Are independent directors better off?

Updated on: Jan 13, 2013




The Companies Bill, 2012 defines ‘independent director’ and attempts to distinguish between the liability of an independent director and a non-executive director from the rest of the board. Clause 149 (12) of the Bill provides that liability for independent directors would be “only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.”

From this, it is evident that the clause seeks to provide immunity to independent directors from civil or criminal action in certain cases.

However, the immunity appears to have no relevance in terms of applicability of clause 166 (2) of the Bill, which states that the whole board is required to act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the best interest of the company, its employees and shareholders, the community, and for the protection of the environment. By virtue of this clause, the Bill narrows the distinction between independent directors and executive directors.

Investors want banks to disclose more

Investors and analysts in the banking sector have identified areas where improvements can be made in the reporting of regulatory capital and liquidity.

Regulatory capital: Strength is a key area of focus for investors. The information on capital strength plays an important role in restoring market confidence needed to increase financial stability. Investors would like to see a reconciliation of regulatory capital to the amounts reported in the financial statements.

Liquidity reporting: Investors and analysts want the management to explain their funding sources — including where concentrations exist — and to disclose funding by major currency.

Again, consistency in reporting across the banks is vital as comparability is crucial for analysis.

Investors would also like a detailed explanation of the banks’ key metrics, including loan-to-deposit ratios, new Basel and RBI requirements, and the net stable-funding ratio. Disclosing the basis of these calculations is important for comparability. Investors also encourage the management to discuss expectations around deposit outflows and re-investment.

Share data with bourses first

Companies dealing in certain industries, such as cement, steel and automobiles, need to make some monthly disclosures of their sales/turnover/production figures to their trade bodies or industry associations. Certain companies, however, do not disclose this information to the stock exchanges.

The Securities and Exchange Board of India has recently clarified, through a circular, that listed companies need to disclose such information to the stock exchanges, too. This requirement is based on Clause 36 of the Equity Listing Agreement, which requires all the events or material information which will have a bearing on the performance/operations of the company as well as price-sensitive information to be first disseminated to the stock exchanges.

From this clarification, listed companies which are providing information to their trade bodies or industry associations will now need to disclose the same to the stock exchanges first as required under Clause 36 of the Equity Listing Agreement.

Corporate governance: Get it right

The Companies Bill, 2012 has been passed by the Lok Sabha. Capital-markets regulator The Securities and Exchange Board of India had been pushing for grant of powers to prescribe matters relating to corporate governance for listed companies. Listed companies are subject to the Listing Agreement wherein several norms of corporate governance have been stipulated.

However, the governing principles of corporate governance have been incorporated in the Bill itself and consequently, there are overlaps between the Bill and Listing Agreement. The regulator has now floated a consultation paper seeking inputs from stakeholders on adopting better global practices.

There is no paucity of laws and regulations in India. There are voluntary guidelines on corporate governance issued by the Ministry of Corporate Affairs as well. The need of the hour is to have a single, clear and comprehensive regime which can lift the standard of corporate governance in India Inc.

Published on January 13, 2013
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