SEBI’s Consultative Paper on Corporate Governance Norms

 

The New Year has begun with an optimistic note on the corporate governance (CG) ecosystem in India. The Lok Sabha passed the long awaited Companies Bill in December 2012 with substantial provisions for minority investor protection as well as improving the CG structure in Indian companies. SEBI kept up with this trend by bringing out a consultative paper on revising CG norms on January 04, 2013, with the intention of aligning the corporate governance practices under Clause 49 of the listing agreement to the provisions in the new Companies Bill. The proposals, if implemented, will enable Indian corporate governance norms to align with the global best practices of corporate governance and help companies 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 CG Guidelines by the MCA. Although Clause 49 was a breakthrough in Indian CG scenario, its implementation was not as effective as it was envisaged. The main reason for this was the classification of its provisions into mandatory and non-mandatory requirements. Provisions in the non-mandatory segment would have been very effective had all companies adhered to it, but as the name suggests, 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 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 greater role of institutional investors in enhancing the CG culture by regular intervention in their portfolio companies in CG matters as well as monitoring their performance. The provisions will also make it mandatory for institutional investors to have a clear policy on voting and disclosure of voting activities as well as to have a robust policy on managing conflicts of interest with their portfolio companies. 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 the capital markets.

The proposals by SEBI are a welcome step and will sure go a long way in maintaining an effective CG regime in the country.

Link to the Article on Moneycontrol: SEBI Consultative Paper on CG Norms