A Clash in Respect of Authority over Independent Directors

It is not rare for different legislative or administrative authorities to lay down laws or regulations that contradict each other. Today’s Business Standard and The Times of India quote the Minister of Corporate Affairs Premchand Gupta that the proposed Companies Act (which is expected to overhaul the existing Act) may restrict the number of independent directors on boards of companies at 33%, following the report of the JJ Irani Committee. This runs counter to, and dilutes, the existing requirement of 50% (for companies with executive chairpersons) and 33% (for companies with non-executive chairpersons) that is currently prescribed by the Securities and Exchange Board of India (SEBI) under its corporate governance requirements in Clause 49 of the listing agreement.

My quick reactions to this move are as follows:

1. A thorough study regarding the role of independent directors in enhancing corporate governance in the Indian context needs to be conducted before a limit is fixed on their number. There does not appear to be a logical reasoning for either the limit of 33% or 50% with specific reference to the Indian context.

2. The SEBI requirements listed above came into effect on January 1, 2006 after heated discussion and debate in the regulatory and business circles. In fact, the implementation of Clause 49 in its current form was delayed several times on this count. It is only now that companies have put in place systems to comply with its requirements, including those regarding the number of independent directors. Not surprisingly, several PSUs are yet not fully compliant and are still taking steps to comply with appointment of independent directors and undertaking other steps towards corporate governance and independence from government control (see report in today’s Economic Times). That being the case, the move by the Ministry of Company Affairs would result in considerable ambiguity to corporates and businesses if the independent director requirements are again altered as that would take away certainty in the legal regime that enables businesses to operate in India.

3. Although the SEBI regulations apply only to listed companies (with wide public shareholding), news reports indicate that the new Company Law is likely make the independent director requirements applicable even to unlisted companies. This comes as a surprise. Why should an unlisted company (which is usually closely held) that does not have public shareholding have independent directors? Whose interests are the independent directors expected to protect when the owners and managers are likely to be in the same as is typical in an unlisted company which is closely held? The requirement of independent directors or other corporate governance measures in relation to unlisted companies appears to be excessive and onerous.

The Government is still in the process of consultation with respect to these matters, and a consolidated Companies Bill, being formulated by the Law Ministry is likely to be introduced in the Parliament in the Winter Session.

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