Law Vs. Ethical Conduct

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW VS. ETHICAL CONDUCT

Corporate Governance Research Private and confidential Proxy Advisory Services For limited circulation only Corporate Governance Scores Stakeholders’ Education  Stakeholders Empowerment Services 2012 – 2013 | All Rights Reserved MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

BACKGROUND

On 30th April, 2019, Indian media reported that Mr. Ness Wadia, heir to the 283-year-old Wadia Group, was caught in New Chitose Airport in Japan with 25 grams of ‘cannabis resin’ earlier in March, 2019. The news further stated that a Japanese Court had handed him a two-year prison sentence, which was suspended for a period of five years. (weblink)

Mr. Ness Wadia is a director on the Board of 4 Listed Companies viz., Britannia Industries Ltd (NED), The Bombay Dyeing and Manufacturing Company Limited (NED), National Peroxide Limited (NED) and Bombay Burmah Trading Corporation Limited (ED) having an aggregate market Cap of more than ₹ 75,000 crores in value, with Britannia Industries alone comprising of ₹ 65,000 crores.

The Stock Exchanges were quick to seek clarification from the above Companies as soon as the above news broke out in public domain, to which the Company responded by stating that:

“1. Please find enclosed the letter dated April 30, 2019 with respect to clarification on media reports on Mr. Ness Wadia, Promoter and Non-Executive Director of the Company.

2. Further, in respect of the query with respect to the disclosure requirement under Schedule III, Part A, Para A(6) of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, we request you to kindly note the following clarification that, neither was the Company aware of the events, nor did the underlying facts and events warrant any disclosure under the SEBI (LODR) Regulations, 2015 which deal with detentions and arrests connected with offences involving corporate and financial frauds” The said response from the Company also enclosed clarification provided by Mr Ness Wadia which stated that:

“The judgement referred to is clear. It is a suspended sentence. Hence, I have been suitably advised that it will not impact not impair me in the discharge of my responsibilities and I will be able to continue to play the role that I have done hitherto, both in the Company and the Group as also my other activities.”

DECODING MR. WADIA’S RESPONSE:

The response provided by Mr. Wadia indicates the following:

• that the news reported in media was not a rumour and he had indeed been sentenced (though suspended) for possessing drugs.

• Mr. Wadia had obtained advice to clear doubts relating to his disqualification from the Board.

DECODING THE RESPONSE OF THE COMPANY:

It appears that while the Company has on one hand accepted the fact that it was not aware of Mr. Wadia was arrested / detained in Japan, on the other hand, it is trying to indicate that such an event does not warrant any disclosure to Stock Exchange. SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘SEBI LODR’)

Regulation 30 of SEBI (LODR) states that: 30. (1) Every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material. (2) Events specified in Para A of Part A of Schedule III are deemed to be material events and listed entity shall make disclosure of such events. (6) The listed entity shall first disclose to stock exchange(s) of all events, as specified in Part A of Schedule III, or information as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information:

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

Provided that in case the disclosure is made after twenty four hours of occurrence of the event or information, the listed entity shall, along with such disclosures provide explanation for delay: (10) The listed entity shall provide specific and adequate reply to all queries raised by stock exchange(s) with respect to any events or information: Provided that the stock exchange(s) shall disseminate information and clarification as soon as reasonably practicable.

(11) The listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchange(s).

Events prescribed under Part A of the Schedule III to the SEBI Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI Listing Regulations’) include:

6. Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or promoter.”

In order to examine conduct of the Company, its Board and Directors, a time line of events is important. (weblink)

• Detention of Mr. Ness Wadia in Japan - Early March 2019 & Prior to March 20, 2019 • Indictment - 20 March 2019 • Financial Times Article - 29th April 2019 • Indian media reports - 30th April 2019 • Queries by stock exchanges - 30th April, 2019 • Board Meeting – 1st May 2019 • Response to stock exchanges - 2nd May 2019

NSE WEBSITE DISCLOSES CONTENT OF NSE MAIL TO THE COMPANY.

The Exchange has sought clarification from the Company with respect to news item captioned- "Ness Wadia gets 2-yr jail term in Japan over drugs possession: Report". In this regard, you are advised to provide clarification/confirmation on the news item in detail including the following: a) Whether such event stated in published news were taking place? If so, you are advised to provide the said information along with the sequence of events in chronological order. b) The material impact of this article on the Company. c) Whether company was aware of any information that has not been announced to the Exchanges under Regulation 30 of Listing Regulations. If so, you are advised to provide the said information and the reasons for not disclosing the same to the Exchange earlier as required under Regulation 30 of the Listing Regulations. The response from the Company is awaited.

