‘Key corporate governance rules not in sync with Companies Act’

Apr 19 2014, 14:32 IST
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SummaryThe Sebi on Thursday had released detailed corporate governance norms for listed companies.

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 “arm’s length” or not in the “ordinary course of business”.

“Requiring approval from non-related party shareholders even for related-party transactions that are at arm’s length and in the ordinary course of business would be burdensome and pose practical difficulties. This is particularly excessive for transactions with the company’s 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

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