Corporate India had heaved a sigh of relief
when M. Damodaran, shortly after becoming the Chairman of
SEBI, announced that the new Clause 49 of the Listing
Agreement would kick in after 31 December 2005 — and not
from April of this year. The belief was that Mr. Damodaran,
being a ‘reasonable’ man, would reconsider, dilute and
eliminate some of the new clauses.
Mr. Damodaran is a reasonable man. But he is
no ‘softy’. An honest and excellent administrator, he owes
his new appointment to nobody. Moreover, as the SEBI
chairman, he knows that his primary responsibility is to
safeguard investors’ interests. Therefore, it came as no
surprise when he recently warned corporate India that SEBI
will not dilute the provisions of Clause 49. Immediately,
nine out of ten boardrooms of corporate India went into a
The various concerns of corporate India can
be broadly classified under four heads.
India does not have an adequate supply of
independent directors who can fulfil the requirements of
The responsibilities and the duties of
the board-level Audit Committees have been made far too
It will be difficult to have a CEO and
CFO certification, and there is no need to mimic the
Sarbanes Oxley Act in India.
Cause 49 demands too many disclosures —
many of which give out competitive information that are
inimical to corporate interests.
Let us consider each of them. Quite honestly,
I find it difficult to believe that a country of over a
billion people with some of the brightest minds in the world
cannot supply the requisite number of independent directors.
One only needs to cast the net fractionally wider then what
has been done in the past to reel in a large number of
intelligent, well educated, competent and committed people
from different walks of life who can professionally
discharge their fiduciary responsibilities. I just can’t buy
this ‘lack of supply’ argument. Facts don’t support it.
Regarding Audit Committees, it is true that
the duties and responsibilities are greater than before.
However, if one were to look carefully at the proposed
Clause 49 — which very few have done — one would see that
none of the recommended tasks is unnecessary or frivolous.
We forget that directors, especially those who are
independent, have fiduciary responsibilities on behalf of
the shareholders. And as members of the Audit Committee, it
is their beholden duty to ensure that the financial health
of the company in all its material aspects is not in
Yes, an Audit Committee member’s tasks have
become greater then before. Yes, the committee will need
more time compared to the typical one and a half hour
sessions earlier. Yes, on occasions, members will have to
meet outside the boardroom and off-line. And yes, if
companies want well functioning Audit Committees with
competent independent directors, they will have to pay
accordingly. Why should these be retrograde developments? In
any other circumstance, these would be considered as moves
towards greater professionalism.
Regarding CEO-CFO certification, as a
shareholder would you not want your company’s CEO and CFO to
certify that the financial statements do not contain
anything material untruth, omission or misstatement? That to
the best of their knowledge, the company has not engaged in
any fraudulent or illegal transactions? And that they have
adequately reviewed the internal control systems with the
management, auditors and the Audit Committee? I bet you
would. So what is wrong with this certification, especially
when it does not carry any criminal liabilities like
I have sympathy with the fact that we are
probably demanding too many disclosures. For instance, no
country except India requires companies to give a report
that discloses segment income, profits and capital employed.
Equally, none require each director’s remuneration to be
stated in the annual report. These are matters that Mr.
Damodaran might wish to consider — along with making
Let us recognise that Clause 49 has not only
improved corporate governance but has forced management to
significantly improve internal controls and financial
reporting systems. Let us also recognise what is good in the
new proposals, instead of screaming blue murder, trying to
scuttle corporate reforms and throwing the baby out with the