Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates by Dilip K

8/7/2019 Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates by Dilip K

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Corporate Governance Norms for Listed India

Companies – Have They Changed Corporates?Dilip Kumar Sen, ACS, Vice President & Secretary, Tata Tea Limited, Kolkata.

Since corporate governance norms were first introduced, SEBI has made seve

amendments. The purpose of this article is to examine whether functioning of Ind

corporates have changed due to Clause 49 of the Listing Agreement since these nor

were first introduced about 7/8 years ago.e-mail :

[email protected]

For listed indian companies corporate governance (CG) norms

were first introduced through amendment of Listing Agreementwith Stock Exchanges by the addition of a new Clause 49. The

schedule of implementation of Clause 49 was as under :

(a) For all entities seeking listing for the first time at the

time of listing;

(b) Within financial year 2000-01 but not later than 31st March

2001 for entities which were either in Group ‘A’ of BSE

or in S & P CNX Niftyindex as on 1 st January 2000;

(c) Within financial year 2001-02 but not later than 31st

March 2002 for all presently listed companies with paid-

up capital of Rs.10 crores or more or net worth of Rs.25

crores or more;

(d) Within financial year 2002-03 but not later than 31st

March 2003 for all presently listed companies with paid-

up capital of Rs.3 crores and above.

Corporate governance is all about ethical conduct of business.It

is concerned with code of values and principles which guide a

person to select between right and wrong. Good CG is about

selecting that course of action amidst various alternative optionsand conflicting interest of various parties which seeks to benefit

greatest number of stakeholders. This is easily said than doneand often requires handling pressures from many levels. As a

new concept one cannot expect any dramatic change in the

standards of corporate governance practised by Indian

corporates to take place just because of legislative compulsions.When there is a conflict of interest between the company and

its principal shareholder or the promoter group the dilemma

is compounded. One must remember that there are large

number of companies in India which are managed by the

promoter/founder family who may be holding only 30/35%of the voting power. Historically these companies have operated

with the interest of the promoter/founder family in mindwhat benefits largest number of stakeholders had not albeen the criterion for decisions. In this scenario enforceof corporate governance norms will indeed pose great diffiand the role of independent directors will naturally be challenging. Only when the culture and mindset omanagement gets changed(which indeed is a time consumatter) the standard of CG practices will improve in companies. Therefore even though in terms of framing and regulations we in India may not be lagging far too bewestern countries in so far as Corporate governance nare concerned what is actually practised by the Indian corpowill have to be seen as time passes. Here again changmindset and culture of the organisations originally fou

by a Family which has over the years been converted ipublic limited company will be the key factor to bridggap between regulatory standard of corporate governancwhat actually happens in the organisation. Perhaps independirectors in such companies will have to play even largewhich may at times lead to unpleasantness.

Some of the improvements which good CG practices cbring about in an organisation are:

transparency & trust

maximise long term shareholders value

accountability and responsibility

greater disclosure

stability and growth of the enterprise

strengthens investors confidence

reduces risks to the enterprise

commands respect in market place.

Some of the benefits of good governance practices are



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not quantifiable or measurable but they indeed make significantimpact on the image and reputation of the organisation asperceived by outsiders. An example could be that anorganisation consistently following good CG practices shouldbe able to raise funds from the market without difficulty orcommand higher premium.

Let us now examine what we see in real life with regard toIndian corporates. The readers may consider the followingstatements and think whether they are appropriate in theWonderland of indian corporates. Are these the general ruleor exceptions only.

1. Corporates are run like Chairman/Managing Director/ CEO’s personal fiefdom.

2. MD/CEO/powers that be, do not care at all for welfareof all shareholders but only care for promoter/principalshareholders’ interest – any benefit that may flow toother shareholders is only incidential.

3. Majority of directors are unaware that they are agents of shareholders and not of promoters and their position isone of trust and faith.

4. Participation of a non-executive director in meetings –whether of the board or any committee thereof isinversely proportional to the health of the bottom line –better the bottom line lesser the participation.

5. Most directors of companies do not consider it necessaryto update themselves on changes in laws, regulations etc.which affect responsibilities and liabilities of directors.

6. So long as the financial results/performance of the

company is satisfactory, directors will not object or refuseto approve any proposal that the management may putup for approval.

7. Non-executive directors do not see themselves aswatchdog of all categories of shareholders.

8. Board rooms are invariably filled up with yes men whodo not raise relevant questions and assent to whateverproposal the management puts up.

9. No one can join a board unless the appointment is endorsedby promoter/principal shareholder or by the Chairman/ CEO – how can any such director be independent if he/ she will have to look for the support of the principal

shareholder for his election as a director. A person is invitedto become director of a company only if he/she enjoysthe confidence of Chairman/CEO through old school

connection/social circuit or golf club etc.

10. Except in a crisis even nominee directors tend to play a

passive role at board meetings and do not dissent to theproposals of management! The principle which they

follow perhaps is ‘do not rock the boat when the companyis having a smooth sailing’.

