Thursday, January 10, 2013


By K P C Rao., LLB., FCMA., FCS.,
CMA (USA)., FIPA (Australia)
Practicing Company Secretary

Corporate governance is perhaps one of the most important differentiators of a business that has impact on the profitability, growth and even sustainability of business. It is a multi-level and multi-tiered process that is distilled from an organization’s culture, its policies, values and ethics, especially of the people running the business and the way it deals with various stakeholders.

Creating value that is not only profitable to the business but sustainable in the long-term interests of all stakeholders necessarily means that businesses have to run—and be seen to be run—with a high degree of ethical conduct and good governance where compliance is not only in letter but also in spirit.

At the time of Independence in 1947, India had functioning stock markets, an active manufacturing sector, a fairly developed banking sector, and also a comparatively well developed British-derived convention of corporate practices. From 1947 through 1991, the Indian Government pursued markedly socialist policies when the State nationalized most banks and became the principal provider of both debt and equity capital for private firms.

The government agencies that provided capital to private firms were evaluated on the basis of the amount of capital invested rather than on their returns on investment. Competition, especially foreign competition, was suppressed. Private providers of debt and equity capital faced serious obstacles in exercising oversight over managers due to long delays in judicial proceedings and difficulty in enforcing claims in bankruptcy. Public equity offerings could be made only at government-set prices. Public companies in India were only required to comply with limited governance and disclosure standards enumerated in the Companies Act of 1956, the Listing Agreement, and the accounting standards set forth by the Institute of Chartered Accountants of India (ICAI).

Faced with a fiscal crisis in 1991, the Indian Government responded by enacting a series of reforms aimed at general economic liberalization. The Securities and Exchange Board of India (SEBI)—India's securities market regulator—was formed in 1992, and by the mid-1990s, the Indian economy was growing steadily, and Indian firms had begun to seek equity capital to finance expansion into the market spaces created by liberalization and the growth of outsourcing.

The need for capital, amongst other things, led to corporate governance reform and many major corporate governance initiatives were launched in India since the mid- 1990s; most of these initiatives were focused on improving the governance climate in corporate India, which, at that time, was somewhat rudimentary.

“Corporate governance processes presently in convention are designed with a view to serve the shareholders and protect them from managerial excesses. However, this premise is turned on its head when companies are run by a dominant shareholder or group. A corporate governance regime which involves strengthening board processes alone would be rather irrelevant to solve the problems of governance abuses by dominant shareholders”.


The first major initiative was undertaken by the Confederation of Indian Industry (CII), India’s largest industry and business association, which came up with the first voluntary code of corporate governance in 1998. More than a year before the onset of the East Asian crisis, the CII had set up a committee to examine corporate governance issues, and to recommend a voluntary code of best practices.

Drawing heavily from the Anglo-Saxon Model of Corporate Governance, CII drew up a voluntary Corporate Governance Code. The first draft of the code was prepared by April 1997, and the final document titled “Desirable Corporate Governance: A Code”, was publicly released in April 1998. The code was voluntary, contained detailed provisions and focused on listed companies.

Although this Code was welcomed with much fanfare and even adopted by a few progressive companies, it was “felt that under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful, at least in respect of essential features of corporate governance”. Consequently, the second major corporate governance initiative in the country was undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to promote and raise the standards of good corporate governance.

The Birla Committee specifically placed emphasis on independent directors in discussing board recommendations and made specific recommendations regarding board representation and independence. The Committee also recognized the importance of audit committees and made many specific recommendations regarding the function and constitution of board audit committees. In early 2000, the SEBI board accepted and ratified the key recommendations of the Birla Committee, which were incorporated into Clause 49 of the Listing Agreement of the Stock Exchanges.

The Naresh Chandra committee was appointed in August 2002 by the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs, to examine various corporate governance issues. The Committee submitted its report in December 2002. It made recommendations in terms of two key aspects of corporate governance: (1) financial and non-financial disclosures, and (2) independent auditing and board oversight of management.