SES ANALYSIS:

• The Company states that it was not aware. On the face of it, it is difficult to believe this statement, especially because Mr. Ness Wadia is the son of Mr. Nusli Wadia, who himself is a director on the Board of Britannia Industries Ltd. Did Mr. Nusli not know that his son was arrested? That may be a remote possibility.

• In that case, the next question is, when he came to know about it, and what did he do? Did he come to know about the incident only after the Financial Times reported it? Even after that Report, what steps did he take? Considering that there was no communication to Stock Exchange in this regard, the answer is ‘nothing’. Is disclosure of the incident, not a part of good governance practice?

• What did the Board members do? Even allowing for their ignorance till 29th April 2019. When the Board met on 1st May 2019, they had newspaper reports and letters seeking clarification from both the exchanges available with them.. Was the response letter placed before the Board? Did they discuss it in their board meeting? Obviously not, at least from the communication made to Stock Exchange relating to the ‘Outcome of the Board meeting’.

• While NSE had asked pointed questions, unfortunately, the reply of the Company to the same is neither available on NSE website nor on the website of the Company, even while the reply to BSE is available. There is no reason that the

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

NSE reply should be different. If that be the case, there would be information asymmetry. NSE had asked for chronological events, that information is unfortunately not in the public domain.

• The fact remains that the Company has not denied that Mr. Wadia was arrested / detained in Japan, and sentenced. This clearly falls under the clause 6 Part A of the Schedule III of LODR. Further, the Company’s argument that the aforesaid clause does not apply, does not hold any water as the relevant law doesn’t limit that the arrest has to be in connection with Corporate or Financial frauds, as contested by the Company.

• Lastly, the question is, whether Mr. Ness Wadia was only detained or arrested as well. SES is of the view that this legal fine distinction is best left to the Courts and cannot be a subject matter for governance professionals to debate. However as neither Mr. Ness Wadia, nor the Company has denied his arrest, it is futile to debate the distinction. SES is of the view that failure to report such an event to the Company by Mr. Ness Wadia and by the Company even after coming to know of it is not in accordance with law. The fact is that there is certainly a delay on the part of the Company to report such an event. The law states that the Company may provide an explanation for the delay in response. While the response provided by the Company (in view of the above) is not satisfactory as per SES, it would be interesting to see what stand Stock Exchange and SEBI take on it.

This Article, now further seeks to analyse the following: ➢ What is the meaning of a ‘Suspended Sentence’? ➢ What is the equivalent provision under the Indian Legislation? ➢ What is the provision under the Companies Act, 2013? ➢ Is there any International treaty between India and Japan, in this regard? ➢ Legality vs Ethical Conduct.

CONVICTION IN JAPAN-IMPLICATIONS:

In order to understand the impact of the order of the Japanese Court, one will have to understand the meaning of ‘suspended sentence’.

SUSPENDED SENTENCE:

According to Article 25 of the Penal Code of Japan (weblink), “When any one of the following persons has been sentenced to imprisonment or imprisonment without work for not more than 3 years or a fine of not more than 500,000 yen, the execution of the sentence in whole may be suspended in light of circumstances for a period of not less than 1 year but not more than 5 years from the day on which the sentence becomes final and binding.” Article 26 prescribes ‘Suspension of execution of the sentence in whole’ shall be revoked in the following cases;

……… (i) “when a further crime is committed within the period of suspension and imprisonment without work or a greater punishment is imposed for the crime, and the subject person is not granted suspension of execution of such sentence in whole;

(ii) when the person who was granted suspension is sentenced to imprisonment without work or a greater punishment for a crime committed before such grant, and is not granted suspension of execution of such sentence in whole. (iii) When it is discovered that, before a person was granted a suspended execution of sentence for a crime, the person had been sentenced to imprisonment without work or a greater punishment for another crime before such grant.”

