The Hindu Business Line : Is there a dilution of corporate governance?

The Securities and Exchange Board of India (SEBI) has replaced the extant Clause 41 of the Listing Agreement by an entirely new Clause 41 with effect from July 1, 2007. The objective behind this has been to rationalise and simplify the process and formats for submission of quarterly and annual financial results of listed companies to the stock exchanges and their publication in the print media for the information of investors. The new clause has introduced some new req uirements which stand out distinctly when compared with the earlier clause 41.

However, a grey area surfaces as a result of provisions in the new Clause which permit adoption of the quarterly results by a sub-committee of the board (not being the audit committee) consisting of not less than one-third of the directors and including the MD and at least one independent director. The said provisions further provide that such results (as are adopted by the sub-committee) shall also be placed before the board at its next meeting. Some intriguing questions arise in this context:

Instead of specifically stating that the quarterly results shall be approved by a committee (which is not the audit committee) the clause could have done better justice to corporate governance by referring to the review of the results by the audit committee prior to the approval by the sub-committee. This would have satisfied the spirit of clause 49 of the Listing Agreement as well as Section 292A of the Companies Act, 1956 which have very specifically empowered the audit committee to review the financial results before their placement before the board.

Section 292A in fact goes to the extent of stating that the recommendation of the audit committee on the results shall be binding on the board;

Both Clause 49 as well as Section 292A refer to placement of the results (duly reviewed by the audit committee) before a full-fledged board and not any sub-committee. It therefore is debatable whether the said provisions of clause 41 w ould come in conflict with Section 292A and clause 49 and may be vulnerable to judicial challenge;

Clause 41 has curtailed the role of the board by stipulating mere placement of the results before the board after they have been approved by the sub-committee. It is not clear whether the board is supposed to merely review them or app rove them?;

Is not corporate governance weakened by sub-delegation of such important power of the board to a mere sub-committee?

How can the board’s power be restricted to mere review of quarterly results and that also as a part of an administrative ritual?;

What happens if the board has reservations about the quarterly results which have been approved by the sub-committee and already furnished to the stock exchanges?

The underlying objective of such disclosures is to keep the investors and stakeholders informed about the financial health of a company and enable all investors to take well-informed decisions about selling or buying of shares of such a listed company.

Such systematic disclosures also help prevent insider trading considerably as they reduce the chances of misuse of price sensitive information by those who are privy to such information. Clause 41 has thus to a considerable extent acted as an effective barrier against misuse of unpublished price sensitive information.

(The author is a Senior Company Secretary.)

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