Specialist in Indian Banking and Economic Research

Hemindra Hazari

Is a Securities & Exchange Board of India (SEBI) registered research analyst with over 25 years experience in the Indian capital markets with a specialization in banking and economy research and has managerial experience of establishing profitable equities business, leading and mentoring analysts.  He has worked with prominent foreign and domestic capital market firms such as UBS, Societe Generale, HSBC, ASK Raymond James  and Karvy Stock  Broking and is a regular guest on business media channels and is respected for his non-consensus view on stocks and the market.

The Rise of Shareholder Activism in India

IDFC - At the End of the Demerger Lies Opportunity

IDFC De-merger - Proposed Structure Is Inefficient But It Must Be Done.

The <a href="https://www.smartkarma.com/entities/idfc-ltd" target="_blank" data-smartkarma-citation="entities:518:1" rel="noopener">IDFC Ltd (IDFC IN)</a> ’s board of directors’ decision to <a href="https://www.idfc.com/pdf/IDFCLettertoSEOutcome25052021.pdf" target="_blank" rel="noopener">reclassify</a> Vinod Rai, hitherto independent director, as a non-independent non-executive director provides a backdoor entry for all those independent directors whom founders/promoters and executive management want to retain after the mandated two consecutive terms. In the critical financial sector there is a reason why regulators stipulate maximum continuous tenures for auditors and independent directors. The purpose is to prevent excessive proximity to the promoters/executive management. It is surprising that not only does the IDFC board fail to comprehend this basic principle, but that Vinod Rai himself is willing to compromise his “independence” and stature to continue on the IDFC board on such terms.It is equally surprising that the IDFC, which in its FY2021 annual report describes itself as being “renowned for exemplary governance”, declined to inform the stock exchanges of Vinod Rai’s resignation, and failed to upload his resignation letter on the grounds that this stipulation would be effective from January 1, 2022. Pertinently, when two of Zee Entertainment’s directors resigned on September 13, 2021, the firm <a href="https://www.bseindia.com/xml-data/corpfiling/AttachHis/52a91184-ea90-4412-bf35-9e2998867d22.pdf" target="_blank" rel="noopener">promptly disclosed</a> this to the exchanges. While IDFC claims to practice “exemplary” governance standards, in reality it is barely conforming to the stipulated minimum.Apparently, for IDFC, the 73-year old Vinod Rai is indispensable, and he has to be retained on the board at all costs. Indeed, Rai’s public pronouncement on the recent <a href="https://www.idfc.com/pdf/Transcript-of-IDFC-Ltd_Pre-AGM-Call_14Sep2021.pdf" target="_blank" rel="noopener">conference call</a>  suggests that he plays an executive role in the company.There is no explicit legal requirement which prohibits a person from continuing on the board as a non-independent director after his/her mandated two consecutive terms as independent director. However, the underlying principle of independence would have required an independent director gracefully leave the board after the mandated two consecutive terms. That Vinod Rai is willing to continue as a non-independent director on IDFC, with the support of the executive, raises suspicions about the extent of his “independence” when he was an independent director from <a href="https://www.idfc.com/pdf/apptofdirectorNSEBSe.pdf" target="_blank" rel="noopener">2015</a>  to <a href="https://www.idfc.com/pdf/IDFCLettertoSEOutcome25052021.pdf" target="_blank" rel="noopener">May 2021</a>  .That a prominent company with significant institutional ownership declines to disclose the resignation of its independent director to the exchanges and seamlessly reclassifies its independent director as a non-executive non-independent director is an indication of poor standards of corporate governance.  Far from being “exemplary”, it has devised a method of subverting governance for all those companies who would want to continue with compromised independent directors after their mandated tenures as independent directors are over.

The IDFC Ltd (IDFC IN) ’s board of directors’ decision to reclassify Vinod Rai, hitherto independent director, as a non-independent non-executive director provides a backdoor entry for all those independent directors whom founders/promoters and executive management want to retain after the mandated two consecutive terms. In the critical financial sector there is a reason why regulators stipulate maximum continuous tenures for auditors and independent directors. The purpose is to prevent excessive proximity to the promoters/executive management. It is surprising that not only does the IDFC board fail to comprehend this basic principle, but that Vinod Rai himself is willing to compromise his “independence” and stature to continue on the IDFC board on such terms.It is equally surprising that the IDFC, which in its FY2021 annual report describes itself as being “renowned for exemplary governance”, declined to inform the stock exchanges of Vinod Rai’s resignation, and failed to upload his resignation letter on the grounds that this stipulation would be effective from January 1, 2022. Pertinently, when two of Zee Entertainment’s directors resigned on September 13, 2021, the firm promptly disclosed this to the exchanges. While IDFC claims to practice “exemplary” governance standards, in reality it is barely conforming to the stipulated minimum.Apparently, for IDFC, the 73-year old Vinod Rai is indispensable, and he has to be retained on the board at all costs. Indeed, Rai’s public pronouncement on the recent conference call  suggests that he plays an executive role in the company.There is no explicit legal requirement which prohibits a person from continuing on the board as a non-independent director after his/her mandated two consecutive terms as independent director. However, the underlying principle of independence would have required an independent director gracefully leave the board after the mandated two consecutive terms. That Vinod Rai is willing to continue as a non-independent director on IDFC, with the support of the executive, raises suspicions about the extent of his “independence” when he was an independent director from 2015  to May 2021  .That a prominent company with significant institutional ownership declines to disclose the resignation of its independent director to the exchanges and seamlessly reclassifies its independent director as a non-executive non-independent director is an indication of poor standards of corporate governance.  Far from being “exemplary”, it has devised a method of subverting governance for all those companies who would want to continue with compromised independent directors after their mandated tenures as independent directors are over.

Vinod Rai Re-Enters the IDFC Board Through the Backdoor Highlighting “Exemplary” Governance