Finally, Article 27 states that:

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

“Article 27 When a period of suspension of execution of the sentence in whole progresses without rescission, the sentence shall cease to be effective.” Therefore, according to Article 25, 26 & 27 as stated above, one can conclude that:

i. The sentence is conditional, subject to the commission of another offence within the period of suspension as per Article 26.

ii. Article 26 clearly states that such suspension is revoked if the offender commits another crime within the suspension period and is sentenced to imprisonment, as more clearly explained in Article 26 of the Penal Code of Japan as reproduced above. iii. Article 27 further provides that if no repeat offence is committed during the period of suspension, the sentence ceases to be effective, indicating that there will be no sentence to be served post 5 years. In a nut shell, it appears to be a warning, that, if a further crime is committed, one will not only be prosecuted again for the fresh crime, and the existing sentence will become effective and, if no crime is committed, there would be no sentence to be served except that a tag will remain for the period of suspension of the sentence.

APPLICABILITY:

The legislation of Japan would be applicable throughout the territories of Japan only and sentence, if any, has to be undergone in Japan only. Although Indian courts would not have jurisdiction on such cases, in the extreme case where suspension of sentence is revoked, and Mr. Ness Wadia doesn’t submit himself to Japanese courts, Government of Japan can move Indian courts under an extradition treaty, if any. However, this note is not analysing such a situation as it is hoped that such a situation would not arise.

FOREIGN CONVICTION - INDIAN LAW:

As per a recent judgement of the Bombay High Court, conviction of an Indian Citizen by a Foreign Court will not ipso facto be binding on Indian Courts or authorities. The Court has held that, in such cases, Indian Courts must exercise their discretion considering facts of the case and variety of factors involved therein. (weblink)

Clearly, there is presently no such law which binds the Indian judicial system to implement orders pronounced by a Foreign Court. It is also important to analyse what is the equivalent law and punishment for similar offence if committed in India.

INDIAN LAW RELATION TO POSSESSION OF CANNABIS RESIN

The corresponding provision under the Indian legislation is the Narcotic Drugs and Psychotropic Substances, Act, 1985 (‘NDPS Act’). Section 20 of the NDPS Act, states that:

Punishment for contravention in relation to cannabis plant and cannabis.—Whoever, in contravention of any provision of this Act or any rule or order made or condition of licence granted thereunder,— ………. (b) produces, manufactures, possesses, sells, purchases, transports, imports inter-State, exports inter-State or uses cannabis, shall be punishable (i) ……. (ii) where such contravention relates to sub-clause (b), — (A) and involves small quantity, with rigorous imprisonment for a term which may extend to 1 year, or with fine which may extend to ten thousand rupees, or with both; (B) ……. (C) …….. Provided that the court may, for reasons to be recorded in the judgment, impose a fine exceeding two lakh rupees.

As per the notification issued by the Central Govt. in this regard, ‘small quantity’ here refers to any quantity lesser than 100 gm of cannabis resin.

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

Therefore, as per the NDPS Act, Mr. Ness Wadia could have been sentenced to imprisonment of up to 1 year. Had Mr. Wadia been found guilty for a similar offence in India, he may have been required to vacate his position as a director in all the Companies, under the Companies Act, 2013, if sentenced to any period beyond six months. However, it is unlikely that he would have been sentenced to imprisonment at all in India, as reportedly it was his first offence and the quantity was much smaller compared to threshold of small quantity i.e. 100 gm.

COMPANIES ACT, 2013

Section 167 of the Companies Act, 2013 states that: “The office of a director shall become vacant in case—

he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months”

Since, the NDPS law provides for imprisonment up to 1 year, therefore, if any Indian Court had pronounced a verdict where Mr. Wadia was sentenced for a period of more than six months, Mr. Wadia would be required to vacate his directorships in all the Companies post 30 days from the date of such verdict, unless he prefers an appeal within stipulated period. The disqualification would then depend on the order of the Appellate Court.

It is here clarified that the term ‘Court’ as per the Companies Act, 2013, means an Indian Court, therefore, any sentence pronounced by a Foreign Court will not have any bearing on the office of director in India.

From the above, one can clearly conclude that Mr. Ness Wadia does not attract any sort of disqualification, at least going by the Law.

MORAL OBLIGATIONS OF THE BOARD AND MR. NESS WADIA:

However, SES would raise the following questions here:

• Should Mr. Ness Wadia not tender his resignation as a director on moral grounds?

• If he does not do so, then, should he be allowed to continue as a director on the Board of Companies on ethical grounds?

