Nikunj is auditingthe accounts of a firm owned by a fewpartners. The accountsshowedinvestments of Rs 2 crore in time deposits of banks. He wants to see these fixed deposit receipts. But the managing partner has pledged them in Labhada Bank without telling his partners and took a loan. Nandita, the chief accountant, goes to the managing partner and tells him about Nikunj’s demand. He is in a fix and wonders what to do. Nandita volunteers that she knows the manager of Labhada Bank well, and will get photocopies of the fixed deposit receipts. She gets the copies and shows them to Nikunj pretending that the originals are in a safe deposit vault in a faraway suburb. Nikunj unsuspectingly accepts her story.
To which of the following comments you would agree?
1. Nikunj must be either incompetent or corrupt.
2. Managing partner has committed a breach of trust by securing a personal loan on the support of fixed deposits belonging to the partnership firm.
3. Manager of the Labhada Bank must be corrupt.
4. Only (1) and (2)
Regarding (1) we have no evidence to come to the conclusion that Nikunj is corrupt. He should have asked Nandita why she is showing photocopies of fixed deposit receipts. What is the compulsion or requirement to keep FDs in a safe vault in a faraway place? He could have given some time to Nandita to bring the original receipts and show him. Nandita could not have then tricked him because the Labhada Bank or for that matter any bank would not part with the receipts on which loan has been taken.
Managing partner has committed a breach of trust. There is no doubt about that. He is in a position of trust with respect to other partners. They have entrusted the management of the firm to him. He cannot use property of the partnership as security to get a loan for himself. The partnership firm is an entity separate from the managing partner. Somebody may incorrectly argue that no loss has been caused to the firm because the bank had no occasion to realise the value of the deposits. Nor that the firm has been deprived of the use of the money. However, ethically we do not need to see the result of the action. Mere possibility of doing harm is sufficient for ethical evaluation.
We have no basis to conclude that manager of Labhada Bank is corrupt. Giving a photocopy to the owners or their representative is a permissible action. The manager who sanctioned personal loan to managing partner committed an error. However, there is no statement that the same manger allowed the copies of the FD receipts to be taken. Hence (3) is not a correct statement. Hence (4)
Every listed company and companies of prescribed classes shall have at least one-third of total number of directors as independent directors. For the first time, the Companies Act has defined the term ‘independent director’. An independent director has to give an annual declaration of
independence to Board. He is not entitled to receive stock option (i.e. the benefit or right to purchase or to subscribe for, the shares of the company at a future date at a pre-determined price) but may receive remuneration and reimbursement of expenses. An independent director can hold office for a term of five consecutive years. However, he cannot hold office for more than two consecutive terms. But he will be eligible for appointment after a break of three years. Independent directors shall not be subject to the provision of retirement by rotation.
The Companies Act has prescribed the qualifications of independent directors and the procedure for their appointment. Their appointment has to be approved in general body meeting. To help companies in selecting independent directors, a data bank will be maintained containing names, addresses and qualifications of eligible and willing persons.
The independent directors are the custodians of corporate governance and the conscience keepers of the board. The Companies Act includes a code as a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investor community, particularly minority shareholders, regulators and companies in the institution of independent directors.
The qualities expected of an independent director include: integrity and probity; objective and constructive approach; bonafides of action; banishing extraneous considerations that threaten his objective, independent judgment; refraining from abuse of his office and from any action that would lead to loss of his independence.
A listed company may have one director elected by small shareholders. A small shareholder holds shares worth up to Rs 20000. There shall be at least one woman director in companies of prescribed class or classes.
The articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company based on proportional representation.The duties of directors mentioned in the Companies Act include good faith, due and reasonable care, skill and diligence, independent judgment, and no direct or indirect conflict of interest. Any violation of duties is punishable with a fine from one lakh to five lakh rupees.