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Mirror,Mirror On The Wall

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Not long ago, there was a moribund outfit in New Delhi called the Ministry of Corporate Affairs (MCA). Regulating all firms registered under the Companies Act, it ran like most ministries, replete with clerks, section officers and Class I civil servants. With some exceptions, the IAS officers were not especially noted for their zeal, knowledge or ability; and the ministers were unhappy at what they considered to be an inferior posting, disinterestedly marking time for worthier opportunities.  
 
Then there was the Securities and Exchange Board of India (Sebi). A modern creature of the post-1991 reforms located in the commercial capital of India, Sebi had a more exciting remit. It looked after the interest of retail investors; oversaw the capital market; and focused on the big fish — the publicly listed companies that comprised the  bulk of capital employed in India. 
 
Until the Satyam scandal in January 2009, that was the order of things: a slow and generally ineffectual bureaucracy in Delhi without the resources to monitor India’s corporate sector; and a quick-on-the-uptake regulator in Mumbai that mostly made the right kind of interventions when needed. 
 
Thanks to energetic interventions of the minister of the time, Prem Chand Gupta, the MCA did itself proud in handling various aspects of the Satyam fiasco — so well that you wouldn’t believe that it could happen in India. In contrast,  Sebi, under C.B. Bhave, was seen to fall short. The balance of power shifted to the MCA. As it remains today.
 
Energised by the limelight, the MCA drafted various versions of a brand new Companies Bill, piloted it through the Standing Committee of the Parliament, and got it passed by the Lok Sabha. It will soon become law. Sebi, whose corporate governance mandates under Clause 49 of the Listing Agreement were more modern than the sections in the Companies Act, 1956, is now on the backfoot.
 
So, it has to demonstrate that it is in the running, which it is doing by circulating a consultative paper on corporate governance. Most of its proposals are to align Clause 49 to the new legislation. Some are also well thought of. But others are totally overboard. Let me share a few. 
 
The first is that the appointment of independent directors should be only by minority shareholders. Only Italy has this in its statute book, a country famously renowned for its excellence in corporate governance. Sebi forgets that directors, independent or otherwise, are appointed by all shareholders. One might conceivably advocate postal ballot for the election of directors. But to claim that the voting college for independent directors must be minority shareholders because otherwise such fiduciaries may be prone to act according to the will of the majority shareholder is balderdash. It is an attempt by Sebi to prove that it is holier than the MCA. 
 
The second is the performance evaluation of independent directors. It is gross legislative overreach of the Companies Bill to mandate this. Sebi goes further and proposes to determine what elements should constitute such an evaluation. Such love for regulatory minutiae is one of form trumping substance, by which Sebi hopes to take the moral high ground in corporate governance.    
 
Third, to be classified as an independent director, the Companies Bill proposes that none can serve on the board of more than 10  public companies, listed or otherwise. Sebi wishes to be holier still, and wants a debate on whether it should be restricted to seven listed companies.  
Fourth, and this is another example of  overreach, Sebi wants to examine whether board- or committee-level discussions on succession planning should be mandatorily disclosed to the shareholders. 
Fifth, because the Companies Bill states that evaluation of a company’s risk management systems should be examined by the board’s audit committee, Sebi wants to go further — appointing chief risk officers and determining specific parameters and requirements of the risk management plan.

Again, form over substance, with too much interference in the internal governance of companies.
 
This list gives a flavour of the proposed regulatory interferences in the running of companies — first by the Bill, and now by Sebi. Let me end by stating that since the late 1980s, I have been known as a corporate governance advocate. But I hate it being equated with ‘ticking the check-list’, form-over-substance clauses. My plea is that Sebi return to what it is respected for — sane mandates backed by prompt execution —  instead of trying to show who is fairest of them all. 
 
The author is chairman of CERG Advisory. 

omkar(dot)goswami(at)cergindia(dot)com

(This story was published in Businessworld Issue Dated 28-01-2013)