Their confidence stems from the fact that the ministry of company affairs (MCA) has officially written to the Securities and Exchange Board of India (Sebi) to extend the compliance deadline, because it soon intends to prescribe board composition through an amendment to the Companies Act. The amended Act clearly plans to go with the JJ Irani committees less onerous recommendation that only one-third of the board needs to comprise independent directors. Earlier, the Naresh Chandra committee (also set up by the MCA) had also advised Sebi not to tighten the regulation of listed companies through clause 49, instead of an amendment to the Companies Act.
Sebi has, however, refused to back down. Its confidence stems from the fact that the finance ministry has ignored the lobbyists. Sebi chairman M Damodaran is determined to ensure that companies have no excuse for non-compliance. He has repeatedly warned that disobedience will attract delisting, irrespective of whether companies are in the public sector or private sector. This was necessitated by the fact that although thousands of companies have complied with the most contentious provision of the amended clause 49that half the board must comprise independent directorshundreds of others continue to live in the hope of an extension. Many are also banking on Sebi balking at a drastic delisting of companies, since it would hurt investors the most.
But Sebi has been working to plan. Anticipating complaints about the difficulty in finding suitable candidates for the post of independent directors, it facilitated the creation of public lists of thousands of able and willing candidates. Next week, it will emulate the tax collection agencies by issuing an official advertisement exhorting listed companies to comply with the new listing rules and alerting investors to be vigilant.
Hundreds of companies cant believe Sebi will delist defaulters
However, Sebi seems serious and believes its threat is credible
The danger is that board composition will seem a panacea for malpractices
Since the composition of the board itself has turned so contentious, a couple of equally touchy issues have gone on to the back-burner. The first is over the ban on independent directors having a material pecuniary relationship with the company. Here, one group is engaged in a semantic debate over when a pecuniary benefit becomes material enough to become objectionable. Some want specific ceilings and others believe they are mature enough to create their own definitions. Meanwhile another set of blue-chip companies have quietly started lobbying for independent directors to be allowed to keep their directorships (that come with fat sitting fees, a share in profits and stock options these days), while also earning some more as consultants or advisors to the company.
Ironically, the debate is so skewed that board composition alone is made to seem like the panacea for corporate malpractices. This is clearly incorrect and tends to mislead investors. Clause 49 itself raises other issues, such as mandatory risk assessment and certification of accounts by the CEO/CFO and a bigger role for independent directors on audit committees. These rules and conditions are necessary to ensure a degree of transparency in the operation of publicly listed companies and safeguard investor interest at a time when companies are busy cashing in on a powerful bull market to raise more funds than they need. But investors must remember that technical compliance with a fat rule book does not stop dubious managements from bending the rules.