| Will the corporate governance structure change? |
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With the government notifying new rules for the appointment of independent directors ( IDs) for public sector banks ( PSBs), public sector insurance companies, Reserve Bank of India (RBI) and financial institutions (FIs), it has become clear that the government wants to alter the level of corporate governance practised in these boardrooms. However, many experts familiar with the functioning of these companies' boards feel that it might not be enough to change the status quo and more needs to be done to change the governance structure in the boardrooms. So what has changed? While the Companies Act, 2013, which was implemented last year, was one step forward to give IDs more power, they were much more broadly defined — focusing more on the duty on the ID to ensure that the interest of all stakeholders are protected; particularly minority shareholders. According to Companies Act, 2013, an ID should be a person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience. Further, he/ she should also possess ' appropriate skills, experience and knowledge' in one or more fields of finance, law, management, sales etc. On the other hand, the rules recently notified for PSB, FIs, RBI and insurance companies have a much more focused tone — giving them a tenure of six years, asking for aminimum 20 years of experience from persons coming from industry, putting an age restriction at 67 years. Moreover, the government officials who have 20 years of experience with 10 years at joint secretary or above; retired chief managing directors/ executive directors of PSBs after one year of cooling period; academicians, chartered accountants and professors with more than 20 years experience ; will be the only eligible ones to apply. "The normal expectation globally of the role of an Independent Director is essentially two- fold: advisory and monitoring," said an expert who did not wish to be named. "While the Companies Act focuses more on the ' monitoring' part — asking ID to ensure the interest of all stakeholders; particularly minority shareholders; the rules for ID appointment in state- run banks and insurance companies envisage him/ her more as a ' strategic advisor," the expert added. " For example, one of the acceptable qualifications of an independent director is that he or she led a reputed organisation or brought turnaround in a failing organisation." What do experts fear? The qualification rules focuses more on how the ' government officers' can apply. This tilts the scale more towards the role of IDs as a strategic advisor. The experts are worried that the seasoned bureaucrats will find these positions more attractive for post- retirement stationing, affecting governance of the board room. "Given the unique nature of banks, financial institutions and insurance companies, it is appropriate to prescribe more detailed and specific education and other requirements. There is nothing wrong in that," said Dolphy D'Souza, Partner at a member firm of Ernst & Young Global. " However, the emphasis should have been to get more people from the private sector as independent directors in PSBs, FIs, RBI and insurance companies rather than retired bureaucrats. This is important to delink the public sector from the hold of the political class and bureaucracy." It is a known fact there is a lack of qualified IDs — who have a certain industry experience —even in the private sector. Moreover, there are more lucrative offers waiting for them in other private sector companies, which have to mandatorily appoint onethird of their board as IDs, as per the new Companies Act. "Such IDs do not have an incentive to enter the boards of state- run banks and insurance companies," said another Mumbai- based expert. " Moreover, the state- run banks etc. are yet to culturally evolve in this corporate governance structure to a point where they have strong IDs who can speak their minds." "The only concern could be that these positions at PSUs should not be parking place for the retired senior officials, as there is a need of strong corporate governance mechanism with PSUs," said Harinderjit Singh, partner Price Waterhouse. Many PSUs are right now looking for IDs to fill up the vacant positions. Therefore, the only way to know if the government really wants acorporate governance improvement in PSB, FIs, RBI and insurance companies, is when the appointments begin. Stringent rules for independent directors in state- run banks and insurance companies RULES FOR INDEPENDENT DIRECTORS Companies Act, 2013, |Focuses more on its role as a watchdog |Specific education qualification and industry experience are not required |Tenure restriction of 10 years |Tries to introduce a powerful corporate governance structure Recent notification for state- run banks and insurance companies, RBI and FIs |Focuses more in its role as a strategic advisor |Applicant needs to be a graduate with at least 20 years of experience |Tenure restriction of 6 years |Serving and retired bureaucrats or academicians - soaked in old world practices- could be a road block to improving governance structure in these institutions |
| BRIEF CASE |
