The government has used the powers vested with it under the Companies Act to not just supersede the Satyam board but also appoint fresh directors.
The Satyam fiasco: Complete Coverage
The supercession of a company's board does not automatically lead to appointment of fresh directors. Under Section 408 of the Companies Act, the Centre has the powers to appoint a completely new board or appoint additional directors once approved by the Company Law Board (CLB).
The directors can be appointed for a period of up to three years. Apart from the government, the CLB can ask for a change in the board if 10 per cent of the shareholders seek its intervention on the grounds of oppression and mismanagement.
However, the government has used provisions under Section 388 of the Companies Act to push its intent to appoint 10 nominees on the Satyam board. The section provides for a change of management in case the existing personnel are found to be guilty of fraud, malfeasance, persistent negligence or default in carrying out their obligations and functions under the law, or for breach of trust.
Alternatively, the government can say that the business is not being run in a prudent manner and the management can cause, or has caused damage to the business.
"It is a provision which is used as a last resort. It is an extreme measure which is open to judicial review. I hope that the new board consists of eminent and reputed people," added the department's former secretary Vinod Dhal.
The government's nominee-directors will have the powers to appoint new statutory auditors. The government is also empowered to issue directives to the board.
"The nominee directors are also immune to any prosecution, they are not subject to the requirement to hold any qualification shares or liable to retire by rotation," said B Ravi, a company law expert.
Satyam remains the biggest case of board supercession in corporate India. There have been instances such as CRB Capital and WH Bradey in the past. In many cases, the government had only appointed nominee directors and not superceded the board.
However, in case of banks, the Reserve Bank of India has used the powers vested with it to place banks under moratorium. In the last decade, RBI has put four banks -- Bareilly Corporation Bank (March 1999), Benaras State Bank January 2002), Global Trust Bank (July 2004) and United Western Bank (September 2006) -- under moratorium. In all the cases, the banking regulator has also undertaken match making and merged the banks.
Under the Companies Act too, the government enjoys the power to amalgamate companies "in national interest".