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Sebi’s headquarters in Mumbai. A consultative paper on the subject released on Friday by the regulator is in sync with the changes proposed in the Companies Bill by a parliamentary committee. Photo: Abhijit Bhatlekar/Mint
Sebi’s headquarters in Mumbai. A consultative paper on the subject released on Friday by the regulator is in sync with the changes proposed in the Companies Bill by a parliamentary committee. Photo: Abhijit Bhatlekar/Mint

Sebi aims to tighten norms for corporate governance

Sebi planning to change norms related to independent directorships, audit panels, related-party transactions

Mumbai: In an effort to strengthen corporate governance among Indian companies, the capital market regulator is planning to change norms related to independent directorships, the remuneration of top management, audit committees, related-party transactions and whistle-blowers, among others. It also envisages punishment for non-compliance with corporate governance standards.

A consultative paper on the subject released on Friday by the Securities and Exchange Board of India (Sebi) is in sync with the changes proposed in the Companies Bill by a parliamentary committee.

In March 2012, the ministry of corporate affairs constituted a committee headed by Adi Godrej, chairman of Godrej Industries Ltd, to formulate a policy document on corporate governance. The panel submitted its recommendations in September. Sebi posted this on its website on Friday evening with its comments.

While the Godrej panel’s recommendations are for all companies, Sebi will confine implementation of the suggestions to listed entities. It has sought public comments on the paper until 31 January.

The regulator will consider certain changes in rules to prevent investors from abusive related-party transactions by controlling shareholders. It will also explore the possibility of mandating listed firms to secure shareholder approval for the divestment of shares in subsidiaries.

This assumes significance in the backdrop of instances of widespread resistance by minority shareholders when promoters of several companies opted to acquire controlling stakes in subsidiary firms in the past. One such example was information technology (IT) company Satyam Computer Services Ltd seeking to acquire a majority stake in group firm Maytas Infra in 2008 before the accounting scandal at the IT company broke.

“Abusive RPTs (related-party transactions) are real concerns as they can be used for personal aggrandisement of controlling shareholders... This would dent the confidence of the investors," said the Sebi paper.

The paper also hints at prohibiting companies from granting superior rights to certain categories of investors. When a company seeks funds from a private equity investor or a financial institution, it enters a shareholders’ subscription or investment agreement that often grants certain superior rights to these investors. This may be restricted by Sebi in the coming days.

“Investors expect management to act in their best interests at all times and adopt good corporate governance practices," the paper said.

According to the panel’s report, corporate governance norms should be changed in such a way that they protect the interests of all shareholders and disclose matters, including the financial situation, performance, ownership and governance of the company. It said companies should strive to bring diversity to the board, and incentives for top management should be based on remuneration aligned with the long-term interest of the company.

To ensure that the interests of minority shareholders are protected, listed firms above a certain market cap may be mandated to have at least one director appointed by minority shareholders.

The paper said companies should issue a formal letter of appointment when non-executive directors and independent directors are recruited, and when an independent director resigns, the person should state the reason for stepping down.

Sebi is likely to implement these measures and will also examine the question of a minimum and maximum age for independent directors. Currently, there is no age limit for such directors.

According to the Companies Bill, independent directors can hold office for a term of up to five years, but are eligible for reappointment following a special resolution. Such directors may currently serve for nine years, however, according to the existing norms. Sebi is proposing to align the norms in accordance with the Companies Bill.

The regulator also proposes to align the remuneration norms stated in the Companies Bill for independent directors. As per the proposed Companies Bill, independent directors are not entitled to any remuneration, other than sitting fees, reimbursement of expenses for participation in the board and other meetings, and profit-related commissions approved by the members.

The paper is in favour of performance evaluation of independent directors, based on attendance and contribution to board meetings, to ensure that such directors deliver on their duties towards shareholders appropriately.

Sebi will also examine whether a restriction on the number of independent directorships can be imposed. According to ministry of corporate affairs norms, the maximum number of public companies in which an individual may serve as an independent director is capped at seven. Sebi will examine whether such restrictions can be imposed on listed firms. Currently, there is no restriction on the number of independent directorships.

As far as directorships are concerned, the new Companies Bill has proposed that no person can hold office as a director in more than 20 companies at the same time, with the maximum number of public sector companies being 10. The consultative paper has endorsed this.

To ensure adequate accountability standards at companies, Sebi will also consider a proposal to make a whistle-blower mechanism compulsory.

In an effort to bring parity among all classes of shareholders, the paper has suggested e-voting for all resolutions of a listed company. This will enable wider participation of shareholders in corporate democracy.

The paper has also proposed to make it mandatory for companies to get approval from minority shareholders for chief executive pay beyond a limit in some Indian companies.

In order to strengthen monitoring, Sebi will consider the corporate governance rating of companies by credit rating firms, and inspections by stock exchanges and other agencies.

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