The New Year has begun with an optimistic note on the corporate governance (CG) front. In December 2012, the Lok Sabha passed the long awaited Companies Bill, and on 4th January 2013, Sebi issued a consultative paper on revising CG norms.
By Shriram Subramanian, Founder and Managing Director, InGovern Research Services, a corporate governance research and proxy advisory company
The New Year has begun with an optimistic note on the corporate governance (CG) front. In December 2012, the Lok Sabha passed the long awaited Companies Bill, and on 4th January 2013, Sebi issued a consultative paper on revising CG norms. The proposals, if implemented, will surely make Indian CG norms amongst the highest global standards and push Indian companies to be more transparent and accountable.
The present CG norms in India are governed by provisions in the Companies Act 1956, Clause 49 of the Listing Agreement and Voluntary Guidelines by the MCA. Although Clause 49 was a breakthrough in Indian CG scenario, its implementation was not as effective as it was meant to be. The reason was classification of provisions into mandatory and non-mandatory requirements. Provisions in the non-mandatory segment would have been very effective had all the companies adhered to it, but companies view them as optional practices and often don't adhere to them. The consultative paper proposes making some of the important non-mandatory provisions as mandatory while introducing many other essential provisions.
Some of the proposals which are sought to be made mandatory are:
- Prescribing a maximum term, age limit, outside directorship, remuneration and liability for Independent Directors (IDs),
- Formal induction, training and yearly performance evaluation of IDs,
- Appointment of a lead ID and separate meeting of IDs,
- Treatment of nominee directors as non-IDs,
- Separation of Chairman and MD/CEO roles,
- Higher role and authority of the audit committee,
- Setting up nomination and remuneration committees,
- Proper succession planning, and
- A whistle blower policy
Other proposals include:
- Appointment of at least one ID by ‘small shareholders' (i.e., shareholders holding shares of less than Rs. 20,000),
- Cumulative voting for appointment of IDs (i.e., allowing a shareholders to cast all of his/her votes for a single nominee, rather than one-vote-per share method),
- Rotation of audit partners,
- E-voting for all types of meetings,
- More transparency in related party disclosures,
- Support for class action suits,
- CG ratings of companies by recognized agencies
The consultative paper also recognizes the importance of proxy advisory firms like InGovern and their influence in enhancing the CG culture in the country. It also calls for institutional investors to have a greater role in enhancing CG culture by regularly voting based on a voting policy and quarterly disclosure of voting activities. The paper also proposes various penalties on companies for non-compliance of CG norms. They range from monetary penalty, delisting of securities to legal prosecutions and debarring directors from capital market.
The proposals by Sebi are a welcome step and, if enforced properly, will sure go a long way in an effective CG regime in the country.