The Hindu Business Line : Fault line in Clause 49

THE improvement of corporate governance through revised Clause 49 of the listing agreement, which was to come into effect from April 1, has been postponed yet again. The clause was to have been enforced w.e.f. April 1, 2004, but because of numerous representations on its impracticability, the date of implementation was kept in abeyance.

A committee headed by Mr N. R. Narayanamurthy was appointed by SEBI to revisit this clause in the context of the upheaval, and a revised Clause 49 was proposed. Much time and money has been expensed on a code which, ab initio, is illogical apart from being untenable in law. This is because SEBI, in the first place, is not an appropriate authority to regulate the affairs of companies.

SEBI not empowered

Is SEBI empowered to regulate the corporate sector? It was established to "Protect the interest of investor in securities and to promote the development of and to regulate the securities market and matters connected therewith." Surely the legislature has not permitted the regulator to interfere with the day-to-day functioning of a company's management which is entrusted by the shareholders of the company to the board of directors aided by, where applicable, the managing director or whole-time director.

In corporate hierarchy two types of managements are envisaged: i) companies managed by board of directors; and ii) those by a managing director, whole-time director or manager subject to the control and guidance of the board of directors.

All directors are elected by shareholders, except where nominees are permitted subject to the overall ceiling limits of Section 255 of the Companies Act, 1956. There is no provision for the appointment of `independent director' (there is no such definition) or for that matter the Act does not classify directors, except managerial personnel who merely get additional assignments.

It was certainly not the intention of the legislature that SEBI should police the management. At best, model guidelines may be prescribed as guidance. Clause 49 cannot be said to be falling under the purview of "protection of the interest of investors in securities." Let security-holders decide for themselves the type and manner of management. Shareholders should oppose any encroachment in their domain. Let us look at a few examples.

Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report. This goes beyond what is contemplated under Section 217 of the Act.

A company is also required to obtain a certificate either from auditors or practising company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report. A case again that goes beyond Section 217.

The clause mandates composition of an audit committee; one of the directors is required to be "financially literate". Conditions contrary to Section 292A are also provided.

DCA competence

The regulatory body for companies is the Department of Company Affairs (DCA). In fact, there is now a Ministry for Company Affairs, under which the DCA falls. The Companies Act is regulated by the DCA. The Act deals exhaustively with provisions relating to the appointment of the directors, their (dis)qualifications, duties and functions, tenure, manner and mode of appointment/reappointment, removal and vacation of office.

The Act also mandates cases where companies are required to be managed by a managing/whole-time director. By an amendment made in 2000, Section 292A was specifically introduced in the Act for adherence to good corporate governance. The Act is exclusive and deals comprehensively on matters pertaining to companies.

SEBI ineligibility

In support of the argument that SEBI's role does not include overseeing management affair, it may be worthwhile to examine the SEBI Act provisions that support the view that SEBI has no power to frame such regulations.

Section 11(1) of the SEBI Act, 1992 permits the SEBI board to protect the interests of investors in securities and promote the development and regulation of the securities market. Section 11(2) specifically elaborates the areas in which the measures referred to in sub-Section (1) can be taken by SEBI.

Nowhere in sub-section (2), SEBI is permitted to take measures and regulate the affairs of a company, its management, how the board should be constituted, and the duties and responsibility of the members of the audit committee. Assuming that SEBI can claim that it draws its powers from the omnibus Section 30 of the Act, a plain reading of the section will torpedo such contentions. The introduction of Clause 49 cannot fall in the omnibus provisions to "make rules for the purpose of carrying into effect the objectives of the SEBI Act."

In the Indian corporate set-up, where promoters generally take decisions, board meetings are a mere formality. Some discussions in respect of matters relating to dividend, capitalisation of reserves or issue of further capital do take place. The ultimate decision hinges on optimum benefit to shareholders. But the optimum benefit will go to the promoters, who are the largest shareholders in most cases. These are the hard facts. Let SEBI confine its activities relating to areas of disclosure rather than the management of the company. Let there be no multiplicity of regulators overseeing the affairs of companies.

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

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