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A drug manufacturing firm, which gets certain products made by job workers on their premises, would not be liable to pay excise duty on the goods, the Supreme Court has stated in its judgment in Commissioner of Central Excise, Goa vs M/ s Cosme Farma Laboratories. The commissioner had issued a show cause notice to the drug firm and the workers asking them why penalty should not be imposed on them under the Central Excise Act. The firm moved the Excise Appellate Tribunal which found in its favour. The revenue authorities moved the Supreme Court. Dismissing the appeal, the court stated that the excise law is different from the Drugs and Cosmetics Act. They are enacted for different purposes. The Drugs and Cosmetics Act is meant to control the quality of drugs for which licences are given under the Act. It also allows the pharma firms to get drugs made by someone else under its supervision. The excise law cannot be invoked in this case as the issue is not the quality of the drugs. Condition for Customs exemption The Supreme Court last week dismissed the appeal of IVRCL Infrastructure & Projects Ltd, a contractor for the Golden Quadrilateral project in Andhra Pradesh, which was denied exemption in Customs duty for importing electronic hot mix plant from German firm Lintec GmbH. A purchase order was placed on the foreign firm for supply of the plant. The importer split the contract between Lintec and an Indian firm, Marshalls of Chennai. The German firm will supply the " critical items" while the Chennai firm will supply various other items, also imported. The court ruled that only a complete plant was exempted from the duty and not components which did not have the essential characteristics of a hot mix plant. Rail track in factory is ' capital goods' Laying down a rail track to convey raw materials within the establishment for manufacturing process would qualify for Modvat credit as it would be included in the definition of capital goods. The Supreme Court set aside the contrary view of the revenue authorities and the appellate tribunal in the case, Jayaswal Neco Ltd vs Commissioner of Central Excise. Show cause notice was issued to the steel company in Indore for claiming the credit on the ground that the laying of the railway track did not manufacture or produce any other goods and therefore not entitled to the benefit. Moreover, it was alleged that the tracks were used for extraneous purposes other than conveying hot metal. Rejecting this view, the Supreme Court remarked that even if the track was used for incidental or innocuous purposes, the track can be treated as capital goods. Gender bias at workplace denied The Supreme Court has dismissed a petition moved by a former woman employee of Coca- Cola Co who sought arbitration regarding her complaint about gender discrimination and harassment in service conditions relating to pay and emoluments. She invoked the mechanism of arbitration under " solution programme" of the US parent company claiming compensation for her suffering harassment in the course of employment. The company rejected the complaint in the in- house investigation and asserted that the solution programme was not applicable to her but only to employees in the US. Accepting this argument, the Supreme Court in the judgment, Payal Chawla vs Coca- Cola, stated there was no arbitration agreement between her and the employer and, therefore, the Arbitration Act could not be invoked. Further, there is no word about the solution programme in the job contract, the judgment said. Damages for electrocuted maid The Supreme Court has imposed compensation on the employers of a housemaid who was electrocuted in their house while operating a washing machine due to faulty wiring. Her husband had filed a criminal case against her employers, but the Kerala High Court quashed it, as it was not considered a " rash and negligent" act making it an offence. On appeal, the Supreme Court invoked its extraordinary powers under Article 142 of the Constitution to help the family in the poor social strata. In the judgment, Rajan vs Joseph, the court noted that the government had already paid ₹ 1 lakh and the employers should also match the figure. Gammon India plea on bids rejected The Delhi High Court last week dismissed the writ petition of Gammon India Ltd which had challenged the rejection of its bid by Delhi Metro Rail Corporation Ltd. The firm alleged that its bid was rejected on irrelevant considerations and another firm was selected for the project. The Metro corporation maintained that the bid was rightly rejected because the firm's performance in the Chennai metro project was not satisfactory and there was abandonment of work in Delhi also. The high court stated that the technical committee and the tender evaluation committee after evaluation of Gammon's bid had concluded that the bid was not suitable. It said courts would not interfere in commercial contracts and judicial review was justifiable only if there was arbitrariness or mala fides. Hawkins Cookers wins copyright case The Calcutta High Court has granted injunction against Khaitan Pressure Cooker Ltd on an application by Hawkins Cookers Ltd alleging infringement of registered copyright for its logo with deceptively similar label on the product. Khaitan defended its case asserting that the mark was not an original work of art and the marks are dissimilar. However, the court found that Hawkins has made out a case for injunction and it was entitled to three reliefs: compensatory damages, nominal damages and punitive damages. The company had benefited out of the sales and therefore it must compensate Hawkins with the profits it had earned. It should also make over the profits earned after it changed its logo. Hawkins is also entitled to punitive damages of ₹ 10 lakh so as to prevent further infringement of the trade mark, the judgment said. |
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