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Air Asia governance & Tatas' involvement

  The controversy surrounding Air Asia India and the Tatas presents a thorny problem, with allegations of corruption and monetary fraud. While it does give the Tatas’ reputation a beating, more importantly, it has thrown up the requirements and responsibilities that a board, and independent directors, must have.  

Dr Suresh Srinivasan

There are a number of issues that have recently come to light that questions the responsibility of directors on boards of companies. Directors, including independent directors on the boards of companies, are becoming more responsible for the governance of said companies.

Allegations and bad press
The airline Air Asia India, for example, has recently been in the news for all the wrong reasons. More importantly, Tata Sons, a business group considered to be one of the most ethical in India Inc, was linked to Air Asia India and were plagued by allegations of corruption. These allegations included bribing government officials to gain faster approvals to fly international destinations, circumventing the government’s required norm of the airline possessing a minimum of 20 aircrafts, and having a history of 5 years in experience; popularly known as the ‘5/20 Rule’.
The charges that were leveled at the CEO of the AirAsia group, Tony Fernandes, were severe and included criminal conspiracy under the Prevention of Corruption Act. The scope of charges also covered the board of Air Asia India, and resulted in the Enforcement Directorate (ED) probing allegations of money laundering as well. One would recall that similar allegations
were made by Cyrus Mistry against Ratan Tata and the other members of the board of Tata Sons, before Mistry was dismissed as the chairman of Tata Sons. Mistry was reportedly sacked as he raised the issue of fraudulent transactions of `22 crore that were highlighted in the Air Asia India operations; this was exposed by the consulting company Deloitte during an investigation and forensic audit.
The charges also included the Indian airline’s flouting of the regulations of the Foreign Investment Promotion Board (FIPB) and violation of the foreign direct investment (FDI) norms. In simple terms, the regulators alleged that while the airline was supposed to be controlled by Indian residents, in actuality, it was being controlled by the Malaysian group.

About Air Asia India
Air Asia India is a joint venture between the Malaysian low cost airline Air Asia Berhad Group and the Tatas. The joint venture company is structured with a shareholding of Air Aisa holding 49% and Tata Sons holding 49%. R. Venkataramanan holds 1.5% and S. Ramadorai, former CEO of Tata Consultancy Services (TCS) and a senior Tata executive who used to be on the board of many Tata group companies, holds 0.5%.
R Venkataramanan is a nominee on the board of Air Asia India. He is the managing trustee of the Sir Dorabji Tata Trust, and is responsible for management and oversight of all the Tata Trusts. The Tata Trusts are public charities and are the principal shareholder of Tata Sons, the parent company of the Tata group, India’s largest conglomerate. Close to two thirds of Tata Sons is owned by these trusts.The Central Bureau of Investigation has summoned Venkat, the director of Air Asia India, for questioning in this connection.

The concerns
Venkat’s involvement in this episode has become a major cause for concern, especially with him being at the helm. Venkat holds the position of trustee of one of the largest trusts in India, and is also known for bringing in the name of Tatas that is considered to be ‘gold standard’ in corporate ethics.
The board of Air Asia India investigated the matter and concluded that they were unaware of the actions of the former CEO of Air Asia India Mittu Chandilya, which involved misappropriation of funds worth `22 crore, the transaction that seemed to have been alleged for bribing government officials. On such an inference, the board of Air Asia India filed an FIR against Mittu Chandilya, claiming that they had been ignorant of such a transaction and thereby shifting the responsibility. Chandilya, however, has alleged that he was falsely implicated in the report at the behest of the AirAsia chief.
In a recent order, the National Company Law Tribunal (NCLT) dismissed all allegations against Ratan Tata and Tata Sons Ltd, saying that it did not find merit in any of the issues raised. It clarified that the board of Tata Sons Ltd had nothing to do with the fraudulent transaction of `22 crore in Air Asia India, as alleged by Tata Sons ousted chairman Cyrus Mistry.

A worrying precedent?
These events raise some very important issues that we need to understand. The very initial charges leveled by the CBI, linking the board of Air Asia and Tata Sons in some form to such a charge, is very serious, and we need to understand how the board of directors of Indian companies in general are responsible for frauds and legal misconducts perpetrated at the operational level of the company. Or is it that the board get away just by saying that they had been ignorant of such operational transactions?
It is critical for the board of directors, especially the full-time directors who hold executive roles in running the company, to remain vigilant; these directors simply cannot argue that they were not responsible for the actions of managers and executives within the company. In recent court rulings, it has been shown that individual directors can be held responsible for an offence by a company if there is enough evidence of the individual’s active role coupled with criminal intent.
For independent and non-executive directors, the Companies Act of 2013 stipulates that they are liable only in cases where their knowledge and involvement can be established, or where they, despite having knowledge, failed to act diligently. However, the Prevention and Money Laundering Act of 2002 can be more aggressive, and may still hold independent directors responsible to an appropriate extent in case of fraud at the operating level of the company. Hence, for independent directors to get away with such charges becomes challenging in today’s context, especially given the magnitude of responsibility they have in terms of protecting shareholder’s monies.

The role of the directors
Hence, all of this brings us to a very important point. In order to be effective and live up to the expectations of the shareholders in terms of preserving their interests, independent directors need to be truly ‘independent’ of the management of the company, and have an eye to look at sometimes even smaller transactions if there is even a grain of suspicion.
Therefore, such an independent director will have to move beyond being a yes man to the CEO of the company, and don the hat of the shareholders to ensure that the company and its executive directors are acting in the best interests of the shareholders at all points in time. The independent directors should not hesitate to engage external experts if they smell something fishy to investigate potential fraud or misconduct.
All of this means that the role of independent directors is moving beyond traditional realms and is becoming a focal point in preserving the interests of the shareholders. Independent directors are being looked upon as those who, at all points in time, will have an eye of a shareholder. Gone are the days when independent directors are appointed by the managing director (MD) simply to be positioned as a yes man and to support decisions that the MD will benefit from, and not the shareholders at large.

Current regulations also ensure that the independent directors are no more considered as a mere
pawn in the hands of executive directors and managers of the company in furthering their own personal interests. In effect, this is good for the overall investor community, as this will foster more trust for the public to invest in shares
of companies!