The Hindu Business Line : Clause 18 compliance

CLAUSE 49 of the Listing Agreement obliges listed companies to re-organise their board composition to ensure safeguards for independent decision-making by companies. The deadline for this compliance is December 31.

The Clause, covering one aspect of corporate governance, requires that with effect from January 1, 2006, at least 50 per cent of the board should be composed of independent directors, where the chairman is an executive. If he is not, at least one-third of the board should be with independent directors.

The Securities and Exchange Board of India chairmanrecently made it clear that the deadline, announced to listed corporates a year ago, would not be extended. Defaulting companies would be proceeded against, regardless of the sector to which they belong — private or public. Corporate India is reportedly in need of about 15,000 independent professionals from different disciplines to maintain the highest standards in governance. There is no dearth of talent; yet, corporates have been slow in complying with the Clause for more than a year now. The reasons arevaried, but here are some concerns, regarding the Clause in its present form.

In defining `independence' of directors, Clause 49 uses certain adjectives , which lead to subjectivity and multiple interpretations. For instance, a non-executive director should not have `material' pecuniary relationship with the company and its associates (such as promoters, directors, subsidiaries, and so on), which `may' affect the independence of the director. What is `material' and how is that to be judged?

All fees/compensation, if any, paid to non-executive directors, including independent directors, shall be fixed by the board of directors after getting the approval of shareholders, says Clause 49.

Does it include even the regular sitting fee paid to directors? Since the law permits payment of sitting fee (which is usually a small honorarium, compared to other forms of compensation), why again go for `previous' approval of shareholders?

These are areas needing clarity in the drafting stage itself. Also, there is a more fundamental issue of law and legal system, not only remaining inconsistent with the regulatory framework but, sometimes, working against it. Factually, independent directors, by their very nature, are involved in the policy-making of companies and not in the day-to-day management.

Yet, for offences against companies, all directors, (including independent members) will invariably get drawn into litigation, and, it is for them to prove their case before the authorities. They must be ready to appear in courts, even for such offences as cheque bouncing, of which they may not know ay thing. Except at a fairly higher level, the law tends to treat `directors' virtually as owners, and how far it would appreciate the fine distinction between whole-time directors in charge of business and independent directors remains to be seen.

The law imposes duties, responsibilities, and intimidates directors with reprimands, but is not clear as to what their rights are? They have to depend on the companies even to file their own resignation with the Registrar of Companies.

The role of independent directors should be appreciated and they should not be exposed to needless litigation, unless they are clearly involved in an offence. However, in a situation where the promoter-directors own, say, the majority of shares in a company as business owners, they have to be at the mercy of independent directors.

Surprisingly, the regulator assumes that only a body of `independent' directors can ensure corporate governance and protect investors. Thepromoter-directors, who have a major stake in the companies, cannot afford to leave key decisions to third-parties, regardless of their expertise.All these cannot be defence for delaying compliance.

The spirit of compliance in any business law is best ensured not by mere imposition, but by assuring clarity, consistency, supported by the rule-maker/enforcer appreciating the human and business sides alike of such a rule. This way, compliance with corporate governance will progress from the stylish `form' to sophisticated `substance'.

(The author is a Chennai-based advocate.)

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