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

[Dr. Sanjiv Agarwal]

This article in its last part continues with the proposals for improvement in Corporate Governance practices in India in the back drop of SEBI's Consultative Paper on Review of Corporate Governance in India.

Investor Education

Investor education can be made a part of CSR activities and any amount spent by listed companies on investor education for shareholders or otherwise should be considered as a part of CSR initiative. It would only add to qualitative investment decisions and better awareness of investments, risks and other allied issues. Companies may be mandated to -

a)    hold atleast 2 investor programs in a year (atleast one can be clubbed with AGM)

b)    disclose efforts and amount so spent on investor education in Corporate Governance report

c)    All communications to investors / shareholders could be used to propagate / spread investor education which will involve no extra cost to the company. Also, one can find atleast 1-3 pages space in notice / annual report etc. What can be contained in such mailers / messages can be prepared as a model. Companies may also be encouraged to use regional language for this purpose.

Institutional Investors

So far as institutional investors are concerned, their voting policy should be in public domain and a board approved policy. It should be applicable to all investments / companies. However, it is desirable that institutional investors should actively participate in meetings and must go out to ask uneasy questions to probe the management, wherever a need to do so arises.

Investors holding more than one percent of total shareholding in listed companies should be obligated to attend annual general meetings.

The same should apply to all public sector companies and banks. Wherever directors are elected from the shareholder category, they should actively participate in order to ensure quality independent directors, diversification of board and enhancement of director's responsibility.  In banks, institutions and corporations, there is a provision of shareholder's representation on the board.

Infact election of directors at such general meetings where elections are fiercely contested, election proceedings should be conducted in presence of a representative of SEBI / stock exchange or an independent professional nominated by stock exchange / SEBI / RBI.

Enforcement & Audit

Instances of effective enforcement for non-compliance with Corporate Governance norms will go up with enhancement of quality of audit of Corporate Governance implementation and disclosures. To achieve this, auditors should be well versed with the Corporate Governance norms, practices and its consequences. It is suggested that auditors should be obliged to undertake some course or training on Corporate Governance and must keep themselves abreast with latest developments. How this can be achieved could be debated. The experience suggests that the Corporate Governance audit is by and large a 'tick box' exercise without looking at compliance in totality. SEBI can also experiment with Corporate Governance audit being conducted by an independent professional (CA or CS), other than the statutory auditor of the auditee company.

Corporate Governance ratings

Corporate Governance rating could be considered to be made mandatory for companies –

  a) with 7500 crore paid up capital

  b) companies / body corporates under public sector (PSUs / PSBs)

  c) in 'A' group

Consequences of non-compliances

Consequences of non-compliance with Corporate Governance norms should be made so much so that non-compliance of Corporate Governance norms is discouraged at all levels. Following measures could be considered by for penalizing defaulting companies–

a)    prosecution of directors

b)    prosecution of CFO / company secretary

c)    prohibiting companies from further issue of capital (FPUs, rights issue)

d)    Appointment of SEBI / SE nominee on board for oversight

e)    monetary penalty

f)     punishment for auditors

g)    debarring independent directors from re-election / election on board of other companies

h)   making such instance an offence so as to disqualify the direction u/s 274 (1) of the Companies Act.

Epilogue

Corporate Governance in India and elsewhere in the world is still evolving. Nevertheless, one needs to make continuous efforts to improvise, standardize and continuously upgrade the current levels of Corporate Governance in India.

 

(Concluded)