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SUDIPTO DEY & ISHITA AYAN DUTT
Over the next five years, 1,456 ( National Stock Exchange ( NSE)- listed companies would need to fill up 3,000- odd independent directorship positions. Currently, of the 6,053 independent directorship positions in these companies, around 48% are those who served for more than five years. Around 283 independent directorship positions would fall vacant by October 2014 in these 1,456 companies. The current incumbents hold more independent directorship positions than mandated by the Securities and Exchange Board of India ( Sebi). Around 382 nominee directors in 227 companies would lose their " independent" tag by October this year. These positions could throw up fresh demand for independent directors. Search is already on for 1,000- odd women directors to fill up mandatory positions in NSE- listed companies. These are the findings of a recent survey by Indianboards. com, an initiative by PRIME Database and NSE following Sebi's amendment of the corporate governance norms. " We are going to see newer faces in Indian boardroom," says Pranav Haldea, managing director, PRIME Database. By the Companies Act 2013, and the Sebi's latest listing agreement, industry experts estimate that India Inc could see an additional need for up to 5,000- odd independent directors by 2019. Already, several top executive search firms have been sounded by many leading corporate houses to be on the look- out for suitable independent directors. However, not everyone is convinced that India Inc has the capacity to meet the challenge of complying with stricter corporate governance norms. " There is already a debate on the ability of the country's existing infrastructure to provide requisite number of independent directors. Additional restrictions over and above the Companies Act 2013 requirements will add on to the burden and immediate non- compliances," says Yogesh Sharma, partner, assurance, Grant Thornton. There are no prescribed eligibility norms for an independent director. " One hopes the companies will comply in spirit, and not just in letter," says Haldea. Changed environment Corporate legal experts point out that the changes brought in by the SEBI amendments and the Companies Act would change the way independent directors engage with corporates in India. According to Sai Venkateshwaran, partner and head, accounting advisory services, KPMG India, the new requirements include several conflict reducing provisions. These include mandatory rotation of independent directors, stricter definition of independence, mandatory committees of the board of directors, requirement for sessions of the independent directors without management, prohibition on issue of stock options, restrictions on loans to directors and their related entities, etc, among others. Kaushik Dutta, director, Thought Arbitrage Research Institute, points out that the Companies Act creates civil and criminal liability for breaches by an independent director. " This means independent directors would need to demonstrate clear independence of deed and actions," he says. In order to cope up with these new requirements and discharge their significantly enhanced duties and responsibilities, existing and new independent directors would need to invest far more time and resources in their job. Most industry experts expect a demand- supply mismatch for independent directors, at least in the short- run. With these increased responsibilities and associates risks, several existing independent directors may choose to step down from boards of companies, thereby causing a drop in the supply of independent directors. On the other hand, there will be a significant increase in demand for independent directors as their requirements are extended to unlisted companies under the Companies Act. Building Capacity Jamshed J Irani, who has been on the board of several Tata group companies, feels that one of the reasons for the sorry state of corporate governance in the boardroom is the practice of appointing independent directors through "word of mouth". "Unfortunately, most of the independent directors are not appropriately trained," says Irani. While welcoming the stringent norms set by Sebi, he is of the view that independent directors should be encouraged to attend orientation sessions run by audit companies and industry associations. However, there are some like Tridibesh Mukherjee, former Tata Steel deputy managing director, and now an independent director with several companies, who feels there should not be any cap on the number of directorships. "It is for the director to decide what his limit should be," he says. Stints in smaller companies can be a good learning ground for many aspiring independent director, adds Mukherjee. The Ministry of Corporate Affairs has started taking some baby steps in preparing industry for the new governance regime. The Indian Institute of Corporate Affairs, an autonomous body under the Ministry, has tied up with Institute of Directors, London, to launch India- specific orientation programme for independent directors over the next six months. "These would be open to both existing and aspiring independent directors," said Bhaskar Chatterjee, directorgeneral, IICA. The ministry is also in the process of coming out with a database of independent directors for industry to choose from. As India Inc learns to live with new corporate governance norms, the churn in the boardroom is something that is here to stay. Stricter corporate governance norms may make India Inc turn to fresh faces as independent directors REVISED CORPORATE GOVERNANCE CODE definition of independent director prescribes that an independent director shall not be entitled to any stock options prescribes separate meeting of independent directors at least once a year directors and to section 134, which prescribes annual evaluation of the board To restrict the total tenure of an independent director to 2 terms This is aligned to section 149( 10) and ( 11) of the Act, of 5 years. However, if a person who has already served as an except that under the Act, these requirements are independent director for 5 years or more in a listed company as applied only prospectively, whereas, the Sebi on the date on which the amendment to listing agreement amendmentprescribes that one term of five years becomes effective, he shall be eligible for appointment for one would get reduced if the independent directorhas more term of 5 years only already served in that role for five years or more Source: An analysis by KPMG India | Sebi wants empowered board in listed companies | |
On February 13, 2014, the Securities and Exchange Board of India ( Sebi) revised the Code of Corporate Governance for listed companies (Code) significantly. Most revisions are in sync with the provisions in the Companies Act 2013, though some norms are stricter than those in the Companies Act 2013. The revised Code will be effective from October 1, 2014 and the mandate of the new Code is clear: empower the Board.
