Introduction
The listing of a multinational corporation’s subsidiary (“Subsidiary(ies)”) on the Indian bourses is a major shift for the once private company. This allows the Subsidiary to unlock value through India’s thriving capital market, while also subjecting it to oversight by the Securities and Exchange Board of India (“SEBI”). SEBI functions as the watchdog for the Indian securities market and ensures that listed entities comply with corporate governance norms to protect the interests of minority shareholders.
Prior to going public, these Subsidiaries often operate as an extended department of the parent multinational company (“Parent MNC”) for all major operational matters, including inter alia human resource, finance, sales and marketing, product-pricing, information technology systems, research and development inputs, operational support, and branding. Also, certain employees of the Subsidiary have a direct relationship with their counterpart in the Parent MNC. However, post-listing, such Subsidiaries must reconcile with being independent, both in letter and spirit, in keeping with Indian law. The challenge lies in navigating this duality of global businesses operating in India — ensuring that the Subsidiaries’ board (“Board”) functions independently, both in form and substance, while also preserving strategy-based alignment with the Parent MNC. This blog provides an outline for Subsidiaries to navigate this challenge — maintain Board autonomy, while complying with the extant Indian legal framework.
Maintaining Board autonomy: Mandatory, and not merely aspirational
Under the Indian legal jurisprudence, a subsidiary is a ‘distinct legal entity’ and not a mere extension of its parent.[1] Further, the Companies Act, 2013 (“Act”), and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), prescribe that the Board should exercise ‘objective independent judgement on corporate affairs’[2], while safeguarding the interests of all stakeholders[3]. Moreover, as per the celebrated commentary of Mark Arnold, “a director will fail to exercise independent judgment if they merely do what they are told to do by the majority of the board, or the dominant personality on it, or if they unthinkingly accede to the demands of those who control the company”[4].
Further, “a company is a legal personality, and the board of directors acts as its body and mind. Under Section 291 of the Companies Act, the board of directors is authorised to do what the company is authorised to do, unless barred by restrictions on their power by the provisions of the Companies Act. It is well-settled that directors, while exercising their powers, do not act as agents for the majority or even all the members and so the members cannot by a resolution passed by a majority of even unanimously, supersede the directors’ power and instruct them how they shall exercise their power”[5]. Thus, the powers of the Subsidiary’s management are vested in the directors appointed as the Board, and these directors can solely exercise the powers vested in them.
Therefore, the first step in safeguarding the Board’s independence is ensuring that the Board, and its committees are constituted in accordance with the Act and LODR. This includes the appointment of independent directors[6], who by virtue of being experts unrelated to the Subsidiary, are better equipped to provide unbiased opinion. Additionally, since independent directors are required to possess skills and expertise in fields such as finance, law, corporate governance, etc.,[7] they can uphold and propagate good governance practices. Akin to other directors, independent directors are expected to: (i) act objectively in the interest of the Subsidiary[8]; (ii) actively engage in deliberations; (iii) challenge the Board’s assumptions with insight-led inputs; (iv) act in the best interest of the Subsidiary[9]; and (v) devote sufficient time and attention to their professional obligations[10].
The Board’s autonomy is further reinforced through the constitution of:
- An audit committee, comprising at least two-third independent directors[11], which plays a pivotal role in scrutinising and providing prior approvals for related-party transactions[12], including those undertaken with the Parent MNC.
- A nomination and remuneration committee (“NRC”), comprising at least two-third independent directors[13], which ensures that the appointment and remuneration of directors is made in an autonomous and merit-based manner[14].
Apart from guardrails such as independent directors and committees, the Board’s autonomy in spirit, must be reflected by its directors through: (i) active participation and deliberation on matters of the Board; and (ii) asking probing questions and offering dissenting opinions, wherever required. Additionally, the Subsidiary should capture this independent decision-making process by comprehensively recording the minutes of each Board meeting. Further, the Subsidiary must consider making separate appointments to the offices of chairman of the Board and managing director/ chief executive officer, to prevent any potential conflict of interest emerging from management overlap of the Board and routine business of the Subsidiary.[15]
Nominee directors: Navigating conflicts with clarity
Conflicts pertaining to duty:
Nominee directors appointed on the Board by the Parent MNC (“Nominee Directors”) may find themselves in situations where they must take decisions impacting the interest of the Subsidiary and the Parent MNC; and are conflicted about the precise contours of their duty. However, the legal position is unequivocally clear in this aspect — in a situation of potential conflict, Nominee Directors must give primacy to the fiduciary duty owed toward the Subsidiary.[16] This stems from the principle under law that there is no distinction between a nominee director and any other director, i.e. a Nominee Director owes the same duties as other directors on the Board[17], implying that they must act independently and in the interest of the Subsidiary.
