Those involved in India’s corporate
governance know of the regulatory wars between the
Ministry of Corporate Affairs (MoCA) and the SEBI.
Till recently, with listed entities dominating
corporate India, and with SEBI defining their
corporate governance and public financial disclosure
norms through its Listing Agreement, MoCA played
second fiddle. The ministry hated it. Despite being
the guardian of the mother act — The Companies Act,
1956 — it was being finessed by the Mumbai’s
regulators. MoCA wanted to level the field.
That opportunity arrived in January 2009, with
Satyam. Everyone was stunned that half a dozen
crooks led by an executive chairman systematically
stole huge piles of company funds, with neither the
auditors nor the non-executive directors having a
clue. The balance shifted. MoCA played the lead role
with the investigators, politicians and the press.
SEBI was relegated to the sidelines. Since then,
MoCA is determined to hold the aces.
The Companies Bill, 2009, is such an example.
Substantive modifications suggested by MoCA have
been passed by the Parliamentary Standing Committee
(PSC) chaired by Mr. Yashwant Sinha, and presented
to the Lok Sabha on 31 August 2010. The bill will be
debated in the winter session. Given that little
debate takes place these days, especially on
corporate laws, it will surely be passed as law
before the end of the session.
None doubt that we need a new Companies Act. Many of
the statutes are outdated. The problem is with some
of the corporate governance clauses that feature in
the bill, which are retrograde, counter-productive,
and exhibit excessive over-reach of law. For the
want of space, here are but two.
Size of the Board. According to Clause 132(1), every
public limited company must have a minimum of three
and a maximum of 15 directors, excluding nominees
from lending institutions. However, a company may
appoint more than 15 directors after obtaining prior
approval of Central Government and passing a special
resolution. There is no problem with a minimum. But
why should law prescribe a maximum? That is a matter
for the company and its shareholders to decide. If
the shareholders agree, why does a company need
“prior approval of Central Government” to increase
its Board size beyond 15? Example No.1 of
legislative over-reach.
Tenure of an independent director. According to a
new clause 132(7) introduced by MoCA and approved by
the PSC, (i) no independent director shall have a
tenure exceeding, in the aggregate, a period of six
consecutive years on the Board of a company; (ii)
three years must elapse before such a person is
inducted in the same company in any capacity, and
(iii) no individual shall have more than two tenures
as independent director in any company in the manner
provided in this clause.
Here’s a story of subterfuge. Clause
132(7) was not in bill that originally went to the
PSC. In December 2009, MoCA released a booklet,
Corporate Governance: Voluntary Guidelines. On the
tenure of independent directors, it stated:
a) An individual may not remain as an independent
director in a company for more than six years.
b) A period of three years should elapse before such
an individual is inducted in the same company in any
capacity.
c) No individual may be allowed more than three
tenures as an independent director in the manner
suggested in (a) and (b) above.
Almost identical words, right? When various bodies
across India severely critiqued this provision,
MoCA’s answered that it is a ‘voluntary code’, no
different in spirit to the voluntary recommendation
in SEBI’s Clause 49 that an independent director
ought not to serve for more than nine consecutive
years.
In its deliberations with the PSC, MoCA successfully
slipped it into The Companies Bill, 2009 as a new
sub-clause. The PSC has not only agreed, but has
also stated that it “would like the Government to
formulate a code of Independent Directors [to]…
include their mode of appointment, role and
responsibilities… their remuneration and extent of
their liability”. MoCA has thus convinced the PSC
that various elements of its ‘voluntary’ code should
be incorporated in the Bill. The ‘voluntary’ code
was a ruse to create the entry that MoCA wanted with
PSC so that its provisions got appended to The
Companies Bill, 2009 — so making it mandatory!
No corporate legislation in any major country states
the maximum number of years that a director can
serve on a Board. Not in the USA; in the UK; in
Australia; in Canada; in Singapore; in Hong Kong;
and many more. Such a ceiling, if it exists at all,
is in the domain of the Memorandum and Articles of
Association of a company, or as a practice of a
Board.
Does law state the maximum number of terms for an
elected Lok Sabha member? It doesn’t, and rightly
so. If political fiduciaries have no ceilings on the
number of terms that they can be elected, why is it
imposed on corporate fiduciaries? How can law decide
the maximum tenure of an elected appointee of the
shareholders? It is for a company’s shareholders to
choose, not the State. Example No.2 of inexcusable
over-reach.
Such a clause vitiates the real world of Boards and
governance. Consider multi-product, multi-location,
multi-service companies, or businesses with
substantial regulatory overhang such as banks and
insurance. Even with serious induction-level
training, it takes a new independent director a year
and a half to properly understand nuances of the
business. Thus, the effective tenure of being an
informed and sensible fiduciary will be four and a
half years. After which the Board will have to look
for a replacement. What great corporate governance
is this?
I could go on about number of board positions and
counter-productive restrictions on auditors. But
let’s end with a tailpiece. The PSC has stated that
maximum political contributions in a year be raised
to 7.5% from 5% of average net profits during the
three immediately preceding financial years. Because
“the number of political parties in the country has
increased and such donations are not made every
financial year”.
Published: Business Standard, September 2010
