Missing Corporate Governance In A Large Cement Company - How Independent Directors Failed Here?
Corporate Governance Practice Audit
* Birendra K Jha Independent Director, IICA ( Ministry of Corporate Affairs ); Corporate Governance Practice Audit; CSR Social Impact - CSR Planning & Implementation; Expert Company Law -SEBI Law - Social & Environmental Law EMail: birendrajha03@yahoo.com
This is a large cement producer company. The examination of the Annual Report 2024-2025, submitted in the stock exchange, reveals major violations of the SEBI LODR 2015. The Independent Directors sitting at the Board have failed in understanding the provisions and what violations they have committed. The SEBI LODR is the spinal cord of the Corporate Governance. The Secretarial Compliance Auditor has also failed here in capturing the stated violations. It appears the Independent Directors have forwarded the same opinion what was stated by the Secretarial Compliance Auditor. The Independent Directors have failed to use their own mind.
Needless to repeat the Board of Directors or the Independent Directors sitting at the Board should must get verified and examined the disclosures going to be published in the Annual Report from a good Corporate Governance Expert. This shall save them from heavy penalty from the SEBI. The three violations mentioned here has been done by a reputed company with large capital holding. This speaks the quality of its Independent Directors and the Company Secretary, who prepared the report.
1. Violation of Regulation 30 of the SEBI LODR - Incomplete Litigation Disclosure:
Under SEBI LODR Regulation 30 and Schedule III Part A, the listed entity is needed to disclose the Material Litigation disclosure. This should must include:
a) Name of authority b) Nature of violation c) Financial exposure d) Status of case e) Impact on company f) Probability of loss.
But, what the listed entity has disclosed? It has disclosed a penalty imposed by the Competition Commission of India. This penalty is under appeal before the Hon'ble Supreme Court of India with a stay order. This is a cartel penalty case, where Hon'ble Supreme Court has given stay. Stay doesn't mean the listed company shall not disclosed litigation disclosure related to this cartel case. A brief is needed what caused the CCI to impose penalty. Further what is the merit point under which it has been appealed before the Hon'ble Supreme Court. Complete disclosure should not be understood as partial disclosure. Though there is no litigation provision by the company. It appears the company believes it shall win the case in the Hon'ble Supreme Court. But nothing can be said till the judgement is received.
This is what in the top, has been stated that the Independent Directors and the Company Secretary both failed here to understand this important provision. The SEBI LODR Regulation 30, read with Schedule III Part A needs mandatory disclosures which should must five grounds for this disclosure.
Disclosed Vs. Missing Table:
This analysis shall help the Independent Directors to understand clearly the disclosure related violations committed by them. This listed company has disclosed authority and the penalty amount only. The other disclosures are missing. As stated earlier the listed company must disclose:
a) Name of authority b) Nature of violation c) Financial exposure d) Status of case e) Impact on company f) Probability of loss.
Such material disclosures help the investors to take proper investment related decision. Investors must know - Whether the violation affects the business model or not? What we see clearly in this case drawn from the Competition Commission, the company is facing the following allegations. These allegations are directly disturbing the business model. The three clear allegations are following:
a) Cement cartel allegations
b) Price-fixing charge allegation
c) and Market manipulation allegation.
The allegations are not disclosed. The actual disclosure gives a plain statement where "company believes it has a good ground of winning the case". This disclosure do not mention Risk Assessment. The Risk Assessment should must contain under Regulation 30 the management view on the legal risk ; exposure risk; probability of loosing case; interest liability if defeated in the Supreme Court; legal cost and sensitive analysis.
Similarly the Profit Impact Disclosure is also not mentioned. What is the ultimate impact of this litigation on the profit is completely missing. The disclosure should be in the format penalty imposed by the Competition Commission is equal to X% of the net worth. The Future Business Risk Assessment is also completely missing here. What shall be the impact on operation etc; When Supreme Court likely to decide the case are all missing.
Similarly, other Regulatory proceedings are poorly disclosed. One Custom Case of subsidiary Company has also not been disclosed here properly. The contents are missing in similar way as stated in the Competition Commission case above.
2. Violation of Regulation 34 - Whistleblower data missing:
Company has stated here policy. Other disclosures which are missing are:
a) Number of complaints b) Number investigated c) Number pending c) Nature of complaints d) Violation Type and e) Major governance transparency gap.
3. Violation of Schedule V. Compliance History Disclosure Incomplete:
The Annual Report gives narrow and limited statement states. It mentions no penalties or strictures imposed by the statutory authority during the last three years.
Why This Disclosure is Incomplete:
It covers a period of three years. The SEBI LODR needs complete disclosure "NOT WITHIN 3 YEARS". Beyond 3 years there are multiple litigation not reported here. This includes other compliance cases. Why all these disclosures not mentioned. This type of limited disclosure blocks the investor ability to take right decision. Within 3 Years itself the "Cartel Case" of Competition Commission mentioned else where fail, to appear here. Why? Clearly the disclosure is incomplete. Some examples can be given here:
a) A long running competition litigation running between 2010 - 2016 is not mentioned.
b) The SEBI has taken action on the Asset Takeover Issues. This is missing.
c) The Tax Disputes (Historical) cases are also missing here. This includes the prominent GST demand case relating to 2018–23 operations
Conclusion:
The Independent Directors should must audit the draft of the Annual Report by a good expert on the Corporate Governance, before it is disclosed to the Stock Exchanges. This shall help the Independent Directors to take necessary countermeasures. Though, this is not mentioned in the provision. But it shall be Good Governance Practice.
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