Corporate Governance: SEBI vs Companies Act, 2013
Effective October 1st – all public listed companies in India will be held to higher corporate governance standards! In its Board meeting this week, market regulator SEBI approved a variety of proposals to amend the Listing Agreement. One of these proposals is brand new – the compulsory creation of a whistleblower mechanism. That’s a big one and SEBI has done what our parliament has failed to do all these years.
But most of the proposals approved by SEBI’s Board - align SEBI’s corporate governance requirements to those in the Companies Act 2013 – for instance
- A separate meeting of independent directors
- Prohibition of stock options to independent directors
- Exclusion of nominee director from definition of independent director
- Enhanced role of audit committee and their prior approval for all material rpts
- At least one woman director on board; and the like
And then there are 2 proposals the SEBI Board approved that go beyond the Companies Act, 2013
The first one - the Companies Act, 2013 says a director can hold a maximum 10 public company board positions – SEBI has narrowed that to limit an independent director to 7 public listed company board positions, and only 3 as Whole Time Director. COMPANIES ACT, 2013
A person can hold
Maximum number of directorships = 20
Maximum number of public company directorships = 10
The second one – the Companies Act says an independent director can hold up to two 5 year terms after which there needs to be a 3 year cooling off period. SEBI has maintained that. But the Companies Act applies this prospectively – that is, it doesn’t count the time served already. SEBI has decided that if a person has served as independent director on a board for 5 years or more, starting October 1st he shall be eligible to only one term of 5 years. In that one decision SEBI has forced the old boys club of independent directors to face retirement in 5 years- which is good news for all governance activists but the question is can SEBI do that? Many lawyers I spoke to say SEBI can impose standards higher than in company law. Will that argument stand up in a court of law? Joining me with a view on this is well known Counsel Tushad Cooper
COMPANIES ACT, 2013
Independent Director Term
5yrs + 5yrs (special resolution approval)
3yrs Cooling Off
SEBI: NEW CLAUSE 49!
Effective Oct 1, 2014
‘It has been decided that the maximum number of Boards an independent director can serve on listed companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed company’
Doshi: Can SEBI do this – go above and beyond the Companies Act and in fact narrow a provision that has been laid out in the Companies Act?
Cooper: SEBI is certainly entitled to impose more stringent conditions than the Companies Act lays down and there is no embargo on SEBI to do so. The reality is that one must look one, at the legality of the provision. The other is whether it is desirable and third is whether it is practical.
On the legality of the provision, my view is that, yes SEBI has the power to do so. On the desirability of the provision, it is to prevent cronyism creeping in and that is why SEBI has made a good step. On the practicality aspect there is one question to consider - whether the pool of independent directors is sufficiently large to keep generating good qualified competent independent directors and that might pose a problem.
Doshi: I understand the practicality bit and may be India Inc would be forced to come up with an expanded list of potential independent directors. Let me go back to the legality point that you made. In the Companies Act, Section 149 very clearly says as explanation that, "any tenure of an independent director on the date of the commencement of this Act shall not be counted as a term under sub-sections 10 and 11." This is the will of parliament that we will not apply this tenure restriction retrospectively. It will be counted from day one after the Act is notified. How then can SEBI apply some of it retrospectively and say if you have already enjoyed 5 years or more on the board of a company as independent director then you don’t get two five year terms, you get just one? COMPANIES ACT, 2013
‘any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections’
SEBI: NEW CLAUSE 49!
Board Meeting: Feb 13, 2014
‘To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if a person who has already served as an Independent Director for 5 years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more term of 5 years only.’
Cooper: As far as SEBI is concerned it has imposed this provision qua listed companies which it has a jurisdiction to do. The provision under the Companies Act relates to all the companies and not merely to listed companies. To that extent SEBI has carved out a certain more stringent provisions relating to listed companies as a condition of the Listing Agreement.
Doshi: If someone was to challenge just on the ground of legality, they are unlikely to succeed in the court of law?
Cooper: No. If the legislature was desirous of making it mandatory so that to the extent that SEBI cannot encroach on that legislative diktat they can provide in the Act itself saying Notwithstanding anything contained in any other provision, regulation etc this would be the law. They have not chosen to do so.
Doshi: There it is- SEBI can impose higher standards than laid out in the Companies Act when it comes to listed companies.