Maruti Suzuki Chairman R C Bhargava, ex-director of crisis-hit IL&FS, on Thursday applauds steps taken by the government to step in and reconstitute the board of IL&FS, he said the company is extremely important for the economy and the infrastructure sector.
Bhargava is among the 10 former directors of IL&FS against whom the Ministry of Corporate Affairs has filed a petition to the National Company Law Tribunal (NCLT) alleging mismanagement and negligence as the firm defaulted on payments.
Reports have suggested that these directors would not be allowed to serve on the board of other companies.
RC Bhargava welcomes government's move to take over IL&FS, says he won’t step down as Maruti chairman
“I am not stepping down and the law as far as I have understood is that you only need to step down if something is established against you which makes you unfit to be a director,” Bhargava told CNBCTV18.
We would like to get your first reaction on this entire controversy because the centre sought to a removal of the board of directors as they failed to discharge their duties, this is what they said in the NCLT and they also painted a rosy picture of the balance sheet?
IL&FS is an extremely important company for the economy and for the infrastructure sector. The government acting to do what was required to ensure that the company is going well.
Now amongst the things which have been said, let me point out that what went wrong with IL&FS was that there was not enough capital and liquidity in the company to service - we will not go into detail why that situation developed. This situation was in the knowledge of the management and the board at least for the last 3-4 years and it was reviewed in most of the board meetings, which happened during this period.
Action plans for solving these problems of liquidity and stabilising the operations of the company were made in every board meeting reviewed and then move on.
Unfortunately, that is where the question of failure comes in, what was done in terms of raising of capital or increasing equity capital of the company did not happen. The divestment of the assets did happen to an extent but not adequately to stave off the defaults which took place.
Reductions in costs took place in the last two years, maybe reducing cost by 29 percent in one year, 20 percent in another year, so all of these things happened.
The balance sheet of IL&FS in all the years till March 31, 2018, audited by one of the big four auditors has always shown profits. And that the company was bleeding is actually not quite consistent with the status of the balance sheets. It is not like that. It is in this year that the whole problem of defaults wherein the situation has changed.
The senior counsel representing the government said the board of IL&FS has acted like parasites on public funds taking hefty salaries while the company was bleeding. Do you think this is too harsh?
The salaries are given to the executive directors. The independent directors and nominee directors on the company do not get any salaries at all.
There has been this debate on whether the nominee directors and the shareholders should have also been held accountable? The people who are named by the government were the independent directors, but do you feel that the shareholders who had veto rights, the nominee directors who had key right to vote in major decisions they should have been held accountable?
I am not sure how these legal applications are made and whether a nominee of an institution should or can be named because they keep changing frequently also. Actually, it is the institution which is on the board in a sense represented by that person, he is not there in his personal capacity. So whether these people should be named or not is a question mark. I am not sure if they could be named because of this situation of being a nominee.
But were you surprised that only independent directors were named?
No, because I don't think nominee directors are not named in such matters.
IL&FS has suffered from a string of defaults, were red flags never raised, was no one aware that the company could collapse in the last three years?
As I said it was known for the last four years I think, three-four years that there was a need to increase the capital of the company. That there was a mismatch between the assets and the liabilities. It is not unknown and as I said many steps were taken to increase the capital but they just didn't happen.
Do you think that is where the role of the shareholders needs to be also looked at?
I am not going into what the reasons were but the fact is that we could not increase the capital and that is a failure.
There were attempts. There were at least three or four attempts made to revive?
Various type of attempts was made to increase capital. It didn't succeed.
What about the role of LIC? Given that LIC was the largest stakeholder and had the maximum representation on the board do you think it should be held accountable for letting matters come till here?
No, I am not somebody to evaluate or comment on what LIC did or not. That is for the LIC board and perhaps the government to look into. It is not my job to do that.
Because we have been reading that there was in 2015 it was almost a done deal that the Primal Group will take a 40 percent stake in the company but then it fell through because LIC objected?
This is not a matter I would comment on.
Shouldn't senior executive directors managing a company be held responsible? Many have resigned left the company as well?
From IL&FS, the main holding company the managing director is still there and the other director Arun Saha is still there. The people who left were in charge of other businesses. They have left but the directors a lot of independent directors I believe from one of the subsidiary companies have left.
If we talk about the entire business of infrastructure financing do you think this needs to be seriously looked at now?
Again, I am not the expert on infrastructure financing and I think it is something which will be looked at by the people who should be looking at this. It is not something I would comment on but what is certainly valid is that infrastructure growth if it has to be rapid does require a financing system which is supportive of that growth.
Otherwise, in a developing country to have rapid expansion of infrastructure is difficult if the financing is not appropriate for rapid growth of infrastructure and looking at the special nature of infrastructure compared to let us say industry.
Do you think the new board which is now headed by Uday Kotak should look at this? I also believe that according to reports there has been a letter written by five independent directors to Uday Kotak, were you one of them?
