Business Standard

K P Shashidharan: Independent directors: Changes in the Bill & Sebi's Listing Agreement

K P Shashidharan 

The Securities Exchange Board of India (Sebi) has proposed certain amendments in Clause 49 of the Listing Agreement, pursuant to proposed enactment of the Companies Bill, These changes are necessitated to bring alignment between the two regulations and thereby improving the quality of corporate governance in the country, in the light of changes in the global regulatory environment. Though inalienable rights of the shareholders as the true owners of the corporation and the role of the management as trustees on behalf of the shareholders adhering to business ethics by making a distinction between personal and corporate funds in the management of a company have adequately been emphasised since the report of in 2003, there needs to be harmonisation of regulatory requirements in the proposed Companies Act and the new Sebi’s

While the Companies Bill, in clause 203 (i) provides for segregation of offices of Chairman and Chief Executive Officer, there is no explicit provision in the While the composition of the Board with at least minimum one-third number of directors as independent directors is provided in 149(4) of the Bill, Clause 49(1)(A) of the existing goes further specifying clearly that the board of directors of the company will have an optimum combination of executive and non-executive directors with not less than fifty per cent of the board of directors comprising non-executive directors. Where the Chairman of the board is a non-executive director, at least one-third of the board should comprise independent directors and in case he is an executive director, at least half of the board should comprise independent directors. If the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the board level, or at one level below the board, the agreement is empathic to stipulate at least one-half of the board of the company will consist of independent directors. It would be in the interest of good corporate governance to match the requirements perfectly in the Bill and the Agreement.

The Bill defines director of a company and specifies criteria of independent director in Clause 149. A director is other than a managing director or a whole-time director or a nominee director. In the of the board, he must be a person of integrity, possesses relevant expertise and experience and is or was not a promoter of the company or its holding, subsidiary or associate company. He should not be related to promoters or directors in the company, its holding, subsidiary or associate company. He has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year. Besides, none of his relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed. An ‘independent director’ will mean a non-executive director of the company.

Apart from receiving director’s remuneration, an independent director does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director. He should not be related to promoters or persons occupying management positions at the board level or at one level below the board. He has not been an executive of the company in the immediately preceding three financial years. He is not a partner or an executive or was not a partner or an executive during the preceding three years, of any of the statutory audit firm or the internal audit firm that is associated with the company, and the legal firm(s) and consulting firm(s) that have a material association with the company.

The change proposed by in the Listing Agreement, not only complies with the criteria of independence specified in the Bill, adds that a director of a listed company will not be related to, or having material, pecuniary relationship with key managerial personnel. He must not be a material supplier, service provider or customer or a lessor or lessee of the company that can affect independence and he should not be less than 21 years of age. These changes are proposed to ensure that the independent director has the requisite qualifications and capable of contributing effectively for the cause of good corporate governance.

As per the Bill, every independent director is mandatorily required to declare his independence in the first meeting of the board in every financial year that he meets the criteria of independence as provided in the statute. Sebi’s proposal to include criteria of independence mentioned in the Listing Agreement in the Bill is in the right direction. Code for Independent Directors is mandatory as specified in Schedule 1V of the Bill. Rather than prescribing a non-mandatory code, the current Listing Agreement needs to be aligned with the Bill. As the Bill prohibits granting of stock option to independent directors, the Listing Agreement needs to be finetuned to that extent.

As per the Bill, the term of independent directors is limited to 5 years and the current provision in the Listing Agreement of 9 years needs to be deleted.The Bill brings clarity in the liability of independent directors.

They will be liable only in respect of such acts of omission or commission by a company which had concurred with his knowledge, attributable through board processes, and with his consent or connivance or where he needs not acted diligently. Of course, directors can be of any gender may be kept in view. Maximum number of directors is limited to 10. Training for directors for familiarisation as specified in the Bill may be adopted in the Listing Agreement too to help improving board deliberations.

Requirement of minimum 4 meetings of the board in a year is similar in both the regulations except certain changes to be made in the Agreement to make it identical with the Bill.

In order to safeguard the interests of the investors, proposes effective compliance monitoring by corporate governance rating and inspection by stock exchanges or or any agency and imposition of penalties on the company, board of directors, compliance officer, key managerial persons for non-compliance either in spirit or letter.

The author is director-general in CAG Office.  The views are personal

First Published: Mon, January 14 2013. 00:21 IST