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When cure is better than prevention
August, 26th 2006
About a decade ago, the Supreme Court refused to halt Hindustan Lever Ltd's M&A (mergers and amalgamations) juggernaut, which according to the petitioners, threatened to make HLL the monopolist in the FMCG sector. The Supreme Court adopted a hands-off policy this once, saying effectively that we would cross the bridge when we come to it without bemoaning the absence of an effective competition law. A sensitive issue While some criticised the court for being blithe about a sensitive issue having long-term implications, subsequent events seem to have vindicated the Supreme Court's implicit stand that in a nascent liberalised economy, growth is more important than checking an incipient monopoly. This proves the point that in the world of business cure is often better than prevention. The Reserve Bank of India has reportedly asked Ms Naina Lal Kidwai to step down from the directorship of Nestle SA as a precondition for confirming her appointment as the CEO of HSBC India. Conflict of interest The RBI's apprehension is that by holding the twin posts she would be exposing herself to potential conflict of interest should Nestle India Ltd come asking for a loan from the bank she is the CEO of. Incidentally, the company law in India does not frown upon such dual role. In fact, it permits one to be a director in as many as 15 companies simultaneously, though one is apt to wonder whether such a regime encourages one to blithely collect directorships without being able to do justice to all such offices. Be that as it may, the danger of conflict of interest is tackled by ordaining an interested director from stepping out of the board meeting when the agenda turns on the matter he/she is interested in. And for good measure, it excludes the presence of such interested director for the purpose of quorum, besides ordaining that the vote if cast by the interested director should not be counted at all either for or against. Cynics sneer at these provisions as being utopian with they being followed more in breach than in compliance on the ground. But Parliament has not been tempted to swing to the other extreme and nip the mischief in the bud itself. And wisely so because the business world has been accustomed to the practice of you-sit-on-my-board-I-will-sit-on-yours, though cynics cavil at it for often degenerating into a practice of you-scratch-my-back-I-will-yours. Fairly addressed But the danger of conflict of interest has always been addressed fairly by our judicial system ex post facto. The point is, in the world of business, one cannot always proceed with a suspicious frame of mind. Under our legal system, one is presumed innocent until proven guilty. In the rarefied world of business too, rectitude must be presumed unless its lack is proved. Else, the world of business would come to a screeching halt. S. Murlidharan (The author is a Delhi-based chartered accountant.)
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