The Narayana Murthy Committee on Corporate Governance is expected to take an unexpected step today of reconsidering the representations and feedback received from industry. This unusual move could potentially malign the process of framing new regulation. The Murthy Committee had submitted its report to the Securities and Exchange Board of India in February 2003. The report was first vetted by the finance secretary before being posted on SEBIs website. It was then kept open for public comments for eight weeks. The SEBI board then deliberated on the report, accepted some of the suggestions and discarded the rest. For instance, an important recommendation was that public financial institutions and banks cannot have nominee directors on the boards of companies, since they are accountable only to the lenders. They should either be independent directors accountable to all stakeholders or be considered non-independent. This recommendation was rejected by the SEBI board, which has in it several government representatives. While one may question the wisdom of rejecting the recommendation, committee reports are only recommendatory in nature and the board is well within its rights to reject what it considers unwise. But once it does that, all committees that are not standing committees have to be disbanded and cannot be recalled to reconsider select issues flagged by the SEBI board. In this case, things have moved well beyond the discussion stage. After its boards deliberations, SEBI actually amended Clause 49 of the listing agreement of stock exchanges (covering pre- and post-listing disclosures by companies) and it was only then that a storm of protest broke out.
Industry groups have since prevailed on the government to withdraw the Companies Act Amendment Bill 2003 before targeting the disclosures mandated by SEBI. The regulator has clearly been compelled to clarify changes made to Clause 49 of the listing rules. Some clarifications, such as what constitutes material pecuniary relationship between a company, or the role of audit committees, and the extent of independent directors responsibility to oversee compliance reports, were probably necessary. But that job ought to have been done by the SEBI board itself instead of recalling the Murthy Committee. Especially as industry associations were adequately represented on the committee, had many opportunities to guide the discussions, and register their objections during the deliberations and did not register a single note of dissent. By reconvening the Committee, SEBI has created a situation where a near unanimous report is to be reopened and potentially serious discord within the Committee could jeopardise the entire exercise. This can neither serve industry nor the regulator well.