JM Financial sign board. (Photo: Bloomberg)

Independent Director Quits JM Financial ARC On Governance Differences

It is not uncommon for independent directors to resign from an Indian company board if governance practices are not up to scratch. But to say as much in their resignation letter and not couch in political correctness is nothing short of unprecedented.

In October this year, veteran banker Anil Khandelwal resigned from the board of JM Financial Asset Reconstruction Company Ltd. because he got the impression “that the company’s perception about governance issues is in wide variance to my own understanding about a transparent governance process”.

JM Financial ARC is no small company. It’s India’s third-largest capitalised ARC, with a net worth of Rs 1,067 crore and assets under management of Rs 14,257 crore as per the September-end data on the company’s website.

JM Financial Ltd., founded by veteran investment banker Nimesh Kampani, owns just over 57 percent of the ARC and the Sekhsaria/Neotia family, once the owners of Ambuja Cements Ltd., own 20 percent. The rest is owned by a clutch of banks, high net worth individuals and foreign institutions.

Khandelwal’s resignation letter, first reported on by news site The Wire, describes a year of conversations in which independent directors expressed several concerns but got no response from the rest of the board or company management. And when they did get a hearing, it didn’t go well.

Independent Director Quits JM Financial ARC On Governance Differences

The Timeline

As per Khandelwal’s letter, in January 2018 the independent directors met, in what seems to be the separate meeting mandated by law. In that meeting, suggestions were made to improve corporate governance standards at JM Financial ARC.

Minutes of that meeting, circulated a full four months later on April 26, document the suggestions made.

Khandelwal also wrote to the company secretary about “several resolutions brought to the board authorising executive functions to non-executive chairman”. In that letter Khandelwal explained his objection to the resolutions.

In May, HN Sinor, another veteran banker and the senior-most independent director, wrote an email to the company Chairman VP Shetty, sharing several concerns.

In June, in a board meeting, Shetty told the board that management was considering the issues raised by the independent directors.

Nothing happened for four months.

Khandelwal then requested Shetty to arrange a meeting with the Kampanis, the promoter family.

On Oct. 24, Vishal Kampani, son of Nimesh Kampani and group managing director at JM Financial, met with the independent directors. In that meeting, Sinor raised the concerns of independent directors to Kampani.

The next day, on Oct. 25, Sinor resigned with immediate effect. The reason stated in his letter was that he had completed 10 years on the board of the company and was stepping down “in true spirit of Companies Act guidelines”, with immediate effect. The rest of the letter expresses gratitude to the company and his colleagues on the board.

Interestingly, Sinor was appointed as director on the board on April 10, 2008. He completed 10 years well before he stepped down.

To be clear, the company law provides for a maximum of two five-year terms for independent directors. But the law, that became effective in 2014, does not count time served prior to that.

On Oct. 27, Anil Khandelwal resigned from the board of JM Financial ARC, with immediate effect.

In the absence of any positive intent and assurance to take concrete steps on the issues raised by the IDs, I am constrained to resign from the Board of the company (guided by my conscience) with immediate effect. This is by no way any reflection on the general working of the company, which is by any standards very satisfactory.
Anil Khandelwal’s Resignation Letter (Read Full Letter Below)

So What Went Wrong At JM Financial ARC?

Nothing, said the company in an emailed response to BloombergQuint.

The recent resignation of an independent director from one of our group companies (JM Financial ARC), wherein he has mentioned a few areas of suggestions for “a notch above governance” appear to be causing a misunderstanding about the subject. Do note there is no criticism of current standards of governance in any of the communication.
JM Financial Spokesperson

Most of the actionable points raised by the independent directors can only be implemented in the upcoming cycle of performance evaluation, the statement said.

But if the implementation of the independent directors’ suggestions was work in progress, as the company statement suggests, why would two independent directors resign with immediate effect, one putting his disagreement in writing in no unclear terms?

After all both Khandelwal and Sinor were long-standing directors with five and 10 years each on the board.

But they were not the only ones to attend the October meeting with Kampani, said a company official. Two other independent directors were there as well. And they have not stepped down, the official added, speaking on the condition of anonymity.

Sinor refused to comment and despite repeated efforts BloombergQuint was not able to reach Khandelwal for comment.

What The Independent Directors Want

According to the statement shared by JM Financial, Sinor, in his email sent in May, made four suggestions...

  • that observations made by the independent directors in the board evaluation process be reviewed dispassionately and proper feedback system should be evolved.
  • the Nominations and Remuneration Committee should have a role to play in matters of performance evaluation, payment of directors commissions, filling board vacancies etc.
  • stop current practice of asking some promoters or Group executives, who are neither board members nor company employees, to attend board and committee meetings.
  • stop granting executive powers to the non-executive chairman.

Much of this is already provided for in company law so its not clear why the independent directors would need to make a special request to the board and management, nor clear why the company would say its work in progress.

But three issues standout, as also reported by The Wire.

1. Adi Patel’s Remuneration

Patel is listed as sponsor director on the JM Financial ARC website. He has been associated with the JM Financial Group for over 24 years and his appointment to the ARC board was approved via a resolution passed in July 2017. He joined the board in December.

His remuneration as director on the ARC board, for financial year 2017-18, is almost 10 times that of what any director was paid.

Independent Director Quits JM Financial ARC On Governance Differences

The law requires the Nominations and Remuneration Committee to formulate a policy on director remuneration, so ordinarily the committee, of which Sinor is a member, would have approved Patel’s commission. But the matter is confused by Sinor’s email recommending that the NRC be consulted on director remuneration.

The company stated it followed the law.

2. Vishal Kampani At JM Financial ARC Board Meetings

The independent directors wanted the discontinuation of this practice of promoters or group executives, who are not members of the ARC board, attending its meetings. They pointed to a Reserve Bank of India observation on the same at the ARC.

The company said it was a best practice to have group functional heads and the group chief executive officer attend group company board meetings on invitation. It acknowledged that the RBI had commented on this in context of the ARC and said it would seek the view of the board again.

3. Executive Powers To A Non-Executive Chairman VP Shetty

This is against good governance practices, the directors said in the email sent by Sinor. It has also found mention in Khandelwal’s resignation letter, the only grouse he explicitly mentioned.

The company said the the chairman had been given powers to sign some agreements, documents and cheques for the company but these were procedural powers as the decision making was not delegated to him.

Post Script

The incidents at the JM Financial group company may serve to reinforce the utility of a new provision in the Companies Act, 2013 — that independent directors of the company shall hold at least one meeting without the attendance of non-independent directors and members of management.

It was such a meeting that seems to have set the ball rolling on events that culminated in two independent directors quitting the board with immediate effect and one letter that will go down in India’s governance history.

Anil Khandelwal’s Resignation Letter

Independent Director Quits JM Financial ARC On Governance Differences
Independent Director Quits JM Financial ARC On Governance Differences

HN Sinor’s Resignation Letter

Independent Director Quits JM Financial ARC On Governance Differences