Therefore, Nominee Directors cannot blindly follow the instructions of their nominator, i.e. the Parent MNC, and cannot plead instruction from the Parent MNC as a defence to an alleged breach of their fiduciary duty towards the Subsidiary.[18] Moreover, given the principle that directors of an entity do not have an ongoing absolute fiduciary duty towards shareholders[19]; in case of a conflict, Nominee Directors must always give priority to acting in the interests of the Subsidiary over the Parent MNC.
Conflicts pertaining to sharing of information
As members of the Board, Nominee Directors are routinely exposed to unpublished price sensitive information (“UPSI”) pertaining to the Subsidiary. While the presence of Nominee Directors on the Board is not a concern per se from a SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) perspective; the restrictions on communication of UPSI of the Subsidiary must always be complied with. Accordingly, any sharing of UPSI by Nominee Directors with the Parent MNC, must only be undertaken in compliance with the PIT Regulations.
Global policies: Adoption after alignment
Parent MNCs often require their Subsidiaries to adopt annual business plans, operating plans, and group policies pertaining to ethics, compliance, financial reporting, human resources, and risk management, etc., to maintain consistency within the group.
However, given that Subsidiaries are distinct legal entities from their Parent MNC, any global policy must first be comprehensively deliberated by the Board and adopted only after customising it, in alignment with central and state specific legislations on inter alia labour, taxation, and environmental laws applicable to the Subsidiary in India. For instance, the anti-sexual harassment policy must be adopted only after customising it as per the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
Concluding Thoughts
Globally, Parent MNCs must realise and accept that once their Subsidiaries are listed in India, there are many other stakeholders who would be interested in them, and the Subsidiaries will have to function as per the legal and regulatory architecture prescribed for listed Indian companies. It can no longer function as an extension of its Parent MNC with (i) unfettered information flow to; and (ii) expectations of obedience with all directives issued by, the Parent MNC. The Parent MNC will have to reconcile with the institutions of independent directors, audit committees, and NRCs, which have clearly defined roles and responsibilities under Indian law.
While there could be some alignment with global strategies and business plans, the sharing of information with the Parent MNC will have to be in adherence with PIT Regulations, and any other regulations applicable to UPSI, which may be notified by SEBI. Parent MNCs will also have to reconcile to the fact that their Subsidiaries would be subject to much higher levels of scrutiny by proxy advisory firms, print media, activist shareholders, and regulators. Listing is a mixed blessing, and unlocking of value comes at a price.
[1] Vodafone International Holdings BV v. Union of India [(2012) 6 SCC 613].
[2] Regulation 4(2)(f)(iii)(7) of LODR.
[3] Section 166(2) of the Act.
[4] Mark Arnold KC, “Company Directors: Duties, Liabilities and Remedies, 4th Edn.”, Chapter 13 at Page 332-333.
[5] Shree Raj Travels and Tours Ltd. and others v. Destination of the World (Subcontinent) P. Ltd. [2010 SCC OnLine Del 3358].
[6] Section 149 of the Act read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014; and Regulation 17(1)(b) of LODR read with Regulation 25(2) and Regulation 25(2A) of LODR.
[7] Rule 5(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014.
[8] Schedule IV Part I (5) of the Act.
[9] Regulation 4(2)(f)(iii)(3) of LODR.
[10] Section 166(3) of the Act read with Schedule IV Part I (4) of the Act.
[11] Regulation 18(1)(b) of LODR.
[12] Section 177 of the Act, and Regulation 23(2) of LODR.
[13] Regulation 19(1)(c) of LODR.
[14] Section 178 of the Act and Regulation 19 of LODR.
[15] https://www.sebi.gov.in/media/press-releases/feb-2022/sebi-board-meeting_56076.html.
[16] AES OPGC Holding (Mauritius) v. Orissa Power Generation Corporation Ltd. [2004 SCC OnLine CLB 35].
[17] Commentary on Company Directors: Duties, Liabilities, and Remedies, 4th Edition by Mark Arnold KC.
[18] Id.
[19] Sangram Singh P. Gaekwad and Ors. V. Shanta devi P. Gaekwad [(2005) SCC OnLine SC 144].