• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

THE NEW GUIDELINES from the department of Company Affairs on loans and other financial accommodation to directors are welcome for the spirit of stakeholder protection that underlies them, but they do not quite address the core issue of non-compliance of regulatory provisions. If the problem is really one of lack of standardisation of the terms on which directors have been financially accommodated or that the DCA has applied differential norms in specific cases, then the latest guidelines should promote the cause of uniformity. Surely, the DCA would be the first to admit that it had adopted varying standards in this regard. But the problem really is one of utter disregard by companies of the legal requirement of government approval before granting loans to directors. This is clear from the various instances of the DCA proceeding against corporates for failing to get permission, especially companies promoting collective investment schemes or engaged in non-banking financial services. These latest guidelines would do nothing to promote adherence to legal requirements.

Thatthe latest initiative is only in the nature of `guidelines' only reinforces the impression that the Government is not committed enough to protect the interests of minority shareholder and other stakeholders. `Guidelines' do not have the same binding quality as `Rules' under the Act do in the disposal of application received by the Government. As the name implies, they are only indicative of the terms under which approvals would be accorded — suggestive of a case-by-case approach with all the negative connotations the term implies. Theoretically, even a proposal to grant interest-free loans to directors can be approved if a valid case is made out. The arrangement does not send out a message to the public at large that the government is serious about preventing stakeholder-inimical practices by the corporate sector.

`guidelines' Such as they are, the `guidelines' could do with some more tweaking in the context of protecting shareholder interests. For instance, the stipulation that the rate of interest should not be less than 4 percentage points higher than the bank rate does not, on closer analysis, secure the interests of the company as long-term loans for companies typically come at 13-14 per cent, that is, a good 6-7 percentage points over the bank rate. Similarly, there is some confusion about the quantum of loan a director may be entitled to. The guidelines speak of 25 times the salary drawn in the last six months, which makes it 150 months' salary. This is clearly substantial and, in any case, would be beyond the normal tenure of employment of board-level appointments raising doubts about the recoverability of the loan. Perhaps, the Government had in mind only the average of the last six months, but the word `average' is missing in the official release. This needs clarification.

Send this article to Friends by E-Mail

Stories in this Section
Indebted directors

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line