Ministry asks Sebi to explain stricter governance norms

While most of Sebi's new norms are aligned to changes in Companies Act, they are more stringent in certain areas

The Securities and Exchange Board of India (Sebi) and the Union finance ministry are having discussion over the stricter corporate governance code prescribed by the former for listed companies.

The talks are on whether there is a need to have a different corporate governance code for listed companies than what is prescribed in the new Companies Act, said sources.

Although Sebi’s new corporate governance code is largely aligned to the latter requirements, it has also has prescribed stricter norms for publicly listed companies. Its new code -- revised clause 49 of the Listing Agreement -- will become applicable from October.

The new norms impose more checks and balances on independent directors and auditors of listed companies, to increase transparency. It also has clauses that give more powers to minority shareholders to block abusive related-party transactions (RPT).

Although corporate governance experts have welcomed the new norms, India Inc has raised concern over the increased regulatory burden. In various forums, business heads have voiced their reservations.

Senior finance ministry officials are said to have asked Sebi whether the governance norms have to be different than what the ministry of corporate affairs had already prescribed under the new law.

Some experts believe norms can be made more stringent for listed companies. “There is nothing wrong in Sebi prescribing higher standards for listed companies, where the public stake is generally higher. But every such prescription must have a nexus with the purpose and must factor in all the associated costs and benefits,” said M S Sahoo, secretary, Institute of Company Secretaries of India.

Among the areas where Sebi’s norms go beyond what is stated in the Companies Act are on independent directors (IDs) and RPTs. While the Companies Act allow a person to act as an ID on the board of 10 public companies, under Sebi norms the the cap is set at seven. Also, while the Act only requires pre-approval of RPTs which are not at arm’s length, Sebi's corporate governance norms require approval of all material RPTs by shareholders, with related parties abstaining from voting.

“Sebi has the right to make stricter norms, as it will help in increasing the integrity and robustness of the market and will safeguard investors. However, there is indeed a concern of the rising cost of compliance for companies,” said J N Gupta, managing director, Stakeholders Empowerment Services, a proxy advisory firm.

Recently, during the debate in Parliament on the Sebi amendment bill, Finance Minister Arun Jaitely had pressed the need to specify the jurisdiction of Sebi and the Companies Act. “What comes under Companies Act should be exempted from Sebi Act... There is no overlapping of jurisdiction,” he had said.