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Corporate Oct 8, 2012

Vadra loans and DLF directors: Didn't know or didn't bark?

By R Jagannathan

The Robert Vadra-DLF land deals bring to the fore once again the value of having independent directors on board. Not only do they not appear to be independent, they often seem to be sleeping on the job.

In the Satyam case, we saw two business school worthies - one from Harvard and another from the IIM-ISB stable - as independent directors but they did not spot or stop what turned out to be India's biggest corporate scandal. A whole host of institutional investors also slept on the job or failed to raise a stink. The scam came to light only when the man himself - B Ramalinga Raju - confessed. So much for independent directors being able to flag off potential skullduggery.

More recently, in the Coal India case, the independent directors woke up to government interference in the pricing of coal only when a foreign fund manager, The Children's Investment Fund, threatened to sue them for silence. Do directors become independent only when they are going to be sued?

There is also little evidence that ONGC's independent directors have raised the banner of revolt against the government's efforts to transfer profits from their company to the oil marketing companies. Why don't the ONGC's independent directors quit instead of acquiescing in this loot of shareholder wealth?

Everyone knows that politicians are up to their necks in property deals. So could the independent directors have been unaware of who Robert Vadra was?

Which brings us back to the Robert Vadra-DLF case, in which India Against Corruption, Arvind Kejriwal and Prashant Bhushan alleged that DLF made interest-free loans to Sonia Gandhi's son-in-law, and which both DLF and Vadra have since denied.

The Economic Times talked to two of the independent directors on DLF's board and both came up with this simple disclaimer: it was not brought to our notice. Or words to that effect.

MM Sabharwal, who was the independent director at the time of the DLF-Vadra transactions, is quoted as saying that the auditors never raised the issue. And KN Memani, current independent director on DLF and former chief of Ernst & Young, said something similar. ET attributed this statement to Memani: "The matter was not flagged off at any board meeting. We have not come across any such instance where favours have been done....It is not possible to look at each and every sale transaction. But we try to ensure that all transactions are done at market prices."

DV Kapur, another independent director and former government official, said nothing had been established. "If thereafter anything comes to light, we should investigate it. This is a listed company."

Perhaps we are being unfair to the independent directors, but they have as much explaining to do as the company and Vadra. Three questions arise.

First, do independent directors have to act only when something has been brought to their notice? If it needs an auditor to tell them what's wrong, the board can surely act without the intervention of the independent directors. Why have independent directors in this case?

Second, do independent directors not read the newspapers? People like Sabharwal and Memani and Kapur are not babes in the wood. When The Economic Times front-pages a story - as early as March 2011 - on the deals involving Vadra and DLF, does it not strike them that they should be asking the management for details?

Third, are independent directors really so innocent about what happens in real estate deals? Everyone knows that politicians are up to their necks in property deals. So could the independent directors have been unaware of who Robert Vadra was? Why then did they need the auditor to flag off these deals? In fact, one can argue that it is not the auditor's job to point out political risks in a deal; their job is to confirm to shareholders that what is stated in the balance-sheet reflects the true state of affairs in the company. So did the auditors fail or the independent directors in this case?

But this statement of Memani to ET, about the alleged underpricing of deals to favour Vadra, takes the cake: "If any such instance would have come to us, we would have stopped it. If the company had tried to bypass us, I would not have stayed on the board."

But then he goes on to state: "If investigation takes place, I am certain that nothing would be found."

Assuming the newspaper has quoted him correctly, what is Memani trying to say? That he didn't know, or that if he knew he would have stopped it, or that he doubts there was anything wrong with the DLF-Vadra deals?

India's tribe of independent directors has not covered itself with glory so far. Not in Satyam, not in Coal India or ONGC. Not, it seems, even in l'affaire DLF-Vadra.

by R Jagannathan

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