It also made a series of recommendations regarding, among other matters, the grounds for disqualifying auditors from assignments, the type of non-audit services that auditors should be prohibited from performing, and the need for compulsory rotation of audit partners.

The fourth initiative on corporate governance in India is in the form of the recommendations of the Narayana Murthy Committee. This committee was set up by SEBI under the chairmanship of Mr. N.R. Narayana Murthy, in order to review Clause 49, and to suggest measures to improve corporate governance standards. Some of the major recommendations of the committee primarily related to audit committees, audit reports, independent directors, related party transactions, risk management, directorships and director compensation, codes of conduct and financial disclosures.

The Murthy Committee, like the Birla Committee, pointed that international developments constituted a factor that motivated reform and highlighted the need for further reform in view of the recent failures of corporate governance, particularly in the United States, combined with the observations of India’s stock exchanges that compliance with Clause 49 had up to that point been uneven.

Like the Birla Committee, the Murthy Committee examined a range of corporate governance issues relating to corporate boards and audit committees, as well as disclosure to shareholders and, in its report, focused heavily on the role and structure of corporate boards, while strengthening the definition of director independence in the then-existing Clause 49, particularly to address the role of insiders on Indian boards. In its present form, Clause 49, called ‘Corporate Governance’, contains eight sections dealing with the Board of Directors, Audit Committee, Remuneration of Directors, Board Procedure, Management, Shareholders, Report on Corporate Governance, and Compliance, respectively. Firms that do not comply with Clause 49 can be de-listed and charged with financial penalties.

In the light of the clear consideration of Anglo-American standards of governance by both the Birla and Murthy Committees, it is not surprising that India’s corporate governance reform effort should contain provisions similar to the reform efforts undertaken outside India that adopted such models. In its final report, the Birla Committee noted its dual reliance on international experiences—both as an impetus for reform following “high-profile financial reporting failures even among firms in the developed economies”, and as a model for reform. Significantly, the Birla Committee singled out the corporate governance reports and codes being applied in the US and UK, such as the Report of the Cadbury Committee, the Combined Code of the London Stock Exchange, and the Blue Ribbon Committee on Corporate Governance in the US. The Committee even directly sought out the input of Sir Adrian Cadbury, chair of the Cadbury Committee, commissioned by the London Stock Exchange, in addition to Indian business leaders.

While the report of the Murthy Committee did not explicitly cite the Anglo-American models of governance, it was clearly a reaction to events in the United States, particularly given the timing of the report, which followed just a few months after the enactment of the Sarbanes-Oxley Act (SOA). There are striking similarities between Clause 49 and the leading Anglo-American corporate governance standards, in particular the Cadbury Report, the OECD Principles of Corporate Governance, and Sarbanes- Oxley.

India’s corporate governance reform efforts did not cease after the adoption of Clause 49. In parallel, the review and redrafting of the Companies Act, 1956 was taken up by the Ministry of Corporate Affairs (MCA) on the basis of a detailed consultative process and the Government constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to offer advice on a new Companies Bill.
Based, among other things, on the recommendations of the Irani Committee, the Government of India introduced the Companies Bill, 2008, in the Indian Parliament, which sought to enable the corporate sector in India to operate in a regulatory environment characterized by best international practices that foster entrepreneurship and investment. However, due to the dissolution of the Fourteenth Lok Sabha, the Companies Bill, 2008, lapsed but since the provisions of the Companies Bill, 2008 were broadly considered to be suitable for addressing various contemporary issues relating to corporate governance, the Government decided to re-introduce the Companies Bill, 2008, as the Companies Bill, 2009, without any change in it except the Bill year.

In January 2009, the Indian corporate community was rocked by a massive accounting scandal involving Satyam Computer Services (Satyam), one of India’s largest information technology companies. The Satyam scandal prompted quick action by the Indian government, including the arrest of several insiders and auditors of Satyam, investigations by the MCA and SEBI, and substitution of the company’s directors with government nominees.

For corporate leaders, regulators, and politicians in India, as well as for foreign investors, this necessitated a re-assessment of the country’s progress in corporate governance. As a consequence of various corporate scams, India’s ranking in the CLSA Corporate Governance Watch 2010 slid from third to seventh in Asia .

