Jan 5, 2013

Sebi moots more say for minority shareholders

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If a set of proposals of the Securities and Exchange Board of India ( Sebi) on corporate governance are implemented, minority shareholders would get a greater say in certain decision-making processes at listed companies.

In a consultative paper released on Friday, the market regulator put forth suggestions that include giving more powers to independent directors, putting curbs on related-party transactions by companies and enhancing the role of institutional investors.

The proposals, if accepted, would strengthen companies’ corporate governance practices, under Clause 49 of the listing agreement and align those with the provisions in the new Companies Bill, said bankers and officials of shareholder advisory firms.

  • Appointment of one independent director by small shareholders
  • Certification course and training for independent directors
  • Compulsory whistle blower mechanism
  • Prohibiting grant of affirmative rights to certain investors
  • Approval of managerial remuneration by disinterested shareholders
  • Greater monitoring by institutional investors
  • Enforcement for non-compliance of norms

“Measures announced are good for corporate governance. Sebi has tried to retain the stringent clauses between Clause 49 and the Companies Bill, while realigning the two,” said Pavan Vijay, founder of corporate services provider Corporate Professionals.

Echoing Vijay, Amit Tandon, managing director of shareholder advisory firm IIAS, said Clause 49 would have become redundant with the imminent passage of the Companies Bill, 2011.

Sebi has proposed that minority shareholders appoint at least one independent director in a company. It has also suggested that related-party transactions ( RPT) by listed companies obtain shareholders’ approval, especially in cases of divestment of shares in subsidiaries. Also proposed are immediate and continuous disclosures of material RPTs and prohibition of granting affirmative rights to private investors or financial institutions.

Many proposals pertain to improvement in the quality of independent directors, who are considered vital cog for corporate governance. Sebi has suggested certification course for independent directors, change in remuneration structure and exclusion of nominee directors as independent directors.

Sebi has also proposed to make mandatory a ‘whistleblower mechanism’ for employees to report to the management their concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. As prescribed in the Companies Bill, Sebi has also allowed provision for regulatory support to class-action suits and mandatory rotation of audit partners.

“Some of the proposals like class-action suits, rotation of auditors and audit partners align Clause 49 with the Companies Bill passed by the Lok Sabha,” Shriram Subramanian, founder and MD of InGovern Research Services, a corporate governance research firm, said. “Some of the proposals like succession planning, compulsory ‘whistleblower mechanism’, proposals on RPTs, etc, are truly path-breaking and the need of the hour.”

Sebi has also sought greater participation of institutional investors by asking them to have a clear policy on voting and managing conflict of interest and has called for greater monitoring of their investee companies.

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