India Inc needs 15,000 independent directors

India Inc will require over 15,000 trained independent directors before the end of 2005, as most of the existing independent directors will fail to make the grade once Clause 49 of the listing agreement comes into effect from January 1, 2006, according to the UK-based World Council for Corporate Governance, a global body that promotes greater boardroom transparency.

India has nearly 4,200 Grade A listed firms and each company is required to have four independent directors on its board.

"Although all listed companies have the mandatory number of independent directors on their boards, nearly 90 per cent of the them will be disqualified under the tighter provisions of Clause 49. Also, the average age of independent directors in India is above 60, which makes it difficult for them to play a serious and active role as guardians of shareholder interest," said Madhav Mehra, president, WCCG.

Mehra was also a member of the Naresh Chandra committee on corporate governance norms.

Clause 49, which was initially issued by the Securities and Exchange Board of India in 2000, was slated to come into effect on April 1 this year, but with corporates seeking more time, its implementation has been postponed to the end of 2005.

"Similar regulations around the world, such as the Sarbanes-Oxley Act in the US, and the Derek Hicks Committee's recommendations in the UK, have put the onus on independent directors to be vigilant. Corporate mis-governance definitely stems from the lack of effective training in company directorship. With no major business school in the country making corporate governance a part of the curriculum, it is going to be a major challenge for companies to find competent independent directors," Mehra added.

Modelled on international corporate governance norms, Clause 49 lays down tighter eligibility criteria for independent directors.

Unlike the current practice, representatives of a company's existing legal, audit or consultancy associates, or suppliers, and relatives of promoters, cannot be independent directors.

It also disallows a shareholder with more than a 2 per cent stake in a company from being an independent director, as well as former senior executives who left the company less than three years ago.

According to Mehra, creative accounting and auditing malpractices are common in India, and scandals like Parmalat and Enron are waiting to happen here.

"The stock markets might be booming here, but India ranks very low among emerging economies in terms of corporate governance and stock market transparency. This is preventing a lot of foreign direct investment from coming to India," said Mehra.