First Published: Thu, Feb 13 2014. 06 47 PM IST

Sebi overhauls corporate governance norms for listed companies

The changes will improve transparency in transactions with bigger say for minority stakeholders; whistleblower policy compulsory as well
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Sebi overhauls corporate governance norms for listed companies
The new rules by Sebi will take effect from 1 October. Photo: Abhijit Bhatlekar/Mint
Mumbai: The capital market regulator on Thursday overhauled corporate governance norms for listed companies in an effort to improve transparency in their transactions and give minority shareholders a bigger say in management decisions.
The new rules, which will take effect from 1 October, will require listed companies to expand the role of their audit committees, seek shareholder approval for all material related-party transactions (RPTs) and adopt a whistleblower policy. They will have to follow more stringent rules related to the presence of independent directors on their boards.
A number of changes made by the Securities and Exchange Board of India (Sebi) are in sync with those included in the Companies Act passed last year, which sought stronger regulation of independent directors by restricting the tenure and the number of boards they can serve on.
Shareholder approval for RPTs through a special resolution, enhanced disclosure of remuneration paid to top management and the need for a whistleblower policy were also part of the Companies Act.
Sebi unveiled the new norms, based on recommendations made by a committee headed by industrialist Adi Godrej, in September 2012. A discussion paper was put out in January last year, but their adoption was delayed because of resistance from many companies.
The new rules will require companies to conduct a performance evaluation of all directors, including independent directors, on their boards.
Independent directors, who are primarily meant to oversee the functioning of the board and ensure that the decisions it makes do not hurt the interests of minority shareholders, will be required to hold separate meetings. At present, independent directors are not required to hold independent meetings and this often results in approval for board decisions that may be serving only the promoters’ interests.
The new norms also capped the maximum number of listed companies in which a person can serve as an independent director at seven. If a person serves as a whole-time director, he cannot be an independent director in more than three listed firms.
“Restricting the maximum number of boards an independent director can serve is good for both independent directors and companies as corporates have more access to experienced and qualified directors on board and directors have more time to work with corporates,” said Shailesh V. Haribhakti, chairman of DH Consultants Pvt. Ltd.
Sebi restricted the tenure of an independent director to two five-year terms.
“However, if a person who has already served as an independent director for five years or more in a listed company as on the date on which the amendment to listing agreement becomes effective, he shall be eligible for appointment for one more term of five years only,” Sebi said.
To ensure the spirit of independent directorship is not diluted, Sebi said no nominee director can be appointed as an independent director in a listed firm and no independent director will be entitled for stock options. Also, every listed company will need to have at least one woman director on the board.
The market regulator directed listed firms to adopt the new norms in such a way that they have an orderly succession plan in place at the board and senior management level, as suggested in the discussion paper last year.
According to Indianboards.com, a joint initiative of the National Stock Exchange (NSE) and Prime Database, as on 12 February, 3,431 individuals were serving on the boards of 488 NSE-listed companies. These individuals occupy 5,481 director-level positions in 1,059 companies listed on the NSE and 794 listed on other stock exchanges.
There are a total 4,727 individuals who serve as independent directors in NSE-listed companies. They hold 7,866 independent directorship positions, according to the Indianboards website.​
Some 2,253 of the 3,431 individuals held only one directorship each; 1,304 held only positions of independent directors. Only 191 are women (5.57%), occupying 304 positions. There is at least one woman on the board of 230 NSE-listed companies. Some 237 individuals were on five or more than five listed company boards; one person was on 20 boards.
Related party transactions
The market watchdog has made changes in rules for RPTs to enhance transparency in all material dealings by company promoters and to ensure that business decisions are not against the interests of small and minority shareholders.
An RPT is a business deal between two parties who are joined by a special relationship prior to a transaction being carried out.
Sebi has made prior audit committee approval mandatory for all material RPTs. As a second-level check, all such transactions will need shareholder approval through a special resolution, with related parties abstaining from voting.
