about us
  areas of expertise
  our projects
  ideas & resources


  Index of Articles          Index of Perspectives            Next Article


      Seek Substance, Not Empty Form            

Omkar Goswami


As I have mentioned in earlier columns, there is a “Who is the fairest of us all?” battle between the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). It began with the Satyam scandal, where the MCA took an upper hand, and has not let go the advantage right up to the passing of the new Companies Act, 2013, including framing of its numerous rules and regulations. The SEBI has been waiting in the wings for its time on stage, which never seemed to come.

Until now. With the Companies Act in the statute book, the SEBI has decided that it can prove its regulatory mettle by imposing stricter conditions upon listed companies, which fall under its remit. Let me take an example of this. It relates to the maximum number of independent directorships that a person can hold.Section 165 of the Companies Act states that the maximum number of directorships than an individual can hold is 20, including private companies which are subsidiaries of public entities. However, regarding public companies, the ceiling is 10 directorships. By any reasonable yardstick, 10 board positions should be more than enough. One really cannot carp with this provision.

If the news that one is reading happens to be true, the SEBI seems to be veering to imposing a maximum of five such independent directorships per person. The argument is presumably this: listed companies are publicly traded entities which ought to get greater oversight from the board of directors than others; to properly discharge such fiduciary tasks, directors need time, effort and attendance; and, in the SEBI’s opinion, to properly do the job, an independent director cannot serve in more than five such boards.

As is often the case with regulatory agencies, the SEBI has confused substance for form and proposed a counterproductively mechanical action to address an otherwise laudable objective. None can deny that a director must participate in board and committee meetings of the companies where s(he) serves as a fiduciary. But where is it stated or proven that five is the most that s(he) can do; not four; not six; not seven; or not even ten?

Thankfully, there is enough prima facie proof. However, the SEBI has not examined the data. Every annual report of any listed company must give the record of all the board and committee meetings held in the course of the year; as well as the attendance of each director — whether in person or through video conference — for each of these. Attendance is not a perfect proxy for the fiduciary competence of any independent director. But serious lack of attendance is a sure indicator that the person does not have the time to carry out the necessary tasks required of this position. An intelligent way of dealing with this is to incorporate the attendance data.

If I were to draft the new corporate governance norms for the SEBI under this head, here’s what it would be. For listed companies, I would maintain the cap of 10 imposed by the new Companies Act and add an important proviso: if, in any financial year, an independent director does not attend at least 50 per cent of the board and committee meetings of a listed company, this should be publicly stated by the chairman of the company in the notice of the annual general meeting (AGM) and such a person will need to step off the board and seek re-appointment by the shareholders through postal ballot, and announced in the AGM.

This will be like publishing a defaulters list which adorns the notice boards of all cooperative building societies in Mumbai. It will serve to publicly shame non-performance. And it will allow regularly attending and performing directors to serve on as many boards as they appropriately can, subject to the cap imposed by the Companies Act.

When we have the usual viral fever, doctors prescribe analgesics and antipyretics. They do not recommend anti-fungal cream. Maybe the SEBI can learn from sensible medical practices.

Published: Business World, February 2014


                 Index of Articles          Index of Perspectives            Next Article