New Delhi, February 26, 2017
Regulator Sebi is in favour of a major overhaul of the way boards of listed firms discharge their duties, including for appointment and removal of directors, and also wants their audit committee to be empowered to identify future risks.
There is also a need for "greater tolerance" and enhanced transparency in discussions and decisions taken at the board level and by various board committees of listed companies, but the regulator would prefer them to adopt best global practices in this regard voluntarily rather than being dictated to do so with a new set of stringent rules, a top official said.
While a 'guidance note' was issued last month by the Securities and Exchange Board of India (Sebi) on board evaluation at listed companies, there is a view that the regulator should come out with a new set of regulations to ensure greater compliance.
The regulator may soon come out with a further detailed guidance note while it is also mulling launching a public consultation process to understand whether there is a need for a new set of rules and what those could be, a top official said.
he move assumes significance in the wake of recent boardroom battle at the Tata group and the controversy surrounding the reported differences between some promoters and the top management at InfosysBSE 0.39 % -- both of which played out in a big way in full public glare and forced Sebi and the government to keep a close watch to ensure safeguarding interest of minority investors and other stakeholders -- as also the message going to the foreign investors.
"The prominent view within Sebi as of now is that the concept of board evaluation is very nascent in India and forcing the companies to follow a new set of rules in this regard may not be warranted at this stage," a top official said, while adding that the decision can be reviewed in some time after taking into account response of the companies to the guidance note.
Also, since the regulator itself will go through a leadership change soon, with senior IAS officer Ajay Tyagi set to take charge as the next Sebi Chief on March 1, a final decision on whether to replace the guidance note with a new set of rules could be taken under the new dispensation.
Corporate governance has been a key focus area, with a huge emphasis on safeguarding the interest of minority shareholders in listed companies, during the six-year tenure of current Sebi Chairman U K Sinha.
The proposed moves will also take into account the suggestions made in this regard by the regulator's International Advisory Board (IAB), which was also set up during Sinha's tenure at Sebi to advise it on best global regulatory practices and evolution of various policies.
In its last submission to Sebi, the IAB observed that the Indian companies as also the policymakers need to realise that good corporate governance is about helping the company achieve its objectives, implement its corporate strategy, while keeping the interest of various stakeholders in mind.
The IAB suggested that a matrix of expertise may be introduced to make the board diverse, balanced and in tune with the requirements for effective functioning of the company.
It has also called for "full transparency" in board appointments and removal process, with similar requirements being in place for both stages, while it wants audit committee to also focus on forward-looking risk assessment, in addition to retrospective evaluation.
After looking at global practices, the IAB noted that the board evaluation is a very important element in corporate governance and it should go beyond "a box-ticking exercise".
"The process has to be conducive to the growth of the company and can differ from company to company.
"The best evaluation is actually an exercise in self evaluation of the company's own performance and effectiveness in terms of its mission, financial returns, strategy, business model and social responsibility, and in this context, whether the standards expected from the board are being realised," the IAB felt.
The advisory panel, which includes experts from various fields, said it would be a good practice if the result of the evaluation of the board as a whole is disclosed to the shareholders.
It called for boards of listed companies being made aware and educated about the evaluation process and hoped the new guidance note from Sebi will help further this cause.
In its guidance note issued last month, Sebi has emphasised that the role and function of chairperson in board evaluation needs to be laid out clearly in advance in order to achieve maximum benefit of the process.
Responsibilities of various persons, including independent directors, and committees for carrying out evaluation of respective boards as well as the relevant disclosure requirements under corporate governance obligations have also been touched upon in the note.
It also advises that the nomination and remuneration committee will have to formulate the criteria for evaluation of performance of independent directors and other members of the board.
It will determine whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.
In the meeting of independent directors of the company (without the attendance of non-independent directors and management), such directors will need to review the performance of non-independent directors and the board as a whole, including the chairperson.
The performance evaluation of independent directors could be done by the entire board, excluding the director being evaluated.
"A statement indicating the manner in which formal annual evaluation has been made by the board of its own performance and that of its committees and individual directors shall be included in the report by board of directors placed in the general meeting," it said.
The performance evaluation criteria for independent directors will be disclosed in the section on the corporate governance of the annual report.
[The Economic Times]