Market regulator SEBI has gone in for more stringent requirements in certain areas of corporate governance under the latest amendment to the listing agreement as opposed to those required by the new company law.
This has been done to raise the bar on corporate governance in the country, sources in Securities and Exchange Board of India (SEBI) said.
However, the differences between the latest amendment to the listing agreement and the new company law in areas such as approval of related party transactions and limits for independent directors would be burdensome and pose practical difficulties for Corporate India, say corporate observers.
Given that the new company law had only recently been enacted, one could argue on the merits of more stringent requirements, they said.
SEBI feels the increased requirements in certain areas like related party transactions and independent directors have been mandated to improve the level of governance in listed entities and were not in any manner overriding the requirements of the new company law.
“Our latest prescriptions in corporate governance do not certainly override the company law. We have made additional requirements only in areas where the company law is silent”, SEBI sources said.
As per SEBI, all ‘material’ related party transactions need to be approved by non-related party shareholders. Material means greater than 5 per cent of turnover or 20 per cent of net worth.
However, as per the new company law, related party transaction require such shareholder approval only if not at ‘arms-length’ or not in the ‘ordinary course of business’
SEBI permits an independent director to be such a director on a maximum of 7 companies. This further reduces to 3 if the independent director is a whole time director in any other company. The new company law permits a person to be on the Board of 10 public companies
SEBI prescribes that for the purposes of determining the maximum term that an independent director can be on the Board (10 years), if the independent director has already completed 5 years, that period should be considered (partly retrospective). However, the new company law permits only a prospective application.
"Requiring approval from non-related party shareholders even for related party transactions that are at arms-length and in the ordinary course of business would be burdensome and pose practical difficulties. This is particularly excessive for transactions with the company's own subsidiaries", Jamil Khatri, Global Head of Accounting Advisory Services, KPMG in India, told BusinessLine.
"Given that the Companies Act has been recently enacted, differences between the amendment and the Companies Act requirements in areas such as approval of related party transactions and limits for independent directors should have been avoided"
S.N. Ananthasubramanian, a practicing company secretary, said it remains to be seen whether evaluation of independent directors will prove as effective a measure as it would have been if they were to retire by rotation instead of a fixed tenure.