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NSUNDARESHA SUBRAMANIAN
New Delhi, 1 August
On Friday, shareholders of information technology services firm Tech Mahindra voted on resolutions reappointing independent directors ( IDs) A P Puri, M Damodaran, R Kulkarni, T N Manoharan and MR Rao. Last year, these directors were granted 15,000 stock options each.
Ranbaxy Labs went abroad to reward its IDs. The company, in the process of being acquired by Sun Pharma, has proposed to nominate Rajesh V Shah, Anthony H Wild, Percy K Shroff and Akihiro Watanabe, its IDs, as directors on the board of major subsidiaries abroad, with profit- related payment up to ₹ 1.5 crore a year to each. Ranbaxy also paid a significant amount of commission to its IDs, despite making losses in the past financial year.
Tech Mahindra and Ranbaxy did not respond to email questionnaires sent by Business Standard. Bajaj Auto and Piramal Enterprises have also faced criticism with their remuneration structures and alleged conflicts of interest for their IDs.
The increased focus on IDs comes on the heels of shareholder rejection of a proposal for a pay rise for senior executives of Tata Motors earlier this month. " At a broad level, there is an inverse relationship between remuneration and independence," says Pranav Haldea of Indiaboards. com. " We have recently seen huge sums paid to former civil servants, who take up board positions." He points out that when retired people who take up these positions are dependent on these as their primary income source, things get even trickier.
Recent regulatory changes have pushed up demand for IDs and put pressure on companies to retain them. The Securities and Exchange Board of India has stipulated that a person can serve as an ID on the boards of a maximum of seven listed companies and only three if a wholetime director in one. According to Indiaboards. com, this would mean 97 persons would have to resign from 283 ID positions in companies listed on the National Stock Exchange by October 1. Another measure that will increase demand is the classification of nominee directors as non- independent.
It is no secret that many directors would choose to sit on boards that take better care of them and resign from those less remunerative. To be sure, these payments are within the legal framework. But, questions are being raised whether high levels of remuneration affects a board's independence. Also, IDs are expected to be sounding boards of the management and to act in an unbiased manner.
Proxy advisory firms have been trying to sensitise companies to the difference between what is legal and what is ethical, and what affects independence. In a report that recommended investors vote against Tech Mahindra's proposal to grant options, Stakeholders' Empowerment Services ( SES) said, " Since the options were granted to IDs post the passage of the Companies Act, 2013, SES does not consider the directors who were allotted options to be independent, especially given the fact that all these were members of the remuneration committee which allotted the said options. While legally they may still be classified as independent, SES believes the directors have lost their independence on ethical grounds." Institutional Investor Advisory Services said in a report on executive pay following the Tata Motors incident, "Resolutions on fixing compensation are often ambiguous and do not provide shareholders with sufficient information to make an informed decision. More, the remuneration policies for Indian executives are structured in a manner that gives the board discretionary powers in fixing the final pay. To add to the uncertainty, the resolution is typically merged with the ( re) appointment of the individual. So, while investors may want to ( re) appoint the individual, they may also want greater clarity on the compensation.
Because they are unable to split the resolution of appointment and remuneration, shareholders are often caught on the horns of a dilemma while voting."
Cos offer stock options, board seats in foreign arms; high remuneration has inverse relationship with independence, say critics
|Corporate governance norms tightened under Companies Act, Sebi |Many independent directors may have to give up directorships under new norms |Demand for independent directors to go up |Companies trying to incentivise independent directors through new methods |Governance firms worried that higher remuneration affects independence
| Call for greater scrutiny of ' complex cos' |
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Mumbai, 1 August A recent remark by an experts group that ' complex companies' need different corporate governance structures has sparked hope that the Securities and Exchange Board of India ( Sebi) would soon announce more checks and balances to ensure transparency in such companies. Earlier, this month, its International Advisory Board had recommended separate governance standards for " big and complex business groups". Following which, corporate governance experts and minority shareholder rights activists have asked that Sebi prescribe greater disclosure standards for companies with complex structures, to check transactions which could be against the interest of public shareholders. In recent times, public shareholders in many listed firms have battled the management of several companies, including Maruti Suzuki, Holcim and Tata Motors, over proposals perceived to put them in a disadvantageous position. Experts say several companies deliberately put in place complex structures. Proxy advisory firms opine there is aneed to ensure greater transparency, achievable by a clearer understanding of the flow of transactions between a parent company and its subsidiary. "With multiple subsidiaries and a complex holding structure, it is natural for them to have numerous transactions within the group. In such cases, there should be greater disclosure standards, not only for transactions between parent and subsidiaries but also between the subsidiaries," said J N Gupta, managing director ( MD) of SES proxy advisors. Experts say companies often have such as complex holding structure that even regulators fail to understand the control chain. "Any change in the holding structure should be disclosed by all companies, whether listed or not, to remove ambiguity," said Shriram Subramanian, MD of InGovern, a proxy advisory and corporate research services company. Many Indian companies, listed and unlisted, have subsidiaries that are operational abroad. In such a scenario, both minority shareholders and investors suffer a regulatory vacuum. "In many cases, there are subsidiaries outside the jurisdiction of Sebi, as well as the ministry of corporate affairs. The one way investors can be protected is if Indian regulators ensure any transaction outside their purview should be publicly disclosed, so that shareholders can make informed decisions," Subramanian said. Experts said the regulator should first clearly define which companies would fall under the ' complex business group' tag. " It is important for the regulator to classify the definition of complex businesses — whether it is the size that matters or product diversity," said Amit Tandon, MD of IiAS proxy advisors. |
| Sebi frowns on 15- minute AGMs |
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Mumbai, 1 August The Securities and Exchange Board of India ( Sebi) has criticised companies which wrap up their Annual General Meetings ( AGMs) within 15 minutes. AGMs are once- ayear exercises, allowing shareholders to interact with company officials. " Allocation of 15 minutes for conducting the AGM of a public listed company having more than 100,000 shareholders does not appear adequate enough to facilitate a constructive discussion on matters transacted. Such a practice affects the rights of investors to seek clarifications/ hold discussions and prima facie appears prejudicial to the interest of the investors," said the Sebi circular, issued on Friday. The circular referred to listed companies belonging to a common group formed out of demergers which were found to have done this. The companies had 80 per cent common shareholding, which left only 15 minutes each for these shareholders to attend the AGMs, it said. |
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