Shortly after the news of the scandal broke, the CII began examining the corporate governance issues arising out of the Satyam scandal and in late 2009, the CII task force listed recommendations on corporate governance reform. In his foreword to the Task Force Report, Mr Venu Srinivasan, President of CII, while emphasizing the unique nature of the Satyam scandal, suggested that it was is a one-off incident and that the overwhelming majority of corporate India does business in a sound and legal manner. Nonetheless, the CII Task force put forth important recommendations that attempted to strike a balance between over-regulation and promotion of strong corporate governance norms by recommending a series of voluntary reforms.

The Institute of Company Secretaries of India (ICSI) has also put forth a series of corporate governance recommendations. In addition to the ICSI, a number of other corporate groups have joined the corporate governance dialogue. The National Association of Software and Services Companies (NASSCOM) also formed a Corporate Governance and Ethics Committee chaired by N.R. Narayana Murthy, a leading figure in the field of Indian corporate governance reforms. The Committee issued its recommendations in mid-2010, focusing on the stakeholders in the company. The report emphasized recommendations relating to the audit committee and a whistle blower policy, and also addressed the issue of the need to improve shareholder rights.

Inspired by industry recommendations, the MCA, in late 2009, released a set of voluntary guidelines for corporate governance. These Voluntary Guidelines address myriad corporate governance matters, including the independence of the boards of directors; the responsibilities of the board, the audit committee, auditors, and secretarial audits; and mechanisms to encourage and protect whistle blowing. The MCA also indicated that the guidelines constituted a first step in the process of facilitating corporate governance and that the option to perhaps move to something more mandatory remains open.

In parallel, subsequent to the introduction of the Companies Bill, 2009 in the Lok Sabha, the Central Government received several suggestions for amendments in the said Bill from the various stakeholders and the Parliamentary Standing Committee on Finance who also made numerous recommendations in its report. In view of the large number of amendments suggested to the Companies Bill, 2009, arising from the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating the recommendations of Standing Committee and suggestions of the stakeholders.

The revised Bill, namely, the Companies Bill, 2011 was introduced in the Lok Sabha on 14th December 2011; however the same was withdrawn by the Government on 22nd December and sent back for consideration by the Standing Committee on Finance. Thereafter, on 18th December, 2012 the Lok Sabha has approved the much-awaited amendments to the Companies Bill, 2011, making it mandatory for profit-making companies to spend on activities related to Corporate Social Responsibility (CSR). In case, a company is not doing so, it will have to explain the reasons for shortfall .

The Bill, aimed at improving corporate governance, also contains provisions to strengthen regulations for corporates as well as auditing firms. Moving the Bill for consideration, Minister of State (Independent Charge) for Corporate Affairs Sachin Pilot said private companies, while maximising their growth, also have responsibility towards society besides equitable and sustainable growth of the country. The changes in the Bill include provisions making it mandatory for companies to spend 2% of their average net profit on CSR activities. However, only companies reporting Rs 5 crore or more profits in the last three years have to make the CSR spend. Companies failing to meet the obligation will have to explain and disclose reasons in their annual books of account. Otherwise, companies would face action, including penalty.

Though the corporate governance efforts in India have been spearheaded by SEBI over the last decade, the more recent steps have been taken by the MCA. Also there has been an effort to consolidate corporate governance norms into the Companies Act, 1956. Towards that end, the Companies Bill, 2011, does contain several aspects of corporate governance which have hitherto been the mainstay of Clause 49. This represents a trend towards legislating on corporate governance rather than leaving it to the domain of the Listing Agreement. It also signifies a shift in corporate governance administration from SEBI, which oversees the implementation of Clause 49, towards the MCA, which administers the Companies Act.


A significant feature of the corporate governance reforms in India has been its voluntary nature and the active role played by public listed companies in improving governance standards in India. Organisations like ICSI and CII, (which is dominated by large public listed firms) had played an active role in the development of India’s corporate governance norms in India.

