SEBI norms should insist on having independent directors on Board one year before IPO filing: Mohandas Pai
A good chairman is crucial for a well-functioning Board, balancing the interests of investors and management, and acting as a mentor to the management, says TV Mohandas Pai.
Year 2023 had a series of cases in which founders locked horns with the Board of Directors, bringing corporate governance standards into sharp focus. Byju Raveendran of Byju’s, Bharatpe’s Ashneer Grover and Housing.com founder Rahul Yadav (in his new startup avtar), were all in the news with regard to issues pertaining to their style of functioning. Former Infosys Board member and co-founder of Aarin Capital Partners, TV Mohandas Pai, talks about the importance of having a high-quality Board with capable independent directors that can guide and propel a startup. Mohandas Pai who is on Byju’s advisory council, declined to talk specifically about the edtech company. Excerpts from an interview:
‘Superstar’ founders, the world over, have often created huge headaches for Board of Directors. On the other hand, a cumbersome Board can create stumbling blocks for highly opinionated founders. Of late, many companies are struggling to find that fine balance.
A Board can function well only if it has a good chairman. The chairman is a person who manages the board and who interacts with the management to make sure things go alright. He/she has to balance the interests of the investors and that of the management. The chairman has to be a mentor to the management and a person who is well respected by all. That’s the only way it will work in a high- profile company.
The Board has to talk to the management and lay down the rules of engagement. Power and responsibilities of the Board and the management have to be well defined. When you have a superstar and active CEO who believes that he’s changing the world, there’s bound to be a problem. There are very few such people in the world and you need them. But when you have such people at the top, you need a chairman with great maturity and skill.
Many of the Indian IT services champions like Infosys and Wipro have been beacons of high corporate governance standards in India. Of course, there has been a blip along the way, in the name of Satyam. However, with regard to startups, it appears that governance standards have a long way to go.
For a listed company, there has to be transparency because third party money is involved. So, norms have to be followed. In many listed companies also, the norms are followed only in letter and word and not in spirit. There are challenges there too but since they have to report there’s greater degree of transparency.
Now in a private company, governance is a matter between investors and the management. It’s not a matter for the public. Where’s the public interest involved? Public hasn’t put in money. So, the investors have to lay down the principles as to how corporate governance matters have to be followed. And whenever the company (startup) plans to go public, they have to accept greater transparency and degree of responsibility because they are getting public money into the company. The public money can come from a large number of investors. So, their behaviour has to change.
When you have a superstar and active CEO who believes that he’s changing the world, there’s bound to be a problem.
In what way would you suggest that happens?
At least two years before they go public, they have to ensure they have independent directors and a good chairman on the Board and they all cannot be investor nominees. Nominees will always listen to what the nominator wants. You have to find people who will work and that Board has to work with the management to appoint bankers who will work with accountants to ensure the financials are okay.
When the prospectus if filed, they have to make sure that they have gone through it thoroughly and signed it and passed the resolutions. The red herring prospectus has to reflect the views of the Board. The Board has to take responsibility for it. Now, if a startup wants to go public six months from now, and they appoint somebody as an independent director what independent knowledge will he come to bear? It takes 1.5 years to understand the company. New people joining 3-4 months before the IPO, cannot help matters.
That’s a very valid point. Often, such processes are not followed.
Some startups grant a large stock options one or two quarters after listing (restricted grants). When a large grant is offered to the founder, the matter should have been discussed 6-9 months ago. My view is that investors of any company that has given large options to founder within one or two quarters would have had to discuss the matter before the IPO. But that’s not disclosed in the prospectus. Suddenly, one quarter/two quarter outside, they come up with a stock option and that becomes a surprise to everybody. That’s a big risk. You can’t suddenly change your mind. The market should have been informed about it. Giving them to the employees later is normal course of action but giving it to the founder is not normal course of action.
That shows that the Board wasn’t in control.
That shows the Board was not up to date. They were not independent. Even the SEBI norms should be changed to say any company going for an IPO should have a board of independent directors like a listed company at least one year before filing of the prospectus. I think that’s a reform that’s urgently required. If you appoint independent director 2-3 months before the IPO, they can’t be in control.
It takes 1.5 years to understand the company. New people joining 3-4 months before the IPO, cannot help matters.
It's a work in progress. It’ll happen. Independent directors take at least one year to familiarise with the working of a company. It’s important to bring in that kind of reform as that will make them more accountable.
The importance of having independent directors on the Board of these startups can’t be over-emphasised.
Investors alone being on the Board is not a good idea. Investors have a very focused view. You need independent directors. Investors want the best price for the IPO but the best price may not be in the best interests of the shareholder.
A good mentor has to be there to handhold a ‘superstar’ founder. In the BharatPe case, Rajneesh Kumar has come in and balanced everything. You need a chairman like that. The chairman should be able to balance out the super ego of the founder.
Independence is an attitude of the mind. Just getting a retired person on board isn’t enough.
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Business NewsCompaniesNewsSEBI norms should insist on having independent directors on Board one year before IPO filing: Mohandas Pai
First Published:8 Jan 2024, 09:11 AM IST
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