CORPORATE GOVERNANCE: REGULATORY FRAMEWORKS UNDER CONSIDERATION

After introduction and passing of Companies Bill 2012 in Lok Sabha, many changes in corporate governance scenario is bound to happen. Many provisions of Clause 49 of listing agreement, which deals with corporate governance in listed companies, are being brought into main law to fill governance gap between listed companies and their other counterparts.  Following provisions have been added into present Companies Bill:

1. Requirement of new committees of Board of Directors (Cl. 178)
2. More powerful Audit Committee (Cl. 177)
3. Specific Duties of Directors (Cl. 166)
4. Mode of Appointment and  tenure of Independent Directors (Cl. 149, 150)
5. Code of conduct for Independent Directors (Schedule IV)
6. Rotation of Auditors (Cl. 139)
7. Restriction on non – audit services by Auditors (Cl. 144)
8. Enhance liability of Auditors (Cl. 143)
9. Disclosure and approval of Related Party Transactions (Cl. 188)
10. Class Action Suits (Cl. 245)
11. National Financial Reporting Authority (Cl. 132)
12. Corporate Social Responsibility (Cl. 135)

Internationally OECD Principles of Corporate Governance is an international benchmark. These principles are:

1. Ensuring the basis for an effective corporate governance framework
2. The Rights of shareholders and key ownership functions – protected and facilitated
3. The equitable treatment if Shareholders
4. The role of stakeholders in Corporate Governance
5. Disclosure and transparency
6. The Responsibilities of the Board – monitoring Management and Accountability to shareholders

Presently, there are two basic approaches for implementation of corporate governance principles.  United States and many other jurisdictions are using “Rule based approach” where all provisions are mandatory and their violation attracts penalties. In common law countries like United Kingdom and India, “principle based approach” or “comply or explain” is gaining popularity. Indian adopting mixed of both extremes.

Recently Adi Godrej Committee on Corporate Governance specified following principles:

1. Protection and facilitation of shareholders’ rights
2. Equitable treatment of all shareholders
3. Draft policy/procedure to facilitate shareholders to obtain effective redress
4. Recognized rights of stakeholders in corporate governance
5. Timely and accurate disclosure of all material information
6. Diversity of thought, experience, knowledge, understanding, perspective, gender and age in the Board
7. Induction / on – boarding program in companies
8. Lead independent director
9. Direct conversations between the independent directors
10. Explicitly record dissenting opinions
11. Continuing Board training and education
12. Board evaluation framework
13. Effective whistle – blower mechanism
14. Strategic guidance by board
15. Corporate culture and the values
16. Boards ability to ‘step back’ to assist executive management
17. Rightly encouraging positive thinking but not over – optimism
18. Balance performance with compliance
19. Right mix of skill at top management
20. Place relevant information immediately/ periodically before Board
21. Operational Transparency to stakeholders
22. Plan for orderly succession for appointments
23. Risk / crisis Management Plan
24. Due and reasonable care, skill and diligence by directors
25. Incentive based on remuneration based on long term interest of the company
26. Facilities for independent directors

On basis of above, SEBI has submitted its proposals divided in 31 headings. I summarize these proposals hereunder:

1. Appointment of independent directors by minority shareholders; SEBI proposes at least one independent director appointed by small shareholders.
2. Cumulative voting for appointment of Independent Director; this is in accordance with an existing provision of the Companies Act, 1956 but not a popular method for appointment of directors.
3. Formal letter of appointment; this is in line with provisions of present Companies Bill, 2012.
4. Certification course and training for independent directors; SEBI proposes training by National Institute of Securities Markets for independent directors in listed companies.
5. Treatment of nominee director as Non-Independent Director; this is in line with provision of present Companies Bill 2012.
6. Mandate minimum and maximum age for Independent Directors.
7. Mandating maximum tenure for independent director; SEBI suggest amendment in Listing agreement in line of provisions of the Companies Bill, 2012
8. Requiring Independent directors to disclose reasons of their resignation; this suggestion is in agreement with provision of the present Companies Bill, 2012 but SEBI ask simple question, “what will be happen where one director resign from one company citing ‘personal reason’ but continue in other companies.
9. Clarity on liabilities and on remuneration of independent directors:  SEBI proposes to align the requirements of listing agreement with the provisions of the Companies Bill, 2012.

10. Performance evaluation of independent director: this proposal is align with requirement of the Companies Bill, 2012. SEBI may want to propose detail methodology.