What began as a voluntary effort soon acquired mandatory status through the adoption of Clause 49, as all companies (of a certain size) listed on stock exchanges were required to comply with these norms, a trend which was further reinforced by the introduction of stringent penalties for violation of the prescribed norms. While the Voluntary Corporate Governance guidelines of 2009 represented a move back to a voluntary framework for corporate governance, recent efforts to consolidate corporate governance norms into the Companies Act, 1956 marks a reversal of the earlier approach. In that sense, the corporate governance norms in India appear to have completed two full cycles of oscillating between the voluntary and the mandatory approaches.


As a part of the process of economic liberalization in India, and the move towards further development of India’s capital markets, the Central Government established regulatory control over the stock markets through the formation of the SEBI. Originally established as an advisory body in 1988, SEBI was granted the authority to regulate the securities market under the Securities and Exchange Board of India Act of 1992 (SEBI Act).

Public listed companies in India are governed by a multiple regulatory structure. The Companies Act is administered by the Ministry of Corporate Affairs (MCA) and is currently enforced by the Company Law Board (CLB). That is, the MCA, SEBI, and the stock exchanges share jurisdiction over listed companies, with the MCA being the primary government body charged with administering the Companies Act of 1956, while SEBI has served as the securities market regulator since 1992.

SEBI serves as a market-oriented independent entity to regulate the securities market akin to the role of the Securities and Exchange Commission (SEC) in the United States. The stated purpose of the agency is to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market. The realm of SEBI’s statutory authority has also been the subject of extensive debate and some authors have raised doubts as to whether SEBI can make regulations in respect of matters that fall within the jurisdiction of the Ministry of Corporate Affairs.

SEBI’s authority for carrying out its regulatory responsibilities has not always been clear and when Indian financial markets experienced massive share price rigging frauds in the early 1990s, it was found that SEBI did not have sufficient statutory power to carry out a full investigation of the frauds. Accordingly, the SEBI Act was amended in order to grant it sufficient powers with respect to inspection, investigation, and enforcement, in line with the powers granted to the SEC in the United States.

A contentious aspect of SEBI’s power concerns its authority to make rules and regulations. Unlike in the United States, where the SEC can point to the Sarbanes-Oxley Act, which specifically confers upon it the authority to prescribe rules to implement governance legislation, SEBI, on the other hand, cannot point to a similar piece of legislation to support the imposition of the same requirements on Indian companies through Clause 49. Instead, SEBI can look to the basics of its own purpose, as given in the SEBI Act, wherein it is granted the authority to “specify, by regulations, the matters relating to issue of capital, transfer of securities and other matters incidental thereto . . . and the manner in which such matters shall be disclosed by the companies.” In addition, SEBI is granted the broad authority to “specify the requirements for listing and transfer of securities and other matters incidental thereto.”

Recognizing that a problem arising from an overlap of jurisdictions between the SEBI and MCA does exist, the Standing Committee, in its final report, has recommended that while providing for minimum benchmarks, the Companies Bill should allow sectoral regulators like SEBI to exercise their designated jurisdiction through a more detailed regulatory regime, to be decided by them according to circumstances. Referring to a similar case of jurisdictional overlap between the RBI and the MCA, the Committee has suggested that it needs to be appropriately articulated in the Bill that the Companies Act will prevail only if the Special Act is silent on any aspect.

Further the Committee suggested that if both are silent, requisite provisions can be included in the Special Act itself and that the status quo in this regard may, therefore, be maintained and the same may be suitably clarified in the Bill. This, in the Committee’s view, would ensure that there is no jurisdictional overlap or conflict in the governing statute or rules framed there under.


The issue of enforcement of Corporate Governance norms also needs to be seen in the broader context of the substantial delay in the delivery of justice by the Indian legal system on account of the significant number of cases pending in the Indian courts.

