The Hindu Business Line : Flaws in the clause

Listed companies had been given a New Year gift as it were — maximum time gap of four months between two board meetings is now allowed in place of the earlier three months. This change goes against the very grain of good corporate governance, especially the interests of stakeholders. This concession can be considered a capitulation to the demands of India Inc. This would lead to urgent business being transacted by board resolutions passed by circulation, without giving disinterested directors the opportunity to have a thorough discussion.

A more serious objection to the change is that listed companies could flout the stipulations in the Companies Act that board meetings should be held "at least once in every three months."Companies, be they be listed or not, have to observe the laws of the land, whatever any regulator may prescribe.

Sitting fees to NEDs

The change in this case is that payment of sitting fees to non-executive directors (NEDs), if made within the limits prescribed in the Companies Act, without approval of the Central Government, will not require prior approval of shareholders in a general meeting. There are two flaws here, namely, government approval is not necessary for payment of fees within the prescribed scale and prior shareholder approval is not necessary if the article prescribe so.

Articles may provide for payment of fees in the scale approved by the government and authorise the board to make changes in line therewith. However, if the articles provide that any change in fees would require approval of shareholders, it can be taken post facto, at the next immediate general meeting.

Section 55A of the Act, which lays down the specific areas where SEBI can exercise its powers, significantly does not allow SEBI to tinker with directors' remuneration. In the instant case, the stipulation is not only beyond SEBI's jurisdiction but also not consistent with law.

CEO/CFO certification

The stipulation as it stood shortly before the present change, wanted the executive chairman or managing director and whole-time director or any person heading the financial function to certify to the board that the financial statements (balance-sheet and profit and loss account) and cash flow statement give a true and fair view, comply with accounting standards and do not contain material untrue statements.

The certificate was also to confirm that the signatories had brought to the notice of the auditors and audit committee significant changes in internal control, accounting policies and instances of fraud of which they had become aware. The certificate was also to mention known instances of transactions which were fraudulent, illegal or violative of the company's code of conduct. The current alteration is to the effect that all these requirements would be limited to financial reporting only. It is difficult to understand the logic behind this concern.

It may be recalled that major changes to Clause 49 became necessary for implementing the recommendations of the Narayana Murthy Committee. However, its recommendation that certification should cover the reports of the directors as well has been ignored. Also, another vital recommendation of the earlier Naresh Chandra Committee to the effect that "in the event of any materially significant misstatements or omissions, the signing officers will return to the company that part of any bonus or incentive or equity-based compensation which was inflated on account of such errors as decided by the audit committee" has been ignored.

(The author is a Chennai-based company secretary.)

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