Key corporate governance rules not in sync with Companies Act

Written by Shruti Srivastava | Shruti Srivastava | New Delhi | Updated: Apr 19 2014, 20:02pm hrs
The corporate governance norms issued by Sebi faced criticism by experts on Friday, who said that certain provisions threaten to slowdown the functioning of Corporate India.

The Securities and Exchange Board of India (Sebi) on Thursday released detailed corporate governance norms for listed companies, providing for stricter disclosures and equitable treatment for minority and foreign shareholders. The aim was to align the revised norms with the new Companies Act, 2013, effective April 1.

Experts said that some of the provisions are not in sync with the Act, thereby posing practical difficulties for companies. For instance, the corporate governance rules, effective from October 1, require companies to get approval of shareholders, including minority, for material related-party transactions. This has been done to ensure higher level of governance. Material would mean greater than 5 per cent of turnover or 20 per cent of net worth.

However, this is in contrast with the Companies Act, which exempts companies from the condition if the audit committee finds that the transaction is at arms length or not in the ordinary course of business.

Requiring approval from non-related party shareholders even for related-party transactions that are at arms length and in the ordinary course of business would be burdensome and pose practical difficulties. This is particularly excessive for transactions with the companys own subsidiaries, Jamil Khatri, global head of accounting advisory services, KPMG India, told The Indian Express.

Khatri added that it would lead to delay in even routine and small related-party transactions which may not have any material significance.

Further, Sebi allows a person to be independent director on board of a maximum of seven companies, which would further reduce to three if the person is a whole-time director in any other company.

It goes on to say that while such directors can serve for a maximum of 10 years on a board, if the person has already completed five years, that period would be counted for the tenure. However, the Companies Act, which allows a person to be independent director on board of 10 public companies, is completely prospective in nature.

Given that the Act has been recently enacted, differences between the Sebi rules and the Act in areas such limits for independent directors should have been avoided, Khatri said, adding that while the Companies Act was framed earlier, the market regulator should have a re-look at its policy to synchronise it with the Act.

Another expert, who declined to be identified, said that given the dearth of trained independent directors in the country, it would be a tough task for the companies to appoint them. The expert added that while remuneration is not commensurate to responsibility, in sectors like banking, it would put extra pressure on the independent directors as their role would increase in case of deteriorating assets.

Stark contrast

* Sebi says all material related-party transactions need shareholders approval; Companies Act requires it only when transaction is not at arms length or not in the ordinary course of business.

* Regulator allows a person to be independent director in a maximum of 7 firms while Companies Act allows 10 public firms.

* Sebi Allows maximum tenure of 10 years for independent directors and includes the period served; Companies Act is prospective