11. The general rule followed by Indian corporates is thawhat you preach need not necessarily be practised in

your own company.12. Some non-participating directors can become extremely

inquisitive and start questioning the moment financiaperformance of the company becomes unsatisfactory.

If the readers agree with these statements then they can askthemselves: “does this augur good corporate governance?”

Having said these it is essential to emphasise that –

there are always exceptions to the general rule(as someof us may perceive) outlined above;

such exceptions are still few but hopefully the numberis on the rise;

with the introduction of Clause 49 in the listing agreemena transformation of board room culture has started thoughthe pace of change may be somewhat slow;

if the Companies Bill 2009 is passed by the Parliament adrafted there could be further improvement in the scenario

Some of the visible changes that CG norms have brought intothe lives of listed companies in India are :

1. Setting up of Audit committee under the Chairmanshipof an independent director and holding of at least 4meetings of the committee in a year;

2. Setting up of Investors Grievance committee under theChairmanship of a non-executive director to resolve any

grievance of investors;3. Changes in composition of the Board in some companie

in order to meet the requirement of Clause 49 of ListingAgreement. In 2008 this requirement was changedfollowing clarifications issued by SEBI by circulars dated8th April 2008 and 23rd October 2008. However SEBgranted time upto 31st March 2009 to comply with theboard composition requirement. Effect of this changewill be visible from 2009-10;

4. Greater disclosures in annual reports including a separatereport on corporate governance;

5. Review of related party transactions and transaction

not on arms length basis by the Audit committee;6. Introduction of Code of Conduct, whistle blowing policy

and annual declaration on compliance from Directorsand senior executives;

7. Risk assessment and minimisation ;

8. Review of legal compliances by the Board;

Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates



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9. CEO/CFO certification of financial results;

10. Review of financial statements of subsidiaries by theAudit committee of the parent company.

Readers are aware of the unfolding of events on Corporate

Governance issues in a large IT company some months back.These events are an example of role of Independent Directors inBoard meetings of Indian corporates. One must remember thatthe Board of this company had high profile Independent directorsincluding eminent academicians from India and abroad. Theseeminent personalities had approved proposals to acquire at a priceof about Rs. 7,000 crores by the company shares of two firmsmanaged by the sons of the promoter. While the very next daythe company announced that it will not go ahead with theseinvestment proposals in light of feedback received from investorcommunity it is perhaps still not public knowledge who had carriedout the valuation of the two companies whose shares were intendedto be acquired. Some of the comments of Independent directors

of this company which appeared in national press (upto 5th January2009) as given below are worth noting.

1. Business Standard – 24th December 2008 –“….independent directors had objectively evaluated theproposals placed before them and after being convincedthat the proposals will add to shareholder value , approvedthem with appropriate modifications and conditions.…..The Board has definitely given in-principle clearancebut the final valuation will have to be validated by theformula I have spelt out. The amount of $1.3 billionwas the maximum but the actual value is to be determinedby the conditions stipulated.”

Comments – The intimation given to Stock Exchangesby the company on 16th December 2008(as availablefrom NSE website) does not mention anything eitherabout ‘in-principle’ approval or that $1.3 billion wasthe maximum value while actual value could be loweras suggested by the Independent director in the pressstatement. It is not known what has been recorded in theminutes of the Board meeting at which the proposalswere approved which the Independent director feels wasonly an in-principle approval.

2. Business Standard – 24th December 2008 (comments of a Professional) - “Like morals in life cannot be codified,nuances of governance cannot be legislated through a

rule book. Implicit to good governance is the notionthat the board’s conduct ought not to invoke widespreadapprehension about the board’s bias in favour of someselect constituent group of shareholders and against thewider body of shareholders.”

Comments - Nothing can perhaps be more truthful on thisepisode. More so when one considers that shareholding

Corporate Governance Norms for Listed Indian Companies – Have They Changed Corpor

of promoter group in the company was 8.61%(a30.9.2008 as per NSE website) compared with 61held by FIIs/Insurance companies/Mutual FuSubsequent press reports suggest that promoshareholding was even lower as some of the shares

been pledged by them which had been sold by the ple

3. The Economic Times – 26th December 2008 –Independent director of the company (US-bacademician) who has been on the board since decided to resign from the board taking mresponsibility. It was stated in the letter of resign(as reported in ET) –“..while I raised many of the irelated to the procedures and had expressedreservation during …. board deliberations, I had noa dissenting vote against the acquisition of ….., for wI take moral responsibility.”

