Jan 5, 2013

Recast corporate governance rules: Sebi

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Market regulator Sebi on Friday released a consultative paper on corporate governance which proposes splitting of the post of chairman-cum-managing director, giving greater responsibilities and powers to independent directors. The regulator also pitched for aligning rules relating to listed entities along with the proposed Companies Bill that is awaiting Parliament’s approval.

Among a slew of other proposals, the paper suggested that the appointment of independent directors should be only by minority shareholders, such directors should be formally trained to be on company boards and they should also be regularly evaluated for their performance. The regulator has proposed separating the CMD position in a company mainly to avoid concentration of power with one person. This may lead to changes in the structure of a large number of Indian companies, mainly PSU and family-owned firms, where one person holds the position of chairman-cum-managing director (CMD), market players said.

Interestingly, the regulator also suggested that all independent directors should go through a compulsory training session, followed by an exam, both under National Institute of Securities Markets (NISM), a training body under Sebi. However, it has not stipulated any exemptions even for reputed independent directors in the country, who, with years of experience and a solid track record, may not be willing to take such tests, a corporate lawyer pointed out.

Sebi is also aiming to change Clause 49 of the listing agreement between companies and stock exchanges to align it with the proposed Companies Bill. Listing agreement deals with the rules that all listed companies should adhere to remain listed on the bourses. These rules, although aimed at making the Indian market a safer place in terms of corporate governance, could lead to shortage of good independent directors since remunerations for these people may not commensurate with the duties and responsibilities, practitioners in the corporate field said.

Sebi’s paper proposed that all independent directors should be appointed by minority shareholders only and also suggested that there could be proportional or cumulative voting while electing such directors. In India, proportional voting is done while electing the President. It also proposed the position of a lead independent director in each company.

Sebi also proposed that while resigning, an independent director should disclose the reasons for his/her decision. “It has been suggested that the reason for the resignation of the independent director should be submitted to the Board of the company which in turn should circulate the same to shareholders and inform the stock exchange in this regard,” the Sebi paper said.

Although professionals from the corporate advisory field lauded Sebi’s moves to adopt global best practices, they feel some of the proposals are too stringent, and the issue about remuneration packages for the directors should also be looked into. “The rules will better the corporate governance process in the country, but they look too stringent,” said Pavan Kumar Viajy, MD, Corporate Professionals, a Delhi-based corporate legal and financial advisory firm. “Also, Sebi should be clear about the remuneration package for such directors. Otherwise these strict clauses could emerge to be a deterrent in getting good independent directors,” Vijay, who also sits on the boards of some of the companies as an independent director, said.

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