I am one of them and what we wrote was that we are totally supportive of the government action that is the first thing. Let us be clear that the independent directors all of them, not only me, are fully supportive of what the government has done and we have offered help to Uday Kotak and his board. If they feel that they need any help from us in any way we are there to help them because the main concern of all of us is to ensure that this company continues to be a going concern.
What will be your advice to them?
I am not in a position to advise them.
You have raised red flags about the problems that you had encountered in the running of this company in the last few years?
It is all in the records. I am sure they will be looking at the past record including the past board minutes so they will see all the issues which had come up and what was happening.
Do you also feel that somewhere what has happened with IL&FS also calls into scrutiny the governance by nominee directors on the board? The board compromised of nominees from LIC, SBI, Central Bank do you think their role and their views in meetings should also be looked at?
I have never had a nominee director anywhere so I am not sure what it should be. I have never studied the role of nominee director or what nominee director in corporate governance should or should not be expected to do.
What is certain is that a nominee director on a board should continue on that board for a reasonable length of time. We did have situations in IL&FS when sometimes nominee directors were changing very quickly. If a director keeps changing quickly and that applies not only to nominee director but it applies to any director, if the directors keep changing quickly it is very difficult for that particular director or those who succeed him to really understand what the company needs and what they should do.
Do you also feel that the roles and responsibilities of independent directors should be better defined and liability should also be clearly spelt out?
The law has done a lot to do that but it is more for anybody to judge what is the power and the capabilities in the board of an independent director and what are the roles of management and of the executive directors and if you have nominee directors who are also the major shareholders. IL&FS is a little bit unique because it has only very few shareholders.
If you have these key shareholders, then should they be held accountable at the end? If they had a great say in running the company, they had the veto rights?
I think accountability will always ultimately be of the whole board, you can't hold any individual director responsible. That wouldn't be consistent with corporate governance.
The key stakeholders?
The shareholders whether it is IL&FS or any other company should always be concerned with the protection and growth of profits on their investments. It doesn't matter whether you are on the board or otherwise, shareholders are always to be concerned with that.
If the shareholders feel that some directors are not doing their job particularly well they remove those directors because you get a chance to vote on a director of a company every three years. So if you find the performance of a director is not satisfactory the shareholder removes them. So the shareholders is certainly concerned with what happens about his company.
Given that the LIC was the largest stakeholders and had the maximum representation on the board do you think eventually they should be held accountable?
No, as I said earlier you can't hold anyone institution or anyone director or anyone person responsible.
It is a collective failure?
It is a collective responsibility and as the government has said the board failed to deliver ultimately that is what it says which is a fact, that the board failed to deliver because the company went into default.
Do you think having a clear promoter increases accountability and in case of diversified holdings where should accountability lie?
It is lies with the whole board and the management.
But having a clear promoter do you think that makes it easy?
You mean promoter manager.
That has different types of problems and that is why the whole company law has been amended to provide for more accountability of the promoter because the promoter manager of a company had his own problems when he was running a company where government thinks that he often ran the company without bothering about the interest to the minority shareholders.
So, this whole concept of minority shareholders and all these committees, audit committees and nomination committees where minority shareholders are in majority were brought in to keep a control on what the promoter manager of the company was doing. So, that has a different type of problem. This has a different type of problem. Independent directors are supposed to protect the interest of the minority shareholders from any kind of wrong actions by the majority promoter. Here that situation doesn't arise so the role of the independent directors becomes a little bit different.
The last time the government had moved to take control of the company was during the Satyam scandal. What are the lessons that we learnt from that and can this situation be compared to Satyam?
I don't think that Satyam example and what has happened in IL&FS are comparable. The two situations are quite different. Satyam had massive fraud and right from the beginning it was clear that there was a massive fraud. In IL&FS so far no fraud has actually been established. Sure SFIO is looking into it and we will have to see what the outcome is but it is not as if the company went into the problem because there was some massive fraud which came to light which it did in Satyam. At least our knowledge and for what we have seen in the functioning of the company these years was lack of adequate capital.
There were steps taken to save the company but that couldn't materialise?
Yes, and we couldn't solve that problem.
Could you share with us a couple of instances how you tried to save the company?
There was an IPO attempted, there was an attempt to bringing in an outside shareholder, the sale of assets was taking place, reduction in expenses were taking place, so all these steps were tried. Ultimately the proof of the pudding is in the easting. If you couldn't prevent default then all your steps ultimately were not adequate.
But why did these steps didn't materialise?
That is what will come out now what happened, why did they not materialise.
Was it because of the role of nominee directors?
I don't know. I wouldn't comment on that. That is something which time will tell us what happened.
There have been reports about whether the directors who have been removed can continue as directors of other boards- what is your take on this? Will you be stepping down as Chairman of Maruti Suzuki India Ltd or are you waiting for more legal clarity?
No, I am not stepping down and the law as far as I have understood and told to me as the law is that you only need to step down if something is established against you, which makes you unfit to be a director.
First Published: IST