• What action has the Board, including the Independent Directors of the Companies, taken in this regard? SES can only raise the above issues to initiate a debate and cannot pass any verdict or opinion in this regard. However, the role of Independent Directors on the Board of the Companies as specified under Section 149(8) of the Companies Act, 2013, clearly states that:

The company and independent directors shall abide by the provisions specified in Schedule IV. Clause III of the Schedule IV to the Companies Act, 2013 provides certain duties that an Independent Director must adhere to. These include: (2) seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company; (7) keep themselves well informed about the company and the external environment in which it operates;

(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;

Generally, a Code of Conduct is not only applicable within the premises of the organisation, but also lays down expectations from the employee, outside the organisation. Are directors expected to behave ethically not only inside the Board room or the organisation premises but outside as well?

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

Code of Conduct of Britannia:

The Code of Ethics and Business Principles formulated for Non - executive Directors by Britannia Industries Ltd, in relation to a Director’s ethical conduct, clearly states: “Every director of Britannia shall conduct himself and deal on behalf of the Company with professionalism, honesty, integrity as well as high moral and ethical standards. Such conduct shall be fair and transparent and be perceived to be as such by third parties. Every director shall be responsible for the implementation of and compliance with the Code in his professional environment. Failure to adhere to the Code could attract the most severe consequences including termination of association.” Not only Britannia but other Companies where Mr. Ness Wadia is a director provide for similar Code of Conduct for its Directors and employees. Clearly, the conduct of Mr. Ness Wadia is not perceived by SES as fair and transparent. However, SES would reiterate that it cannot pronounce any judgement on the whole issue, but can only raise questions so as to initiate a discussion / debate. SES is of the opinion that the independent directors of the Company must initiate a discussion and take up the matter with the NRC and the Board, regarding the position of Mr. Ness Wadia on the Board.

CONCLUSION

• The question the Board needs to ask to itself is that, would it not have taken a stern action had an employee of their Company been sentenced to imprisonment in a similar case, even if the sentence is suspended? • Should Mr. Ness Wadia escape such a reprimand because he is a Promoter director? • Would the Company have followed a lenient policy in all such cases? • The Narcotic Drugs and Psychotropic Substances authority in India must enquire from Mr. Ness Wadia, as to source from where Mr. Ness obtained the drug? Did he obtain the same in India? If Yes, the authorities need to find out not only the source but also how it was not detected at departure airport in India? Are the systems not there or he escaped detection being a person of considerable means? Or he obtained it in a third country? If that be the case, in that case one must find out is Mr. Ness a regular visitor to that third country? Or the substance is freely available all around the world? In that case why single out Mr. Ness Wadia only? • Board must seek a response from Mr. Ness Wadia and get assurance that such conduct which impacts stakeholders should not be repeated, while taking corrective action(s) as may be warranted.

While, SES acknowledges that Mr. Wadia is completely within his legal rights to continue his directorships in all his companies, but, from a governance standpoint, he owes the shareholders of his companies a fiduciary duty that supersedes his legal obligations and from that perspective, having failed them, SES is of the view that ethically his position is untenable, unless the ethics committee of the Board accepts that such behaviour does not attract any question on conduct of directors and it also does not impact reputation and value of the Company. In case such conduct dents the value of the Company, the IDs as well other Board members are duty bound to act and protect the interest of all stakeholders.

MR. NESS WADIA’S SUSPENDED SENTENCE – LAW vs. ETHICAL CONDUCT 2019

RESEARCH ANALYST: NAVANEET DESAI | VARUN KRISHNAN | JN GUPTA

RELEASE DATE: 14TH MAY, 2019

DISCLAIMER

While SES has made every effort and has exercised due skill, care and diligence in compiling this report based on publicly available information, it neither guarantees its accuracy, completeness or usefulness, nor assumes any liability whatsoever for any consequence from its use. This report does not have any approval, express or implied, from any authority, nor is it required to have such approval. The users are strongly advised to exercise due diligence while using this report.

This report in no manner constitutes an offer, solicitation or advice to buy or sell securities, nor solicits votes or proxies on behalf of any party. SES, which is a not-for-profit Initiative or its staff, has no financial interest in the companies covered in this report except what is disclosed on its website.

The report is released in India and SES has ensured that it is in accordance with Indian laws. Person resident outside India shall ensure that laws in their country are not violated while using this report; SES shall not be responsible for any such violation.

This report may not be reproduced in any manner without the written permission of Stakeholders Empowerment Services.

All disputes subject to jurisdiction of High Court of Bombay, Mumbai