Sebi has announced some new norms for corporate governance. These were overdue. In some cases, the proposals goes beyond the Companies Act, 2013- and rightly so.
First, Sebi limits independent directors to two terms of five years each. This is the same as in the Companies Act, 2013 except that the Companies Act made the provision prospective. Sebi proposes to include time spent already. If you have served for five years or more already, you can spend only another five years. I believe companies must respect the spirit of the provision and ask people who have spent more than 10 years as independent directors to step down forthwith.
Secondly, Sebi has imposed a limit of 7 independent directorships, compared to the limit of 10 in the Companies Act. I personally think the limit should have been five at least for companies above a certain size.
Thirdly, in line with the Companies Act 2013, boards will have to constitute Remuneration and Nomination Committees, both headed by independent directors.
Fourthly, again in line with the Companies Act 2013, it mandates evaluation of independent directors' performance, separate meeting of independent directors, and compulsory whistle-blowing mechanism and prohibits grant of stock options to independent directors. Sebi needs to spell out how it expects the evaluation of independent directors to be done- and whether this evaluation will be shared with Sebi and the shareholders.
I am curious to know what it means by "enhanced disclosure of remuneration policies". The big lacuna today is that we do not know the basis on which the board awarded performance incentives. Very often, even the board is kept in the dark about these. Sebi must ask companies to spell out the norms on which the CEO and other top executives are given incentive pay.
PS: The Companies Act allows independent directors, who have completed ten years, to come back after a "cooling off' period of three years. In my view, this is undesirable. Sebi needs to address this issue through Clause 49. Once you have been with a board for 10 years, you should part forever- and this should include years served before the present amendments to Clause 49.
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I agree. These are some improvements in right direction but not the exhaustive one. I think one key change that is required in India's CG framework is split b/w Chairman of Board & MD. Take all blue chip companies and you will find in more than 50% of these companies, Chairman & MD are the same. Compare Tata, Infosys, GNFC on one hand & Reliance, Adani on other hand.
Mandatory whistle blowing is a welcome step. Evaluation of independent directors is also a positive leap towards better governance.
I am still asking myself - What about CG of private companies - here there is not so much governance required from shareholders' perspective as Shareholder & management are same. But more transparency & accountability is required from POV of other stakeholders viz. Government, employees, customers, vendors, bankers.
Interestingly, I don't see the market (Sensex or Nifty) reacting in particular to these changes proposed. Does not this show obliviousness of markets? Does market give marks to good governance? Or it gives negative marks only when bad governance strikes headlines (eg. Satyam)? More than companies & government, I think it is investors that ought to be aware of imperativeness that CG has in the framework of Corporation, as an economic model to generate wealth (in words of Adam Smith).
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