Can SEBI Paper on Independent Directors Help Improve Corporate Governance?
A consultative paper released by the Securities and Exchange Board of India (SEBI) to seek public inputs on a few new measures to improve the corporate governance in publicly listed companies has not come a day too soon. 
 
It is a well-recognised fact that corporate boards in India, with a preponderance of promoter influence, come under significant pressure when it comes to the appointment of independent directors and auditors. The consultative paper has come with a very commendable suggestion that independent directors can be appointed only in general meetings and only with a majority of non-promoter shareholders approving it. 
 
This takes a cue from the model followed in the UK and is certainly most welcome. The paper has also other recommendations which are quite timely but are not dwelt upon presently.  
 
To stay with the aspect of neutralising the influence of promoters in the appointment of directors and auditors, it will be useful if a few more measures are considered. 
 
To give teeth to the recommendation of independent directors being appointed by a majority of the non-promoter shareholders, it is essential that the non-promoter shareholders seize this space and play an active and vigilant role in populating the corporate boards with not just socially well recognised faces but persons who are truly independent of the promoters and, more importantly, representing very diverse backgrounds. 
 
It is definitely not the job of SEBI to keep reminding the institutional market players like mutual funds, Life Insurance Corp of India (LIC) and foreign portfolio investors (FPIs) that they have obligations that extend well beyond making money for their stakeholders and investors. 
 
Deepening and strengthening the framework of governance within which the promoters are kept in check and their latitude to cut corners is progressively narrowed down, is bound to boost growth in the corporate sector in the long run. Hopefully resultant burgeoning public confidence in the quality of governance in general can only help more public savings move into the capital market. 
 
It is quite possible that with the exception of LIC, other institutional players may not be individually holding substantial stakes. However, mutual funds collectively would have significant holdings in most large listed companies. It is necessary that they play a role in unison in this endeavour. 
 
Mutual funds have a common organisation in the Association of Mutual Funds in India (AMFI) that facilitates self-regulation. This agency can play a crucial role to seize the opening provided by SEBI in the consultative paper. 
 
AMFI can consider creating its own database of eligible independent directors (IDs) that can be drawn upon by companies wishing to appoint new IDs. It is equally vital that preference is given to persons who are not already on multiple boards, more so if they are IDs in related or group companies. 
 
Common director(s) in a clutch of companies identified as part of a group, whether as per any legal definition or otherwise, is an indication of appointment being made based on familiarity and should be discouraged.
 
 The other critical area, which the present paper doesn’t cover, is the appointment of auditors. A fact that is seldom openly acknowledged is that audit committees have to contend with significant influence of the promoters and the chief finance officers (CFOs) in the choice of external and internal auditors. 
 
While the rotation of auditors may have created a once in 10 years opportunity to cut the umbilical cord between the company and a specific auditor, it doesn’t address the fact that operating managements seek to unduly influence the choice of auditors and the remuneration payable to them. 
 
It is essential that this phenomenon is duly recognised by SEBI and new safeguards are brought in along with the measures that form part of the present paper. 
 
It is worthy of consideration if the audit committee is made to file a report with the National Financial Reporting Authority (NAFRA) on the process adopted in the choice of the auditors and in fixation of the remuneration. 
 
Since this is more or less a once in 10 years affair, it should not be seen as a big compliance burden for any audit committee to observe. NAFRA can come out with a model set of criteria for the process to be adopted by the audit committee in the choice of the statutory and internal auditors. 
 
The need to explicitly seek a report from the audit committee will, in a large measure, help its members to take more ownership in the process and be able to fob off (to dismiss or lie about an underlying issue with something easier to explain) the management influence citing its statutory onus and exposure. 
 
This short piece is concluded with a suggestion that SEBI should move towards developing model codes and best practices and update them once every three years or so.    
 
As a system, we should move away from mandated norms for achieving better corporate governance. Even the existing rules in the listing obligations and disclosure requirements (LODR) should be progressively subsumed in the model code. 
 
Let the market and knowledgeable investors send out the message to companies to tone up governance, than overburdening the rule book with ever so many provisions. It is unavoidable that, unless an expectation is created, most businessmen would not on their own put in place processes to ensure good governance. 
 
This is an unfortunate truth and public sector companies themselves are an example where many of the mandated governance practices are not observed.
 
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.) 
Comments
ramesh.vuyyuru
7 months ago
It has become fashionable to call company promoters crooks. How many promoters are cheating the investors, and how many are enriching them? The vast majority of promoters have their entire life committed to the companies they created and built up. Compare this with a politician who is only thinking of the next election, or the bureaucrat who is waiting for the next posting. We are very happy to keep talking about the UK model or the US model, when it suits us to denigrate the Indian entrepreneur. The author, on the one hand, feels that mandating compliance is not the way to go. However, he also has suggestions for more such regulation.
Free Helpline
Legal Credit
Feedback