Conflicting rules

Apr 23 2014, 02:30 IST
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SummarySebi governance norms which clash with Companies Act are a challenge for listed undertakings

Stock-exchange-listed central public sector enterprises (CPSEs) could face difficulties in complying with the Securities and Exchange Board of India’s (Sebi) new norms on corporate governance as some of these guidelines are in conflict with the provisions of the Companies Act of 2013.

Sebi’s 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 “arm’s 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 arm’s length) and which are in the ordinary course of business is riddled with practical challenges. “This will be particularly excessive for transactions with the company’s 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.

Sebi’s 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

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