Comments - As it appears from press reports the prop

were to acquire shareholding in two companies. In tof Section 372A of the Companies Act, 1956 proposals require consent of all directors present ameeting. Since the independent director mentioned ipreceding paragraph had clearly mentioned about not hcast a dissenting vote one can assume that no other dirpresent at the meeting had voted against the proposalsthat case the investment proposals would not have validly passed.It is however not very clear whethecompany had available limits under Section 372A oCompanies Act, 1956 to make these investments keein view its paid-up capital & free reserves, investmalready made and investments already committe

disclosed in the Annual Report for 2007-08. Howevedetails on this issue are not available so as to make a decomment on the limit available under Section 372A oCompanies Act, 1956. It is also not known if the direof the company had considered the issue of availableunder Section 372A of the Companies Act, 1956 vis-

the amount of proposed investments.

4. Business Standard -30th December 2008- Tindependent directors on the Board of the company re

In the context of corporate governance following issues deto be noted. There are certainly exceptions to the undernpoints as some independent directors do raise valid quesat meetings and will be prepared to exit from the Boa

they believe that the concerns raised by them are not adequaddressed by the management.

1. Introduction of Clause 49 in the Listing Agreemenmade some changes in the lives of Indian corporateonly to a limited extent. It may not be very unfair tothat in most companies compliance with clausrequirements still remain a box-ticking exercise.



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2. It is quite difficult for Audit committee members torecommend to the Board adoption of quarterly and annualresults as they receive these statements either at the meetingor a few hours before the meeting leaving no time forthem to study these statements in detail.

3. Most independent directors feel that it is bad manners toask too many questions during board meetings particularlywhen the financial results of the company are good. If they want to raise any issue they would prefer to do itseparately with the Chairman outside the meeting and oftensuch meeting with Chairman takes place after the Boardmeeting is over.

4. There are only a handful of independent directors in Indiawho do not care for their directorship and raise questionsat Board meetings irrespective of the liking/disliking of the Chairman.

5. In India Board membership as an Independent director is

considered more as a status symbol rather than a positionof responsibility.

6. If agenda papers were not received well in advance for thedirectors to study them in sufficient details rarely anindependent director refuses to attend meetings. Many of them hesitate to ask the Chairman to set a rule that placingof agenda notes at the meeting should be avoided to theextent possible. There are, however, exceptions and someIndependent directors do make a noise if agenda papers arereceived late or too many agenda notes are tabled at themeeting. It is a moot question why many independentdirectors hesitate to ask questions at board meetings – is itbecause (i) they feel their question might embarrass the

Chairman/Management, (ii) Items appearing in the Agendameans the same have been cleared by the Chairman and if some director raises questions the Chairman may not likeit, (iii) they fear losing their directorship if they becometoo vocal at meetings, (iv) they believe that they are notdirectly responsible for approving any proposal at Boardmeeting which lies primarily with management, (v) theydo not want to be singled out as dissenting directors – inother words is there a lack of peer pressure ?

7. Many Independent directors come to Board meetingswithout carefully reading the Agenda papers. They alsodo not systematically update their knowledge on changes inlaws and regulations including governance issues which affectthe operations of the company of which they are directors.

8. Most independent directors do not check whether concernsraised by them at meetings are recorded in the minutes.

9. Most Independent Directors do not think it necessary tofamiliarize themselves with the business model of thecompany.

10. Most independent directors hesitate to ask uncomfortablequestions at Board meetings particularly when the bottomline is healthy. But the same directors become very vocawhen financial performance of the company deteriorates.

It would appear that not all Independent directors are certainabout the role that they need to play in deliberations duringmeetings of the Board and Board committees. Independence ia state of mind and how an independent director would behaveat meetings will depend on that person. Several high poweredcommittees which had in the past examined the issue oindependent directors did not attempt to lay down roles, dutiesand responsibilities/liabilities of Independent directors in astructured manner. In the UK the combined code of corporategovernance provides guidelines about how a non-executivedirector should function. According to the suggested bespractices under the UK code an effective non-executive directo

upholds the highest ethical standards of integrity and

probity;

supports executives in their leadership of the busineswhile monitoring their conduct;

questions intelligently , debates constructively, challengerigorously and decides dispassionately;

listens sensitively to the views of others, inside andoutside the board;

gains the trust and respect of other board members;

promotes the highest standards of corporate governanceand seeks compliance with the Code wherever possible

The need of the hour is to frame similar guideline for non

executive directors of Indian listed companies. It is understoodthat in Singapore whenever a person is appointed to the Boardthe Registrar of Companies while acknowledging receipt ofthe prescribed form informs the director concerned about hirights, responsibilities and liabilities as a director. This is agood practice and the Regulator may consider whether such aprocess can be introduced in India.

Hopefully recent press reports on governance issue will be aneye-opener for independent directors on the boards of Indianlisted companies. The mindset and thinking of Regulators onthis issue is not yet known – in any case as the proposal wadropped the Regulators probably cannot take any punitive action

In Indian corporates very often the promoters manage thecompany holding sometimes even less than 30% of the votingpower. While the extent of shareholding is one issue a matter ofar greater importance is the change of mindset of Promoterand the desire and eagerness of Promoters to instill goodgovernance in the organization. Readers are the best judge toopine whether there is any visible sign of change of mindset.

Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates

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Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates by Dilip K