There are five critical activities of an empowered Board. Those are: ensuring legal and ethical conduct of officers and other employees; approving the strategy and evaluating its implementation; selecting, evaluating, rewarding and if necessary, removing the CEO and senior management; ensuring that top- management succession plans are in place; and evaluating self. At present, most Boards do not undertake those critical activities. The difference between an empowered Board and a passive Board is the difference in the level of commitment and involvement of independent directors in making the success of a company perpetual. For example, independent directors of a passive Board are satisfied by listening to the CEO on new strategy in a strategy retreat. On the other hand, independent directors of an empowered Board ensures that a new strategy does not result in drifting away from the vision and mission of the company, and the strategy formulation process is robust. It reviews the existing strategy periodically, focusing on questions such as whether the current strategy is still relevant in the face of changing business environment and whether the outcome is better than alternative strategies. A passive Board becomes active only in a crisis situation while an empowered Board continuously reviews strategies to identify incipient weaknesses before they blow to a crisislike situation. A passive Board plays no role in appointing and evaluating the CEO and senior management and fixing their compensation. In an empowered Board, independent directors play an important role in the appointment of the CEO and evaluate him against pre- determined targets ( financial and non- financial) established through discussion with him. They do not accept the CEO's self- evaluation. The Companies Act 2013 requires independent directors to have a prime role in appointing executive directors, key managerial personnel and senior management and in fixing their remuneration. The revised Code requires companies to form the Remuneration and Nomination Committee with an independent director as the chairperson. The Companies Act 2013 and the revised Code prescribe separate meeting of independent directors to review the performance of non- independent directors, chairperson and the Board as a whole. Implementation of those provisions will result in empowering the Board. The revised Corporate Governance Code requires the Board to satisfy itself that plans are in place for orderly succession, appointments to the Board and senior management. In a family- managed business, succession plans are formulated at family governance forums and the Board plays minimal role in succession planning. It is impractical to delink family governance from the corporate governance in a family managed business. However, it is the responsibility of independent directors to ensure that appropriate succession plans are in place in the interest of the company and minority shareholders. The power to the Board comes from diversity of knowledge and leadership experience. Therefore, unless the Remuneration and Nomination Committee function effectively, empowerment of Board will be on paper only. The challenge before the independent directors will be to turn the broad array of information into knowledge. Therefore, they will be required to allocate significant time towards board responsibilities. The decision of the Sebi to restrict the maximum number of Boards an independent director can serve on listed companies-- to 7 and 3 in case the person is serving as a whole time director in a listed company-- was presumably taken because in the new regime, the commitment and involvement of indepependent directors in company governance will increase manifold. Another important challenge before the independent directors will be to understand that the CEO is responsible for managing the business and the role of independent directors is to monitor the executive management. Empowering the Board does not change this equation. The Companies Act 2013 and the revised Code have codified the best practices. Successful adaption of those practices will require change in the mindset of the dominating shareholder and capacity building of independent directors. It will be incorrect to assume that the CEO and the dominant shareholder group in companies in which there is concentration on ownership will take initiatives to empower the Board immediately. However, the new regulation will definitely put pressure on them to empower the Board. The new requirement of e- voting facility by top 500 companies by market capitalization for all shareholder resolutions will accentuate the pressure from shareholders. Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor ( Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited. asish. bhattacharyya@ gmail. com The difference between an empowered and passive board is in the level of involvement of independent directors ASISH K BHATTACHARYYA ACCOUNTANCY The role of independent directors is to monitor the executive management |
| | BRIEF CASEN [1] M J ANTONY | |
Bigger the unit, lesser incentive benefit
