gain more prominence the Directions can be modified accordingly, but for now, they seem to be a good starting point.

 

Author: Ayushi Singh; Reviewed by Madhav Rangrass