India Inc's mettle to be tested with voluntary corporate governance norms

India Inc’s corporate governance mettle will soon be put to the test with a stricter framework.

Sources said the country’s largest bourse, the National Stock Exchange (NSE), will unveil governance and disclosure norms next week that will be more stringent than what is prescribed under the Sebi (Securities and Exchange Board of India) Regulations or the Companies Act.

Adhering to these norms will be entirely voluntary and won’t impact the listing status of any company.

Companies that meet the higher standards will earn a special tag or will be clubbed differently, to help investors distinguish them.

Given investors’ preference for companies with high governance standards, those in the club might command higher valuation or greater institutional participation, said industry players.

“It is a good initiative. However, it may take some time to gain wide acceptance among Indian companies. We need to see how companies adapt to it. If it takes off, it will become an aspirational thing,” said Shriram Subramanian, founder and managing director of InGovern.

Brazil has successfully implemented a similar measure where it has created a new listing segment called Novo Mercado (New Market) for companies that voluntarily commit to adopt corporate governance practices outside the law.

Sources said NSE’s initiative will involve signing a contractual arrangement between the exchange and the company to give the scheme more sanctity. Once the new norms are announced, companies will be given six months to sign up, they added.

Some key requirements under the new framework will be minimum public shareholding of 40 per cent, instead of 25 per cent as mandated under the law. Minimum board size of eight as against just six prescribed under the law. More than half of the board should comprise independent directors in companies where public shareholding is less than 50 per cent.

Also, the audit committee will be required to consist entirely of independent directors. Further, the roles of chairperson and managing director must not only be separated but should also not be related.

Besides, the NSE will prescribe greater disclosures in areas such as sustainability, promoter-related entities, and financial health.

Sources said about 200 companies meet the key requirements laid down under the new code.