Business Standard

Cracking the code

Companies have a long way to go before meeting Sebi's corporate governance compliance requirements

Sudipto Dey 

A study by of the boards of the top 150 listed Indian companies (in terms of market cap) for FY12 covering 1,612 active directors made the following observations:

* The number of directors on the boards of these companies ranged between four and 20, with an average of 11


* The average number of directorships held by these directors was five

* About 15 per cent of the directors held 10 or more directorships

* No information was available in the public domain or in annual reports on the credentials of 159 directors; of the remaining 1,453, forty-nine per cent were aged more than 60

* 424 (28 per cent) of the 1,513 directors whose educational qualifications were known had not secured degrees beyond graduation

* The number of members in the audit committees ranged from four to five

* Only one out of every 17 directorships (102 out of 1,612 directors) was held by a woman

* The average number of board meetings in FY12 was seven, with the number of meetings ranging between four and 20

* 16 per cent attended less than four board meetings during the year

Come October 1, 2014, when the Securities and Exchange Board of India (Sebi)'s corporate governance code comes into effect, Indian boards will have to do much better than that.

It's not that the situation hasn't improved since February, when Sebi's board had approved proposals to amend the listing agreement, with respect to corporate governance norms for listed companies. A recent study by law firm Khaitan & Co found as of June 30, 94 companies had appointed 91 women directors to their boards, for 97 directorship positions.

However, some marquee Nifty 50 companies, including Bharat Petroleum Corporation, Cipla, Hero MotoCorp, Hindustan Unilever, Kotak Mahindra Bank, NMDC, ONGC, Punjab National Bank, Tata Consultancy Services and United Spirits, are yet to have a woman director on their boards, according to research by indianboards.com. Several high-profile independent directors continue to hold 6-12 directorships in different companies, the research added.

Head hunters say given the spurt in the demand for woman directors, companies are finding it difficult to fill up these positions with the right skill-sets and within the stipulated timeframe.

Reconstituting boards

While most listed companies have to reconstitute their boards, in keeping with Sebi's compliance requirements, corporate lawyers say this is easier said than done for mid-sized companies. "Mid-sized companies may need more time, as many of them are promoter-driven and not used to the compliance requirements," says Lav Goyal, partner, India.

He expects the bulk of non-compliance to come from these companies. Most experts feel large corporate houses are better placed to meet 80-90 per cent of the compliance requirements by October this year.

Trouble with related-party transactions

Companies say they find dealing with related-party transactions the trickiest piece in cracking the corporate governance code. Many companies are identifying the universe of related parties based on the expanded definitions in the law and mapping transactions with these parties for seeking the approval of audit committees. "Companies with good governance are looking towards information technology-enablement in their transaction systems to flag any related-party transaction, before these are executed," says Mritunjay Kapur, partner and head (risk consulting), KPMG in India.

The challenges of prior approval can be dealt with through master service agreements and circular resolutions.

The moot question is should audit committees approve related party transactions, says Dolphy D'souza, partner in a member firm of EY Global.

"By requiring independent directors to approve related-party transactions, they will essentially be stepping into the shoes of the management, and will no longer remain independent," he adds.

Enforcement capability

However success in complying with the corporate governance code will depend on Sebi's enforcement capability. So far, to ensure compliance in this regard, the regulator has relied on the resources of stock exchanges. However, many corporate lawyers believe that for effective compliance, it has to pick up the enforcement stick itself.

First Published: Sun, August 10 2014. 21:15 IST
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