Independent directors: ‘spring cleaning’ of PSU boards puts Centre in a spot

KR Srivats New Delhi | Updated on October 06, 2014 Published on October 06, 2014

Many listed PSUs stare at non-compliance to board composition norms

Listed public sector companies may soon face regulatory squeeze. The easing out of “independent directors” from many boards by the Government is already beginning to haunt some PSUs, as their replacements are yet to be appointed.

As many as 71 independent directors have reportedly stepped aside from various PSU boards after the new Government came to power on May 16 this year.

Chairmen and company secretaries of several listed public sector companies cannot quote compliance to Clause 49 of the listing agreement (board composition) for the upcoming December quarter if the Government does not move quickly and ensure that substitutes are appointed.

The law requires that every listed company with an executive Chairman requires 50 per cent of the board as independent directors. For those with non-executive Chairmen, the number of independent directors should be one-third of the board strength.

If the vacant slots for independent director are not filled up quickly, it will be difficult for market regulator SEBI and stock exchanges to demand compliance from the private sector as regards Clause 49, say experts.

The entire issue of independent directors getting eased out of listed PSUs was clearly multi-dimensional. These directors were eased out through different mechanisms as part of what is being seen as “spring cleaning” of various PSU boards by the new political dispensation at the Centre.

While some of these directors were voted out, many had voluntarily resigned to avoid embarrassment at the annual general meeting. Some had stepped aside due to apprehensions over the ₹1 lakh deposit to be made by them for participation in the appointment process.

Another interesting facet was that many companies were also not taking resolutions to annual general meetings for undisclosed reasons.

New company law

Appointing independent directors has become more arduous for many companies, thanks to the new company law.

The Government – as the majority shareholder – cannot directly nominate a person as an independent director. There has to be a process of election by shareholders at a meeting or through postal ballot.

Now that the annual general meetings of several companies are over, the Government will have to allow extraordinary general meetings for many public sector companies, say experts.

Governance angle

The Government’s move to ease out independent directors had also raised governance issues.

Some experts have questioned the wisdom of the new Government’s action, especially when the independent directors who were eased out were appointed with the approval of the Appointment Committee of Cabinet.

This action may set a wrong precedent as every fifth year – when a new dispensation comes at Centre – there would be a temptation to “spring clean” the PSU Boards, they said.

The ownership of the PSUs rests with the President of India.

Published on October 06, 2014
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