A research paper by PRS Legislative Research places the number of pending cases in courts in India, as of July 2009, as 53,000 pending with the Supreme Court, 4 million with various High Courts, and 27 million with various lower courts. This signifies an increase of 139 per cent for the Supreme Court, 46 per cent for the High Courts and 32 per cent for the lower courts, from the pending number of cases in each of them in January 2000. Furthermore, in 2003, 25 per cent of the pending cases with High Courts had remained unresolved for more than ten years and in 2006, 70 per cent of all prisoners in Indian jails were under trials. Since fresh cases outnumber those being resolved, there is obviously a shortfall in the delivery of justice, and a consequent increase in the number of pending cases. In addition, the weight of the backlog of older cases creeps upward every year.

This backlog in the Indian judicial system raises pertinent questions as to whether the current regulatory framework in India, as enacted, is adequate to enable shareholders to recover their just dues.

This concern is also articulated in the recent pleadings (filed in January 2010) in the United States District Court, Southern District of New York , on the matter relating to the fraud in the erstwhile Satyam Computer Services, wherein US-based investors were seeking damages from defendants that included, among others, Satyam and its auditors, PricewaterhouseCoopers (PwC) and has thrown up some very interesting and relevant issues. This case was filed on behalf of investors who had purchased or otherwise acquired Satyam’s American Depository Shares (ADS) listed on the New York Stock Exchange and investors, residing in the United States, who purchased or otherwise acquired Satyam common stock on the National Stock Exchange of India or the Bombay Stock Exchange.

In their pleadings, the plaintiffs submitted declarations of two prominent Indian securities law experts: Sandeep Parekh, former Executive Director of SEBI, and Professor Vikramaditya Khanna of the University of Michigan Law School, a leading expert in the United States on the Indian legal system, who filed individual affidavits in which they detailed very cogent and compelling reasons as to why Indian courts cannot redress the harm done to the Class plaintiffs and why India itself does not provide a viable alternative forum for settling the claims of Class members.

It is pertenent to mention here that in their depositions, among other things, Sandeep Parekh and Vikramaditya Khanna have explained that:
  • The substantive laws of India provide no means of individual or class recovery for private investors in securities fraud matters because the civil courts in India are barred from hearing such cases where, as here, SEBI is empowered to act;
  • Even if it did provide a substantive means of recovery, Indian law provides no viable class action mechanism under which investors’ claims can be litigated; and
  • Indian law does not recognize the fraud-on-the-market presumption of reliance in private civil actions, so that, even if both a substantive means of recovery and a viable class action mechanism existed under Indian law, investors would still be required to demonstrate individual reliance, thus effectively depriving the vast majority of Class members of any prospect of relief.

Khanna stated in his declaration that “The lengthy delays in the Indian Judicial System would leave plaintiff shareholders with effectively no recovery even assuming, arguendo ; there might be a potential cause of action.”

Sandeep Parekh argued on behalf of the plaintiff shareholders that, not only, as “private parties have no right to sue to recover damages resulting from the Satyam fraud under Indian statutory or common law because the Indian civil courts have no power to hear disputes where, as in this case, SEBI is empowered to act”, but also that the Satyam investors would “not be able to use the representative action procedure to recover damages because Indian law bars their substantive claims in civil court and the representative action is only a procedural mechanism that cannot create any substantive rights”. Furthermore, Parekh added that any penalties collected by SEBI related to the Satyam fraud would not go to shareholders of Satyam under the Indian securities law and, unlike the Fair Fund introduced in the United States; penalty amounts collected by SEBI go to the Consolidated Fund of India. He concluded that even if SEBI imposed monetary penalties against the various persons alleged to be a part of the fraud, Satyam shareholders cannot expect any relief from such action.

In 2011, the class action suit was settled by Satyam Computer Services; also Satyam Computer Services Ltd and its former auditor PricewaterhouseCoopers agreed to settle U.S. probes and Price Waterhouse Bangalore, PricewaterhouseCoopers Private Limited, and Lovelock & Lewes (PW India firms) and PwC U.S. and PwC International agreed to settle the New York securities class action suit.

The proceedings in the United States District Court, Southern District of New York, on the Satyam issue have thrown up a number of issues as regards the admissibility and enforceability of the claims of investors many of which remain unresolved and would be tested in the future when similar cases are tried in courts.


