Explained | Independent Directors: Know about SEBI's new recommendations and their limitations
New Delhi | Tarun Gupta: The issue of corporate governance in listed entities has often vexed the authorities and investors. It is with the ennobling intent of creating a robust framework of management, bringing in requisite transparency and accountability that the regulatory body SEBI has made some laudable interventions in the past years.
In furtherance to its all-pervasive role as a markets lynchpin, the securities and exchange board of India released a new consultation paper on independent directors. It is a welcome clarification that the proposed changes are said to be enacted only after due deliberation with the industry. We can only hope the consulting paper suggestions are subjected to extensive assessment before adoption.
I take this opportunity to delineate some of the suggestions, which in my view need to be revisited on grounds of practicality and also in few instances where they seemingly appear to be in conflict with fundamental principles.
The most crucial point the consulting paper makes is regarding the appointment and removal of independent directors. It says that independent directors be appointed by not just the majority of shareholders as is the case as of now, but an additional requirement of the majority of minority shareholders is also proposed. Besides problems of execution and compromising the quality of appointment, this dual voting mechanism where the minority shareholders vote separately, dilutes the cardinal principle of corporatization that majority rules over minority.
The board of directors of a listed company should be eclectic. The intent is to draw domain experts, people with administrative, commercial, financial, technical, legal acumen. It is quite probable that minority shareholders due to inadequate knowledge may not make the most prudent choice.
Coming to the fundamental principle of majority rule, it is the bedrock of any functioning. Yes there are provisions in companies act that provide protection to minorities against oppression and mismanagement, Sec 397/398, those however are in specific circumstances, exceptions or proviso to the fundamental idea of majority rule. To constrain majority shareholders from exercising their choice in board appointment will be quite patently unfair to them.
Under the law as it stands, the elected board nominee is required to secure 50% votes. Draw an analogy with electoral politics where candidates are elected despite registering way less than half the votes cast. Notwithstanding academic debates, would we jettison first past the post system? No, because it remains the most appropriate alternative. Shouldn’t the same logic extend to board appointments too?
Whether in a company or in public life, honoring the majority rule is not just a workable practical approach, it is also in consonance with the principle of natural justice. There might be genuine concern over misuse of this majoritarianism, hence built in safeguards in law to provide for checks and balances and prevent exploitation or suppression/oppression of minority. More than the laws around it, the judicial enforcement needs to be strengthened so as to ensure fair play. We cannot however, in our zeal to be watchdogs for the minority become a bloodhound for the majority.
Of course independence, transparency and integrity of the board cannot be compromised. There already exist rules around the same. Independent directors constitute 50% of the board with a majority in the audit and remuneration committee. There is a cooling off period of 2 years before any person who has had a pecuniary association with the company becomes eligible for appointment as independent director. The new proposal extends this period to 3 years.
I am not sure if that is either essential or useful? It might help to restrict appointment of promoter’s relatives as directors. Beyond that to assume that friends and acquaintances of promoters would kowtow to their wish in the present environment of such intense scrutiny, seems unfounded.
A basic rule, at times glossed over, in income tax assessment and audit is that the assessing officer or the auditor is not to wear the hat of the entrepreneur. They have to confine themselves to ascertaining the veracity of the transaction and refrain from delving into the need. It is for the person running the enterprise to decide whether an expense or transaction is necessary or infructuous.
Likewise in board appointments, we must respect the notion of free choice. Who to appoint, should be the discretion of the majority shareholders. The individual businessman and the majority shareholders, so far as they adhere to the legitimate ground rules, should not in any way be straitjacketed.
Over regulation veering towards strangulation has often been the bane of Indian enterprise. Lets not jeopardize governance and discretion at the altar of transparency and control. They are not mutually exclusive. Our endeavor must be to harmonize both.
(Disclaimer: This article is written by Tarun Gupta. The views expressed are of the author and not of the organisation)
Posted By: Talibuddin Khan