New Sebi norms a step ahead of Companies Act

Feb 14,2014

The corporate governance norms announced by the Securities and Exchange Board of India (Sebi) go beyond those mentioned in the Companies Act.

Sebi has pushed for better corporate governance of listed companies through measures such as the need for a succession policy, prior approval of the audit committee for all related-party transactions and e-voting facility for all shareholder resolutions by the top 500 companies (by market capitalisation). All these measures have either not been specified in the Companies Act or haven't been made mandatory.

Shriram Subramanian, founder and managing director of corporate governance research firm InGovern, said some moves tried to improve aspects in the Companies Act. “First, the number of boards independent directors can serve on has been reduced from 10 listed companies in the Companies Act to seven…Also, what they have mentioned about succession planning is not part of the Companies Act, though it is in line with what is happening globally,” he said.

M S Sahoo, secretary, Institute of Company Secretaries of India, said Sebi planned to improve the corporate governance norms for companies under its purview. “The mandate for Sebi extends to listed companies. So, they would look to hold these to a higher standard than other companies,” he said.

The stock market regulator has encouraged boards to put a succession plan in place so that there is a clear second line of leadership, should the top one fall vacant. The Companies Act doesn't talk about the need for a succession plan.

Sebi has also talked about the audit committee looking into related-party transactions, or deals in which promoters may stand to benefit. The Companies Act, however, doesn't mention such a process. Sebi has also urged a provision be made to train independent directors and make it compulsory for the 500 most valuable companies listed on stock exchanges to allow their shareholders to decide on resolutions through e-voting, which is not mandatory under the Companies Act.

“A number of companies hold their meetings in obscure cities and towns. The use of e-voting will ensure everyone, whether they are in Boston or Agartala, will be able to exercise their rights,” said Subramanian.

Sebi’s norms increase the compliance burden for companies. Sahoo said now, the corporate governance standards were being prescribed by multiple authorities, including the Ministry of Corporate Affairs, the Insurance Regulatory and Development Authority and the Reserve Bank of India.

“The issue is there are too many agencies and too many norms in the corporate governance space, but too little enforcement,” he said.