Conflicting rules

Written by Ashish Sinha | Noor Mohammad | Noor Mohammad | Updated: Apr 23 2014, 08:00am hrs
Stock-exchange-listed central public sector enterprises (CPSEs) could face difficulties in complying with the Securities and Exchange Board of Indias (Sebi) new norms on corporate governance as some of these guidelines are in conflict with the provisions of the Companies Act of 2013.

Sebis new rules, which would be effective October 1, envisage that CPSEs get shareholders approval for related-party transactions, establish a whistle-blower mechanism, make elaborate disclosures on pay packages and appoint at least one woman director on their boards. There are around 45 listed CPSEs in India.

Sebi is in the process of revising its corporate governance norms to bring them in line with the provisions of the new Companies Act, 2013 so that India Inc in general and the CPSEs in particular adopt best practices in corporate governance. But experts point to the gaps between what is laid out in the new Companies Act of 2013 and the revised norms on corporate governance brought out by the market regulator.

For instance, the corporate governance rules require companies to get the approval of shareholders, including minority shareholders, for material related-party transactions. Material here means greater than 5% of turnover or 20% of net worth. However, this is in conflict with the Companies Act, which exempts companies from the condition if the audit committee finds that the transaction to be at arms length or not in the ordinary course of business.

According to a senior corporate lawyer who advises on matters related to company laws, the requirement of obtaining approval from non-related party shareholders (like minority holders) for related-party transactions (that are at arms length) and which are in the ordinary course of business is riddled with practical challenges. This will be particularly excessive for transactions with the companys own subsidiaries and may be very difficult to implement, the lawyer said.

On the issue of appointment of independent directors, Sebi has allowed a person to act as independent director on the boards of a maximum of seven companies, which would further reduce to three if the person is a whole-time director in any other company.

Sebis corporate governance norms further stipulate that such directors could serve for a maximum of ten years on the board of a company. If the person has already completed five years, that period would be counted towards the tenure. However, the Companies Act, allows a person to be independent director on the board of up to ten public companies and is completely prospective in nature.

The new norms, which have been finalised after detailed consultations over draft regulations released in January 2013, excludes nominee directors from the definition of independent directors. The new guideline also expand the role of audit committee and envision enhanced disclosure of remuneration policies.

Separate meetings of independent directors, and constitution of a stakeholders relationship committee are also part of the proposals. The watchdog has decided that the maximum number of boards an independent director can serve on listed companies be restricted to seven, while the directorship would be capped at three if the person is serving as a whole time director in any listed company.

But the Sebi norms on corporate governance coupled with those listed in the new Companies Act of 2013 pose challenges for the CPSEs in more ways than one, experts said.

Some of the senior executives of leading CPSEs said unless the selection of independent directors is done in a transparent manner and without interference from the administrative ministry, the additional powers given to them in the new Companies Act would have a negative effect on PSU autonomy. Enhancement of the powers of independent directors is well-intentioned, but in practice there have been allegations of growing instances of misuse of powers by independent directors at the behest of the central ministries, which get them appointed, and this would lead to further erosion of PSU autonomy.

As per Schedule IV of the new company law, independent directors of a company will have to meet at least once in a year, without the presence of non-independent directors and members of management, where they will need to review not only the performance of the chairperson of the company but also of non-independent directors and the board of directors as a whole. It is no secret that most independent directors have strong links with the top people in the ministry administering the work of a PSU. In this context, the provisions in the new Companies Act will create more roadblocks in the functioning of a PSU than ensuring its autonomy and helping it imbibe good corporate governance norms, said a top executive of a maharatna PSU.

The central PSUs fear these new sets of powers for independent directors may adversely affect the businesses unless the process for the selection and appointment of independent directors is overhauled. As per the current practice, the process of selection and appointment of independent directors on the board of CPSEs needs vetting from the ministry concerned after such a proposal has passed through various stages of time-consuming scrutiny.

The practice of administrative ministries having the final say in the selection of independent directors also leads to delays in appointments, often stymieing timely decision-making. For example, late last year Coal India had to put on hold plans to raise coal prices, sign fuel supply agreement with power companies and initiate a price pooling mechanism as the posts of independent directors were vacant.

For two months to October-end, CIL didnt have any independent directors on its board as all the seven of its independent directors had retired between April and August 2013. Important decisions on FSAs could not be taken during the period. Then, on November 1, 2013 the company announced the appointment of three independent directors as proposed by the coal ministry. The public offer of other companies such as NHPC, PowerGrid have also been delayed due to non-appointment of independent directors in the past years.

Power generator NTPC has also found certain projects (such as hydroproject Lohari Nagpala) being thrust upon it by the administrative ministry with the support of independent directors even though the companys management and functional directors did not approve of these projects. We need to change the process of appointment of independent directors, by giving this function to a sovereign, independent and impartial committee and removing the role of administrative ministry in their selection. Under the current system such directors are dependable independent directors whose loyalty is clearly towards the ministry, director-general of Standing Conference of Public Enterprises UD Choubey had told FE in November last year.