Sebi, in its discussion paper, had termed transactions within group firms or among a particular set of investors within group firms as “abusive” if such deals were detrimental to the interests of minority shareholders.
Sebi observed that such transactions dent the confidence of investors and jeopardize the process of channelizing savings into the capital market.
According to Capitaline, a corporate database, 2,326 related-party transactions in listed firms took place in fiscal 2013. The largest included one worth Rs.26,502 crore in Reliance Industries Ltd, a Rs.24,171.88 crore transaction in Adani Enterprises Ltd and a Rs.22,262.19 crore deal in GMR Infrastructure Ltd. Other transactions worth Rs.20,241.05 crore in DLF Ltd, Rs.17,988.8 crore in Mahindra and Mahindra Ltd and Rs.17,247.38 crore in Tata Motors Ltd also took place in the last fiscal year.
In its latest move, Sebi widened the scope of an RPT’s definition to include elements of the new Companies Act and accounting standards.
At present, related-party relationships exclude key managerial personnel of the parent company. Under the new Sebi norms, such personnel too will likely be considered related parties. Also, joint ventures, co-ventures and co-associates are likely to be brought within the definition of a related party.
The regulator had proposed in the discussion paper that under a group, divestment of major subsidiaries must require shareholder approval to curb unfair RPTs. Even material investments, which have so far needed only board approval, will now need shareholder approval.
On the other hand, the Companies Act requires shareholder approval only for selling a substantial part of an entity or all of it, which often results in stake sales at unfair valuations. The new Companies Act has not done anything to address this concern, according to the Sebi discussion paper.
“There have been instances where ownership of major subsidiaries was transferred to controlling shareholders, without taking the approval of other shareholders...,” said the Sebi paper.
On Thursday, Sebi attempted to address these concerns and approved most of the proposals in the paper regarding policies on dealing with RPTs, divestment of material subsidiaries, disclosure of appointment letters of independent directors and resignation letters of all directors.
“Shareholders’ approval of all material-related party transactions is a healthy and welcome proposition,” said Haribhakti, adding that minority shareholders should act responsibly and not come in the way of transactions that may be genuinely in a company’s interest.
In a bid to ensure that all classes of shareholders are given equal and fair treatment, Sebi ordered companies to mandatorily constitute a stakeholders relationship committee.
Top level remuneration
To ensure that listed firms refrain from fixing unreasonably high compensations for promoters and top-level executives, Sebi ordered the mandatory constitution of a nomination and remuneration committee with an independent chairman.
All companies will need to follow enhanced disclosures norms on remuneration. In the discussion paper, Sebi had suggested that incentives given to top management members should be aligned with a company’s long-term interests. The ratio of remuneration of top executives to median remuneration should also be disclosed, Sebi said.
According to Mint research, top paid executives include Sun TV Network Ltd’s chairman Kalanithi Maran and his wife Kavery Kalanithi, an executive director of the company, who drew an annual remuneration of Rs.56.25 crore each in fiscal 2013. Jindal Steel and Power Ltd chairman Naveen Jindal was paid Rs.54.98 crore while Hero MotoCorp. Ltd managing director and CEO Pawan Munjal received Rs.32.80 crore.
Ramco Cements Ltd paid its chairman and managing director P.R. Ramasubrahmaneya Rajha Rs.30.96 crore. UltraTech Cement Ltd’s chairman Kumar Mangalam Birla received Rs.27 crore and Divi’s Laboratories Ltd chairman and managing director Murali K. Divi was paid Rs.26.46 crore.
According to the data, at least 46 listed firms paid more than Rs.10 crore and at least 144 listed firms paid more than Rs.5 crore to their top officials as annual remuneration in fiscal 2013.
Among several other changes, Sebi expanded the role of audit committee in listed firms and directed them to adopt a compulsory whistleblower mechanism to curb unfair business practices and protect the interest of minority stakeholders.
Sunil B.S. contributed to this story.
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