Corporate Governance: Proposed Reforms – Part III (SEBI Proposals)

[Dr. Sanjiv Agarwal]

Code for directors

SEBI should formulate a Code for Independent Directors which may include 'do’s and don'ts' for them. SEBI should prepare a 'panel' of probable independent directors for guidance of companies based on certain parameters of age, qualifications, background, status, experience, other credentials etc. Presently, BSE has a website for such purpose but companies hardly appoint directors from that panel. Also, Department of Public Enterprises (DPE) also maintains a panel for independent directors but independent directors are not appointed from that panel in all cases. As such, the very purpose of such panel is defeated. It is suggested that companies should be under obligation to appoint all or atleast 50 percent of the independent directors from the panel maintained by SEBI for such purpose.

 Ceiling on directorships

In order to provide proper insights and guidance to the companies, there should be an upper ceiling on the number of independent directorships a person can have which could be 5 or 7.

 Restrictions

In order to avoid clash of interest and use of undue influence, SEBI may consider-

(a) Prohibiting individuals such as MPs, MLAs, MLCs etc to be on corporate boards as independent directors.

 (b) Restricting retried bureaucratsfrom being appointed as independent directors on company board for a period of two years so that they may not influence the decision making machinery.

 Appointment

Formal letter of appointment to independent directors may not be necessary. In fact, a copy of the resolutions / minutes could serve the purpose. As an alternative, there could be a sort of ‘welcome kit’ or ‘independent directors kit' containing various guidance for him / her.

 Training

Training for independent directors / other directors could be done by NISM itself or outsourced to institutes like ICAI, ICSI or IICG (under MCA). However, there is an urgent need to draft a ‘Manual for Company Directors’ as a basic guidance for all directors in India.

 ICSI has a Post Membership Qualification Course (PMQ) in Corporate Governance which may be recognized for this purpose. Alternatively, ICAI or ICSI may be mandated to conduct the course on Corporate Governance for SEBI. It could even be considered to be made compulsory for all independent directors and conducted by NISM / IICG.

 Nominee directors

If nominee directors are to be excluded from the category of independent directors, SEBI should come out clearly with their role, responsibilities and liabilities. Companies Act holds all directors to be jointly and severally liable.

 Age limit

The age limit of directors may be provided between 21 and 70 years which is considered reasonable. Further, minimum age may be made subject to minimum qualification, say, an undergraduate degree.

 Tenure

The requirement of mandating maximum tenure for an independent director is subject to a cooling period of three years. During the cooling period, such person should not be appointed in or be associated with the company or its subsidiary or in any of the group companies as a director or in any other capacity, either directly or indirectly.

 Resignation

The resigning director should disclose in clear terms the exact reasons for tendering his resignation from the Board at the time of resignation and it should be placed before the board for its perusal and acceptance. Mere noting of resignation by the board may not be enough. The SEBI may also consider calling the concerned director in the meeting in which his resignation is placed or is being discussed.

 It may also be considered whether it would be appropriate to put a prohibitory window for a specified period (say 6 months from signing the prospectus or IPO date) during which director does not resign unless there are compelling reasons.

 Independent directors

The concept of lead independent director is a welcome move in India and it could be done based on experience, qualifications and seniority. The other view could be that he should be a director who is not an audit committee chairman. The lead independent director may be subjected to rotation on an yearly basis.

 He should also be provided with a basic office infrastructure and a space to work whenever he visits office of the company.

 While separate meetings of independent directors are desirable, atleast twice a year, SEBI may also consider to introduce a two tier board system in India.

 The upper cap on number of independent directorships has now become a necessity as the businesses as well as business laws are now more complex. It is suggested that independent directorships should be restricted to even lower than what Companies Bill suggest, say at 5 with Committee Chairmenships at 3.

 

(To be continued …………)