New Sebi norms a step ahead of Companies Act

The corporate governance norms announced by the Securities and Exchange Board of India (Sebi) go beyond those mentioned in the Companies Act.

Sebi has pushed for better corporate governance of listed companies through measures such as the need for a succession policy, prior approval of the audit committee for all related-party transactions and e-voting facility for all shareholder resolutions by the top 500 companies (by market capitalisation). All these measures have either not been specified in the Companies Act or haven't been made mandatory.

Shriram Subramanian, founder and managing director of corporate governance research firm InGovern, said some moves tried to improve aspects in the Companies Act. “First, the number of boards independent directors can serve on has been reduced from 10 listed companies in the Companies Act to seven…Also, what they have mentioned about succession planning is not part of the Companies Act, though it is in line with what is happening globally,” he said.

M S Sahoo, secretary, Institute of Company Secretaries of India, said Sebi planned to improve the corporate governance norms for companies under its purview. “The mandate for Sebi extends to listed companies. So, they would look to hold these to a higher standard than other companies,” he said.

The stock market regulator has encouraged boards to put a succession plan in place so that there is a clear second line of leadership, should the top one fall vacant. The Companies Act doesn't talk about the need for a succession plan.

Sebi has also talked about the audit committee looking into related-party transactions, or deals in which promoters may stand to benefit. The Companies Act, however, doesn't mention such a process. Sebi has also urged a provision be made to train independent directors and make it compulsory for the 500 most valuable companies listed on stock exchanges to allow their shareholders to decide on resolutions through e-voting, which is not mandatory under the Companies Act.

“A number of companies hold their meetings in obscure cities and towns. The use of e-voting will ensure everyone, whether they are in Boston or Agartala, will be able to exercise their rights,” said Subramanian.

Sebi’s norms increase the compliance burden for companies. Sahoo said now, the corporate governance standards were being prescribed by multiple authorities, including the Ministry of Corporate Affairs, the Insurance Regulatory and Development Authority and the Reserve Bank of India.

“The issue is there are too many agencies and too many norms in the corporate governance space, but too little enforcement,” he said.


HOW THEY STACK UP
A summary of Sebi’s corporate governance norms vis-à-vis the Companies Act 2013:

Proposals: Independent director can be on the board of maximum seven listed companies and three in case the person is serving as a whole-time director in a listed company
Companies Act and draft rules: 10 public companies. No separate provision for listed companies

Proposals: Whistle blower policy made mandatory
Companies Act and draft rules: Yes

Proposals:  Succession policy
Companies Act and draft rules: Not  specified

Proposals:  Independent director: Maximum two terms of five years each
Companies Act and draft rules: Yes

Proposals:  ID tenure to be computed on retrospective basis
Companies Act and draft rules: It has been specified that it should not be applied retrospectively

Proposals:  No stock options for ID
Companies Act and draft rules: Yes

Proposals:  Nominee director not to be treated as independent
Companies Act and draft rules: Yes

Proposals:  Prior approval of audit committee for all material-related party transactions
Companies Act and draft rules: Not specified

Proposals:  Performance evaluation of independent directors and the board of directors    
Companies Act and draft rules: Yes

Proposals:  Separate meeting of independent directors    
Companies Act and draft rules: Yes

Proposals:  Constitution of stakeholders relationship committee
Companies Act and draft rules: Yes

Proposals:  Enhanced disclosure of remuneration policies
Companies Act and draft rules: Yes

Proposals:  Approval of all material-related party transactions by shareholders via special resolution with related parties abstaining from voting    
Companies Act and draft rules: Yes

Proposals:  Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees shall be independent.  
Companies Act and draft rules: Yes. Chairman independence not necessary

Proposals:  At least one woman director on the board of the company
Companies Act and draft rules: Yes

Proposals:  Scope of the definition of material-related party transactions has been widened to include elements of Companies Act and accounting standards
Companies Act and draft rules: Not clarified

Proposals:  E-voting facility by top 500 companies by market capitalisation for all shareholder resolutions
Companies Act and draft rules: Not mandatory

Proposals:  Providing training to independent directors
Companies Act and draft rules: Not specified

Source: Institutional Investors Advisory Services India Ltd (IiAS)