The foundations of the comprehensive revision in the Companies Act, 1956 was laid in 2004 when the Government constituted the Irani Committee to conduct a comprehensive review of the Act. The Government of India has placed before the Parliament a new Companies Bill, 2011 that incorporates several significant provisions for improving corporate governance in Indian companies which, having gone through an extensive consultation process, is approved in the Lok Sabha on 18th December, 2012.

The new Companies Bill, 2011 proposes structural and fundamental changes in the way companies would be governed in India and incorporates various lessons that have been learnt from the corporate scams of the recent years that highlighted the role and importance of good governance in organizations.

Significant corporate governance reforms, primarily aimed at improving the board oversight process, have been proposed in the new Companies Bill; for instance it has proposed, for the first time in Company Law, the concept of an Independent Director and all listed companies are required to appoint independent directors with at least one third of the Board of such companies comprising of independent directors.

The Companies Bill, 2011 takes the concept of board independence to another level altogether as it devotes two sections to deal with Independent Directors. The definition of an Independent Director has been considerably tightened and the definition now defines positive attributes of independence and also requires every Independent Director to declare that he or she meets the criteria of independence.

In order to ensure that Independent Directors maintain their independence and do not become too familiar with the management and promoters, minimum tenure requirements have been prescribed. The initial term for an independent director is for five years, following which further appointment of the director would require a special resolution of the shareholders. However, the total tenure for an independent director is not allowed to exceed two consecutive terms. The new Companies Bill, 2011 also expressly disallows Independent Directors from obtaining stock options in companies to protect their independence.

The new guidelines which set out the role, functions and duties of Independent Directors and their appointment, resignation and evaluation introduce greater clarity in their role; however, in certain places they are prescriptive in nature and could end up making the role of Independent Directors quite onerous.

In order to balance the extensive nature of functions and obligations imposed on Independent Directors, the new Companies Bill, 2011 seeks to limit their liability to matters directly relatable to them and limits their liability to “only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently”. In the background of the current provisions in the Companies Act, 1956 which do not provide any clear limitation of liability and have left it to be interpreted by Courts, it is helpful to provide a limitation of liability clause.

The new Bill also requires that all resolutions in a meeting convened with a shorter notice should be ratified by at least one independent director which gives them an element of veto power. Various other clauses such as those on directors’ responsibility statements, statement of social responsibilities, and the directors’ responsibilities over financial controls, fraud, etc, will create a more transparent system through better disclosures.

A major proposal in the new Bill is that any undue gain made by a director by abusing his position will be disgorged and returned to the company together with monetary fines.

Other significant proposals that would lead to better corporate governance include closer regulation and monitoring of related-party transactions, consolidation of the accounts of all companies within the group, self-declaration of interests by directors along with disclosures of loans, investments and guarantees given for the businesses of subsidiary and associate companies.

A significant first, in the proposals under the new Companies Bill, is the provision that has been made for class action suits; it is provided that specified number of members may file an application before the Tribunal on behalf of members, if they feel that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members. The order passed by the Tribunal would be binding on the company and all its members. The enhanced investor protection framework, proposed in the Bill, also empowers small shareholders who can restrain management from actions that they believe are detrimental to their interests or provide an option of exiting the company when they do not concur with proposals of the majority shareholders.

The Companies Bill, 2011 seeks to provide clarity on the respective roles of SEBI and the MCA and demarcate their roles – while the issue and transfer of securities and non-payment of dividend by listed companies or those companies which intend to get their securities listed shall be administered by the SEBI all other cases are proposed to be administered by the Central Government. Furthermore, by focusing on issues such as Enhanced Accountability on the part of Companies, Additional Disclosure Norms, Audit Accountability, Protection for Minority Shareholders, Investor Protection, Serious Fraud Investigation Office (SFIO) in the new Companies Bill, 2011, the MCA is expected to be at the forefront of Corporate Governance reforms in India.