The Supreme Court last week set aside the judgment of the Rajasthan which had granted 75 per cent rebate on central and state sales tax to Binani Cements Ltd based on an incentive scheme under the state industrial policy. The scheme exempted certain industrial units from payment of tax on the sale of goods manufactured by them within the state. It specified and categorized the districts, types of units, the extent of exemption from tax, the maximum exemption available in terms of percentage of fixed capital investment. The units were classified as new, large- scale, prestigious and very prestigious. The dispute was over the classification and consequent rate of benefit. The company had applied to the state- level screening committee claiming benefit of exemption at 75 per cent under the scheme. The committee rejected the claim, observing that since the assessee company is a large- scale unit, it was entitled only to 25 per cent exemption. On appeal, the High Court held that the company was entitled to 75 per cent. The Commercial Tax Officer appealed to the Supreme Court. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Loan interest not capital investment The Supreme Court has held that pre- operative expenses in setting up or modernisation of a new unit by payment of interest on loans could not be included in the " fixed capital investment" under the Uttar Pradesh Trade Tax. Therefore that amount would not be eligible for tax benefit. The court stated so while partly allowing the appeal of the Commissioner of Trade Tax against the judgment of the Allahabad High Court in its dispute with Bhushan Steel Ltd. However, the apex court rejected the revenue department's argument that transformer and other equipment installed for regulating voltage for running machinery would be covered by the term fixed capital investment. So it would be eligible for tax benefit. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Delay in filing complaint on cheques When the six- month period of limitation to file a complaint of bounced cheque is calculated the day on which the cheque is drawn should be excluded, the Supreme Court ruled in the case, Rameshchandra vs State of Gujarat. In this case, the bouncer cheque was drawn on December 31 and it was presented on June 30, just when the period was expiring. When the payee filed a complaint under Section 138 of the Negotiable Instruments Act for issuing the cheque without sufficient balance, the drawer defended by arguing that the six- month limit was exceeded and therefore the complaint should be dismissed. However, the High Court and the Supreme Court did not agree. The Supreme Court stated that the period begins one day after the date on the cheque. " The six months would expire one day prior to the date in the corresponding month and in case no such day falls, the last day of the immediate previous month," the judgment clarified. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Damages for ' functional disability' A person who suffers ' functional disability' in a road accident should be compensated according to the percentage of the handicap, the Supreme Court stated last week while dealing with the Motor Vehicles Act. In this case, G Dhanasekar vs Metropolitan Transport, the professional driver of a tourist taxi met with an accident and was handicapped by 35 per cent. He could not pursue his profession. Taking into account the functional disability, the Supreme Court raised the compensation from ₹ 3.20 lakh decided by the High Court to ₹ 6.13 lakh. It relied upon an earlier case in which a 24- year- old cine artist suffered disfigurement of her face. The court had held that the functional disability in her case was 100 per cent as she was knocked out of her glamourous career. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Regularisation of casual labourers The Supreme Court last week stated that while regularising casual employees, there should not be any pick and choose policy. Gobind Kumar, who was engaged as a casual typist in 1986 and continued to work till 1990 for the Food Corporation of India in Darbhanga, was not regularised while more than 70 others on par with him were taken in. He raised a dispute under the Industrial Disputes Act which was referred to the central government cum Industrial Tribunal. It declared that the termination was illegal and he was directed to be regularised with 50 per cent back wages. The corporation challenged the decision before the High Court. The single judge dismissed the appeal, but the division bench set aside the tribunal's order. On appeal by the employee, the Supreme Court restored the award of the tribunal. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SC orders resumption of arbitration In a 10- year- old arbitration dispute between Voltas Ltd and Rolta India Ltd, the Supreme Court last week set aside the view of the arbitrator that the counter- claim of Rolta was barred by the rule of limitation. It asked the arbitrator to proceed with the counterclaim. The dispute arose over the termination of a contract in 2004 by Rolta to construct certain buildings by Voltas in Mumbai. The Bombay High Court appointed an arbitrator in 2006 and since then the dispute was tied up on the question of limitation. The arbitrator rejected the counter- claim on the ground of limitation. On appeal, the High Court decided in favour of Rolta. Voltas moved the Supreme Court which modified the High Court order and allowed the arbitrator to go ahead and hear the counter- claim. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Surgical cotton is not cotton Surgical cotton, also known by its medical term absorbent cotton wool, and cotton are commercially different commodities as they have distinctive names, character and use, the Supreme Court declared last week in a dispute over sales tax benefit on the two commodities. However, the Rajasthan government has issued notifications putting them together for tax purposes. Therefore, surgical cotton would get tax rebate in the state, the court ruled in the appeal of a manufacturer of surgical cotton, M/ s Mamta Surgical Cotton Industries. A weekly selection of key court orders |
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