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Corporate Angst About Clause 49

 Omkar Goswami


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 blue funk.


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 Clause 49.

  • The responsibilities and the duties of the board-level Audit Committees have been made far too onerous.

  • 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 jeopardy.


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 Sarbanes Oxley?


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 de-listing easier.


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 bathwater.


 Published: Business World, May 2005


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