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22 April, 2014

Corporates under scanner

BRP Bhaskar
Gulf Today

The power the big corporations wield over the Congress, which heads the government at the Centre, and the Bharatiya Janata Party, its major challenger in the ongoing elections, is a theme which has come up in the campaign. The efforts to reform the corporate sector deserve attention in this context.

Last week the Securities Exchange Board of India (Sebi), the market regulator, outlined plans to improve corporate governance in terms of a law enacted by Parliament last year. It has set October 1 as the deadline for companies to follow the new regulations. They are, of course, free to fall in line earlier than that date.

The agreement that companies sign when they seek listing on the stock exchange contains a clause which deals with matters relating to corporate governance. The Sebi has issued a set of directives to listed companies invoking this clause.

Primarily the Sebi directives aim at ensuring that independent directors on the boards of companies have a key role. The companies have been asked to determine in advance the criteria for measuring their performance and to make them known through the annual reports.

In the new scheme of things, at least half of the members of the board of a company must be non-executive directors. Also, there has to be at least one woman on the board.

The amended Companies Act allows an individual to be on the board of directors of a maximum of 10 companies at a time. Sebi has set a limit of seven listed companies. This leaves the person free to serve on the boards of three unlisted companies.

In future, an independent director of a company can serve only for two consecutive terms of five years each. It is, however, possible for him to return to the board after a break of three years. A small relaxation has been made in the rules for those who are currently serving as independent directors. Even if they have already served for more than five years, they will be allowed another full term of five years.

Sebi has proposed that all independent directors of a company must hold at least one meeting every year without the other directors and management personnel. They should use the opportunity to evaluate the performance of the chairman and the other directors and of the board as a whole.

Sebi has also suggested separation of the roles of the chairman and managing director and the chief executive officer. However, it has clarified that this is not mandatory.

The principle underlying the reform effort is to use internal disclosure mechanisms to curb the promoters’ powers. The scheme will succeed only if the independent directors are ready to exercise the powers vested in them.

The Executive and the Judiciary, too, have acted recently to curb the wide powers exercised by the large private corporations who have great clout by virtue of the immense resources they command.

When the large power companies refused to heed the advice to revise the tariff, the short-lived Aam Admi Party government of Delhi state ordered an audit of their accounts by the Comptroller and Auditor General (CAG) to verify their claims about their finances. The companies moved the Delhi high court, which upheld the state government decision.

Earlier, the high court had ordered the CAG to audit the revenue accounts of private telecom service providers who are involved in disputes with the Central government. Last week the Supreme Court rejected the companies’ appeal against the decision.

Organisations of telecom service providers point out that the companies’ accounts are already liable for checks by several agencies like the Department of Telecommunications, the Telecom Regulatory authority of India, Telecom Enforcement, Resource and Monitoring (TERM) cells, Sebi and the Income-Tax department.

The limited powers exercised by these agencies are derived from specific laws. They have proved ineffective in dealing with the powerful corporations. The CAG is a constitutional authority charged with the task of auditing the accounts of the Central and state governments. It is not under the Executive’s control.

The telecom companies, numbering about 200, with revenues running into billions of dollars, constitute a powerful segment. The Supreme Court verdict having closed the legal options, their organisations are planning to take the issue to wider forums of industry in the hope that the other powerful segments will make common cause with them in the effort to check inroads into an area they regard as private sector preserve. --Gulf Today, Sharjah, April 22, 2014.

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