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: 2 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved 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 3 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved 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’.