In such a case, the company has to enter into the listing agreement with the concerned stock exchange. The requirements of corporate governance can be tested in the context of any of the listing agreements, and the Delhi Stock Exchange listing agreement can be taken as a standard. In the first instance, the company has to agree that the board of directors of the company shall have an optimum combination of executive and non-executive directors, of which the latter shall represent not less that 50 per cent of the board, if the chairman is executive. Otherwise at least one-third of the board should be independent. It may be presumed that a whole time or executive director is not an independent director even if (s)he is a professional and appointed through a proper screening process.
The concept of the audit committee enshrined in the agreement, however, has not been entirely replicated in Section 292A of the Companies Act, 1956, under the listing agreement. The chairman of the committee has to be an independent director, and the members have all to be non-executive, with the majority of them being independent. The statutory consequence of the non-constituting of the audit committee and the non-compliance with the functional requirements have been dealt with in Section 292 sub section (11), making such non-compliance punishable by imprisonment up to one year or a fine of Rs 50,000. The agreement further provides that the audit committee of a listed company shall have additional features/functions as contained in the listing agreement. The company is also required to have a separate section on corporate governance, along with a detailed compliance report in its annual reports. Clause 49(VII) provides that non-compliance of any mandatory requirement has to be specifically highlighted; of these, board composition is a mandatory requirement. The company is further required to submit a certificate from its auditors on the compliance of the conditions of corporate governance which has to be circulated to the shareholders and filed with the stock exchange.
There is, however, absence of clarity as to the consequence of non-compliance, except that of suspension or removal of listing of the securities. After all, the listing agreement is a contract. And on default, the consequences of breach of contract have to follow. In a case where there is a large and widely held investor public, with frequently traded shares, this could be financially crucial. But where there are small and not so many strong investors, and the promoter strength is stronger, what would be the legality of a board resolution in matters where such decisions do not require a general body resolution Or the general body is possibly unaware of the fact that the boards composition is not in compliance with the listing agreement Would the decision of the board taken under Sections 291 and 292 of the Companies Act which would include sale of assets (including immovable property of the company), entering into all business related contracts, investments and most borrowings be invalidated
At first glance, the answer is no. The Companies Act does not require the board composition to be laid down by the listing agreement. And the voidability of such decisions can occur only if provided for under the Companies Act or the Articles of Association of the company. But on second glance Section 292A requires the audit committee to be constituted on a certain basis; whether the legislature will interpret the two-third board representatives to mean non-whole time, non-executive or independent directors is the acid test. For the fulfillment of that requirement, the basic board composition has to necessarily reflect a composition with the required combination of executive, non-executive and independent directors. Otherwise, the requirements of corporate governance are set at nought. The board, not having the requisite composition, can take far-reaching decisions against which the minority, or may be not so minority shareholder, has no recourse, except resorting to litigation. Legislators and the Securities and Exchange Board of India should resolve this disturbing anomaly. Corporate governance will only make sense when translated into justiciable reality.
Kumkum Sen is a practising corporate lawyer and a partner of Khaitan & Khaitan, a Delhi law firm