11. Lead Independent Director; SEBI proposes a lead independent director to chair meeting of independent directors and act as focal point for interaction between management and independent directors

12. Separate meetings of Independent Directors; these are required to independent review of internal control, general governance policies, performance of executive directors and Board.

13. Restriction on the number of independent directorships; Voluntary guidelines on corporate governance issued by Ministry of Corporate Affairs restrict independent directorship to 7 companies. SEBI want to explore possibilities.

14. Separating position of Chairman and that of the Managing Director / CEO; present Companies Bill, 2012 put some restriction on appointment of Managing Director as Chairman. SEBI proposes to remove provision of Chairman who is an Executive Director on the Board.

15. Board diversity; It seems SEBI and MCA limited to diverse background and gender diversification as per current international trends.

16. Succession Planning; SEBI suggest orderly succession plan and its disclosure

17. Risk Management; It is a proposal to compulsory monitoring and review of risk management system by Audit or Risk Management Committee. SEBI also suggest Chief Risk Officer or Risk manager for particular class of companies

18. Reporting of the internal auditor; SEBI suggest direct reporting of Internal auditors to audit committee.

19. Mandatory rotation of audit partners; there is the same requirement in the Companies Bill, 2012

20. Making Whistle Blower Mechanism a compulsory requirement; SEBI suggest alignment of Listing requirement with the provision of the Companies Bill, 2012

21. Making the Remuneration committee a mandatory one and expanding its scope; Making the Remuneration committee a mandatory one and expanding its scope:

22. Enhanced disclosure of remuneration policies; SEBI suggest alignment of Listing requirement with the provision of the Companies Bill, 2012

23. Stakeholders Relationship Committee; SEBI suggest alignment of Listing requirement with the provision of the Companies Bill, 2012

24. Mandating e-voting for all resolutions of a listed company; SEBI put the proposal to require listed companies to provide postal ballot/e-voting facilities for all the resolutions to be passed at general meetings may be explored, so as to enable wider participation of shareholders in the corporate democracy.

25. Abusive related party transactions; these are one major area of concern in corporate governance issues. SEBI has many proposal for this:

1. Requiring approval by shareholders for divestment of major subsidiaries: Present Bill is silent on this and SEBI want to fill this gap.
2. Immediate and continuous disclosures of material RPTs:
3. Prohibiting/regulating grant of affirmative rights to certain investors; SEBI noted present system of filing a petition to Company Law Board, but seeking more effective additional mechanism.
4. Approval of major RPTs by ‘Majority of the minority’; this is in alignment with provision of companies Bill, 2012
5. Pre – approval of related party transactions by Audit Committee and encouraging them to refer major related party transactions for third-party evaluation; this proposal is in line with Companies Bill 2012.
6. Approval of Managerial Remuneration by disinterested shareholders; this proposal is in line with provision of the Companies Bill 2012.
7. Expanding the scope of Related Party Transactions; SEBI underline differences between Ind – AS 18 and Ind – AS 24. It suggests wider definition should be adopted.

26. Fiduciary responsibility of controlling shareholders i.e. Promoters; SEBI suggest mandatory relationship agreement between company an controlling shareholders.

27. Strengthening Private Sector Enforcement; SEBI suggest recognition and encouragement of proxy advisory firms, support to investor associations, more enforcement powers to stock exchanges, investor education and grievance redressal machinery.

28. Improving investor education and awareness for batter participation and deliberations at general meetings.

29. Provision for regulatory support to class action suits; SEBI suggest that provisions of the Companies Bill, 2012 properly address this issue.

30. Role of Institutional Investors; SEBI want to encourage and force institutional investor for more active involvement:

1. clear policy on voting and disclosure of voting activity
2. robust policy on managing conflicts of interest;
3. monitor their investee companies;
4. act collectively with other investors
5. Establish and escalate method of protecting and enhancing shareholders value
6. Periodically report their voting activities

31. Enforcement for non-compliance of Corporate Governance Norms

Clearly public deliberations are going on and future seems very bright.

(UPDATE on 30^th August 2013: Companies Bill as passed by Lok Sabha on 18^th December 2012 (called Companies Bill, 2012) and passed by Rajya Sabha on 8^th August 2013 (became Companies Bill 2013) got Assent of President of India and became the Companies Act, 2013 (Act 18 of 2013). All applicable provision will come into in force on Notification issued by Central Government.)