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Corporate governance in the ‘new normal’, post-lockdown India

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Iqbal Khan
Amarchand Mangaldas & Co, Mumbai
iqbal.khan@amsshardul.com

Ambarish Amarchand
Amarchand Mangaldas & Co, Mumbai
ambarish.amarchand@amsshardul.com

 

India imposed a strict lockdown on its 1.3 billion people to tackle Covid-19 and is now taking steps to open up.

The lockdown was imposed pursuant to an 1897 statute enacted to contain bubonic plague and a more recent 2005 statute enacted to handle disasters; both of which provision for imprisonment for non-compliance. The lockdown is now being lifted in phases, with the government prescribing several strict social distancing requirements, with punishments for violations.

Re-opening businesses in post-lockdown India is forcing companies to re-examine their strategy due to a multitude of concerns, including:

• regulatory issues regarding opening up;

• business and financial issues caused by Covid-19;

• employee wellbeing;

• moral and reputational issues; and

• concerns regarding liabilities, particularly on account of the commonplace provision for imprisonment under Indian statutes.

This non-exhaustive note lists certain markers for good governance, as well as certain considerations for avoiding liabilities in the challenging times ahead.

Regulatory issues and liabilities.

Liabilities may arise on account of two broad factors: designation and involvement. Here are the broad categories of key potential liabilities, with suggested steps to minimise such potential liabilities.

Liability of independent and non-executive directors (not promoters)

These directors generally have limited liability on account of their designation. To ensure that their liability continues to be limited, they typically limit their involvement only to board matters and do not get involved in the day-to-day management or affairs of the company. In addition, such directors typically take steps to demonstrate through the minutes of board meetings that:

• there was no consent to, or connivance with, a non-compliance; and

• due diligence was exercised as expected of a person of their skill.

Liability for breach of directors’ duties

Liabilities may arise if a director breaches his or her duties, including the duty to:

• act in good faith;

• act in the best interest of the company, employees, shareholders, community and environment;

• act with due and reasonable care, skill and diligence; and

• exercise independent judgement, without any conflict of interest.

Liability of key managerial personnel

Key managerial personnel, such as the managing director, chief executive officer, manager, company secretary, full-time directors and certain officers who are one level below the board, are exposed to additional liability, as they are included in the definition of an ‘officer who is in default’ under the Companies Act 2013 – a concept that is used to fix liability for violation of the applicable provisions of this statute.

Liability of persons in charge or responsible

Liability may attach to other managerial personnel or directors if they are found to be ‘in charge of, or responsible to, the company, for the conduct of the business of the company’. Such liability may arise pursuant to the violation of several applicable statutes, including the Disaster Management Act 2005. This is one of the key statutes invoked to contain the spread of Covid-19.

Criminal liability irrespective of designation

Criminal liability may attach for violation of the Covid-19 related orders issued under the Epidemic Diseases Act 1897 to ‘whoever’ commits the contravention. It is independent of the violator’s designation.

Considerations for Covid-19 and avoiding liabilities.

ESG planning and compliance

Although corporate India does not yet have a recommended standardised framework for environment, social and governance (ESG) analysis, an increasing number of investors, especially global financial investors, are evaluating a target’s ESG compliance prior to investments.

With employees working from home, concerns regarding maintaining the core values, culture and ethos of an organisation will undergo a microscopic level of scrutiny by such investors. Therefore, companies may wish to consider:

• adopting a pragmatic ESG framework and ensure strict compliance with it;

• monitoring and evaluating peer data to calibrate its relative performance; and

• internally regulating ESG data disclosure to avoid misconstruction by stakeholders and evaluators.

Scenario analysis, business projections and contingency planning

The board, as part of its fiduciary duties, should ensure that the management has re-evaluated the company’s business strategy and projections. This should include, among other things:

• a capital allocation review;

• a fundraising and liquidity analysis; and

• strategic planning (short, medium and long-term), especially for a scenario which takes into consideration a second wave of Covid-19.

Specific policies, procedures and delegations

The board and the management must consider putting in place specific policies and procedures to address key issues (such as data protection and confidentiality) and to specifically tackle Covid-19 related issues (eg, a detailed reopening plan after lockdown).

The board and the management may also put in place a well-defined organisational structure with identified roles (eg, a Covid-19 task force). This may help demonstrate reasonable due diligence and limit exposure in case of a contravention. Such steps, coupled with adequate training, may also ensure the health and safety of employees, customers, suppliers and other stakeholders.

Expert external advice and review

The board and the management may consider seeking external independent expert advice prior to:

• implementing key policies and procedures;

• re-evaluating business strategy; or

• executing, or defaulting under, any contract.

This will help demonstrate reasonable due diligence, good faith and lack of criminal intent, provided that such expert advice is implemented in a timely manner.

Maintain minutes and other documentation

Documentary evidence is generally crucial in case of prosecution or non-compliance claims by regulatory authorities or other stakeholders,. The board and the management should consider creating proper records – board minutes, other internal and external communications and policy documents – to demonstrate that all necessary steps were taken to follow government directives.

Review contracts

Claims for breach of contracts and invocation of concepts like force majeure are likely to escalate. Management should ensure compliance with the terms of all contracts and assert its rights by issuing timely notices. It should also keep track of defaults (its own defaults and a contractual counterparty’s defaults), even though the key provisions of the Insolvency and Bankruptcy Code 2016 have been suspended, and should try to mitigate any disputes if possible.

Exercise extreme caution while making representations

Fundraising and business contracts will require a company to provide representations (whether verbal or in writing) regarding its present and future prospects. There could be allegations of fraud, cheating or misrepresentation on account of such representations. The board and management should ensure extreme vigilance while approving and entering into agreements governing such arrangements.

Reassess insurance

The board and the management should reassess all insurance policies – especially the directors and officers (D&O) insurance policies and business disruption policies – for sufficiency, coverage and exceptions.

Keep track of regulatory requirements

This is required as the regulatory requirements regarding Covid-19 and other corporate compliances is fast-changing. A lack of knowledge is not a valid defence.

Timely disclosures and effective communication

This is recommended not just for listed companies, but for all companies, in order to ensure shareholder engagement and transparency. The Securities and Exchange Board of India encourages listed companies to evaluate the impact of Covid-19 on their business, performance and financials, both qualitatively and quantitatively, and to make appropriate disclosures.

During these uncertain times, boards and senior management will face unprecedented challenges, and must remain watchful, open and flexible when addressing them.