As I have mentioned in earlier
columns, there is a “Who is the fairest of us all?”
battle between the Ministry of Corporate Affairs
(MCA) and the Securities and Exchange Board of India
(SEBI). It began with the Satyam scandal, where the
MCA took an upper hand, and has not let go the
advantage right up to the passing of the new
Companies Act, 2013, including framing of its
numerous rules and regulations. The SEBI has been
waiting in the wings for its time on stage, which
never seemed to come.
Until now. With the Companies Act in the statute
book, the SEBI has decided that it can prove its
regulatory mettle by imposing stricter conditions
upon listed companies, which fall under its remit.
Let me take an example of this. It relates to the
maximum number of independent directorships that a
person can hold.Section 165 of the Companies Act
states that the maximum number of directorships than
an individual can hold is 20, including private
companies which are subsidiaries of public entities.
However, regarding public companies, the ceiling is
10 directorships. By any reasonable yardstick, 10
board positions should be more than enough. One
really cannot carp with this provision.
If the news that one is reading happens to be true,
the SEBI seems to be veering to imposing a maximum
of five such independent directorships per person.
The argument is presumably this: listed companies
are publicly traded entities which ought to get
greater oversight from the board of directors than
others; to properly discharge such fiduciary tasks,
directors need time, effort and attendance; and, in
the SEBI’s opinion, to properly do the job, an
independent director cannot serve in more than five
such boards.
As is often the case with regulatory agencies, the
SEBI has confused substance for form and proposed a
counterproductively mechanical action to address an
otherwise laudable objective. None can deny that a
director must participate in board and committee
meetings of the companies where s(he) serves as a
fiduciary. But where is it stated or proven that
five is the most that s(he) can do; not four; not
six; not seven; or not even ten?
Thankfully, there is enough prima facie proof.
However, the SEBI has not examined the data. Every
annual report of any listed company must give the
record of all the board and committee meetings held
in the course of the year; as well as the attendance
of each director — whether in person or through
video conference — for each of these. Attendance is
not a perfect proxy for the fiduciary competence of
any independent director. But serious lack of
attendance is a sure indicator that the person does
not have the time to carry out the necessary tasks
required of this position. An intelligent way of
dealing with this is to incorporate the attendance
data.
If I were to draft the new corporate governance
norms for the SEBI under this head, here’s what it
would be. For listed companies, I would maintain the
cap of 10 imposed by the new Companies Act and add
an important proviso: if, in any financial year, an
independent director does not attend at least 50 per
cent of the board and committee meetings of a listed
company, this should be publicly stated by the
chairman of the company in the notice of the annual
general meeting (AGM) and such a person will need to
step off the board and seek re-appointment by the
shareholders through postal ballot, and announced in
the AGM.
This will be like publishing a defaulters list which
adorns the notice boards of all cooperative building
societies in Mumbai. It will serve to publicly shame
non-performance. And it will allow regularly
attending and performing directors to serve on as
many boards as they appropriately can, subject to
the cap imposed by the Companies Act.
When we have the usual viral fever, doctors
prescribe analgesics and antipyretics. They do not
recommend anti-fungal cream. Maybe the SEBI can
learn from sensible medical practices.
Published: Business World, February 2014