In order to keep pace with fast changing business scenario, to align with the provisions of Companies Bill 2012 and to adopt international best practices relating to Corporate Governance, SEBI has come out with a consultative paper on 4th Junuary, 2013 on Corporate Governance norms in India. The paper brings suggestions which will have far reaching effect and will completely change the landscape of Corporate Governance in case of listed companies.
The market regulator has suggested measures such as rationalising CEO pay packets, better compliance for the benefit of small investors, making whistle blower mechanisms a compulsory requirement and disclosing the same, implementation of an orderly succession planning among others.
SEBI has also sought greater powers for minority shareholders and wants companies to bring in diversity of thought, experience, knowledge, understanding, perspective, gender and age in the board of companies. As per the proposed guidelines, all listed companies must appoint an independent director as a lead director, who could chair the meetings of independent directors and act as a liaison between independent directors and management/board/ shareholder.
The SEBI also pointed out that the board should set a corporate culture and the values by which executives throughout a group will behave. The board should eliminate policies that promote excessive risk-taking for the sake of short-term increases in stock price performance and ensure that a risk/crisis management plan is in place.
The market regulator has also suggested hefty penalties for non-compliance of the revised corporate governance norms. Stating that delisting would affect investors and prosecution was a costly and time-consuming process, the SEBI, to strengthen the monitoring of the compliance, has suggested carrying out of corporate governance rating by credit rating agencies, inspection by stock exchanges/ SEBI for verifying the compliance made by the companies. The SEBI has further stated that the provisions of listing agreement are being converted into regulations for better enforcement.
Major proposals in this Consultative Paper are:
  1. Appointment of independent directors by minority shareholders: listed companies beyond a market cap need to be mandated to have at least one small shareholder director
  2. Cumulative voting for appointment of Independent Director: Cumulative voting allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board
  3. Formal letter of appointment to Non- Executive Directors (NEDs) and Independent Directors with specific roles and responsibilities
  4. Certification course and training for independent directors
  5. Treatment of nominee director as Non-Independent Director
  6. Mandate minimum and maximum age for Independent Directors
  7. Mandating maximum tenure for independent director to be two consecutive terms of 5 years in line with Companies Bill
  8. Requiring Independent directors to disclose reasons of their resignation
  9. Clarity on liabilities and on remuneration of independent directors
  10. Performance evaluation of independent director
  11. Appointment of one of the independent director as Lead Independent Director
  12. Separate meetings of Independent Directors at least once in a year
  13. Maximum number of public companies in which an individual may serve as an Independent Director should be restricted to seven
  14. Separating the position of Chairman and that of the Managing Director / CEO
  15. Diversity and formally laid out succession plan for Board
  16. Framing a risk management plan, its compulsory monitoring and reviewing by a Board/Board Committee and the disclosure thereof to the shareholders at periodic intervals (preferably on annual basis) be laid down in the Listing Agreement.
  17. Making Whistle Blower Mechanism a compulsory requirement
  18. Mandating e-voting for all resolutions of a listed company
  19. Measures for preventing abuse of related Party Transactions
  20. Lay down specific fiduciary responsibilities of controlling shareholders, mandating relationship agreement between the company and the controlling shareholder specifying the duties and responsibilities of controlling shareholders
  21. Provision for regulatory support to class action suits
  22. Detailed guidelines on Role of Institutional Investors
  23. Enforcement for non-compliance of Corporate Governance Norms


The objective of the Consultative Paper is to entice a wider debate on the governance requirement for the listed companies so as to adopt better global practices. While it needs to be ensured that the proposals suggested would not result in increasing the additional cost of compliances by huge margin and that the cost should not outweigh the benefit of listing, at the same time, it is necessary to bring back the confidence of investors back to the capital market, for channelising savings into investment, which is the need of the hour.

Though some of these proposals are already provided for in the Companies Bill, 2011, and the Bill is waiting for Parliamentary nod, the SEBI proposed to advance the implementation of these proposals to listed companies to make them acclimatise to these provisions. SEBI has sought public comments on the subject on or before 31st January, 2013.

[Published in Corporate Secretary, Monthly Journal of ICSI, Hyderabad during January, 2013]

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