Companies Bill 2009: The Governance Agenda?
This one is a blockbuster that has been in the making for the last six years and we are hoping that it will release before the year ends. The Companies Bill 2009, produced by the Ministry of Corporate Affairs and directed, this version atleast, by the Parliamentary Standing Committee.
In an interview with CNBC-TV18ís Menaka Doshi, YM Deosthalee, Director and CFO, L&T; Anil Singhvi, Corporate Advisor and DD Rathi, Group Executive President, Aditya Birla Management Corp, review the Companies Bill 2009.
Below is a verbatim transcript of the exclusive interview on CNBC-TV18. Also watch the accompanying videos.
Doshi: Let me get down to the more contentious issues - the good, bad and ugly of what this Parliamentary Committee has recommended and the first one is the one that stands out the most - a code for independent directors that lays out roles and responsibilities, remuneration, a fixed tenure of six years and limited liability. The limited liability is music to everybody's ears; we are desperately in need of this code, aren't we?
Deosthalee: Whether we want a code or not is a different issue but the fact is that it is aimed at corporate governance. All these provisions have come into this bill because of corporate governance related issues. So if you look at some of the main aspects, we are talking about evaluation of board, independent directors or directorsí evaluation and they are all well intended provisions. The question is whether we are ready for these kind of changes? Evaluation of board is a concept which I do not know whether anywhere in the world is being practiced well. Also it only talks about evaluation, the mechanism is something which has not been spelt out. So probably that will come out later. Secondly, as far as the tenure is concerned, we are talking of six years and three years gap and six years - very well intended because probably what is meant is that there should be a change, a fresh look at the board, also new ideas to come in at the board level. However, the fact is six years is too short a period for large companies, for global companies. For the directors to understand the business, the strategies, the goal, it takes time. So by the time they understand the business, it will be time to go. So maybe I think we need to look at a much longer period. So what am saying is that many of these provisions are good provisions but they need to be relooked from the point of view of India as it exists today.
Doshi: And consider the practicality of some of these suggestions is it?
Doshi: You do not think that familiarity breeds dependence? Several Indian companies have had independent directors on board for 10-15, sometimes even 20 years - how can you be independent if you have been on a board for 20 years? Especially keeping in mind the fact that this is family-business dominated country and therefore the core management of a company rarely changes over several generations?
Singhvi: Sure but what is wrong with it if somebody is there for a longer period. I am not saying..
Doshi: ÖinterruptsÖ. doesn't familiarity breed dependence?
Singhvi: I donít think so. I do not agree on that at all because if you are independent you can remain independent throughout your life.
Doshi: ÖinterruptsÖso you do not think there should be a fixed tenure?
Singhvi: No, what I am saying is 20 years may be too long a period because then you are not giving room for fresh ideas to come in because the same man is there...
Doshi: ÖinterruptsÖso somewhere between 20 and 6?
Singhvi: The point Mr. Deosthalee made is to some extent valid, but I am very curious and to some extent amused that after the six year period, you cool off! Cool off and do what in three years and then again you can come back, now what nonsense is this. What do you do in that three year period? Can you have a three year period cooling off and then when you come back you are much better, you are more independent - itís absurd. I think if you want to give 12 years give one stretch of 12 years and be done with it. Define a period. Also after three years again the director will require induction for one more year because in three years the company would have grown, changed its colour, shape... so what is the point?
Deosthalee: This whole issue of independence is a state of mind.
Doshi: You will agree that while it doesn't necessarily need to be a just a six year term and maybe it could be extended, there needs to be a fixed tenure because you cannot have people on boards for 20-21 years?
Rathi: Let me first tell you, it is a deferred provision. I assume and I hope I am right that when the law comes in and it would be effective from the date and director's previous tenure will not be counted, so the existing director in any case will have another six years to run.
Doshi: Twenty years till 2011 and then another six years?
Rathi: Let us not count numbers like these; let us see the rationality of the law. You cannot make retrospective provisions and to assume as both my colleagues said - that you may not be independent even if you are there for just six years and you can be independent even if you are there throughout your life.
Doshi: Do you think there should be a fixed tenure or not or do you believe that this provision is not going to work?
Rathi: Six years perhaps is not the ideal time. More so I agree with Mr Singhvi that you cannot have three year cooling-off period, I don't know what you have gained additionally in terms of independence because you were out for thee years. So I think either sides you keep an open mind and let us see what happens in these six years.
Doshi: Separation of Chairman and CEO/MD, I suspect thatís not going to go down very well in India Inc either?
Deosthalee: Conceptually again good but practically it may be difficult in India because whether one likes it or not many Indian companies still are promoter owned companies...
Doshi: But it is becoming a slowly accepted norm every where in the world.
Deosthalee: Conceptually what they are saying is that the Chairman should be independent and the one who is looking after the day to day affairs, that is the MD, should be separate. Thatís the issue.
Doshi: Don't you agree with the separation proposal Mr Singhvi?
Singhvi: Absolutely, if you look at the model of Mr Birla, he is the Chairman and there are Managing Directors for all the companies. If you look at Rata Tata, he is not managing director of all the companies. So if you talk about these kinds of conglomerates where the ownership is concentrated - they are practicing it and they are very successful in that.
Doshi: Yet in several Indian companies Chairman and Managing director is a common post?
Singhvi: Segregating that I donít think will be much of a problem. Because promoter or whosoever is the family guy or the grandfather of the family can still remain as Chairman and you can have a CEO who is separate.
Doshi: Several promoters have objected to this earlier when we debated this with them. Harsh Mariwala went on record on this very show saying that he doesnít think the 2 roles should be mandatorily separated.
Rathi: I think the solution will lie in defining the roles. If you look at the banking sector in India - there is a common position of CMD in almost all public sector banks. Here once you have defined the role of a non executive Chairman and the CEO I think this should work.
Doshi: You have a common Chairman and Managing Director? Mr Naik is Chairman and Managing Director
Deosthalee: Lets leave aside Mr. Naik. I am just trying to make a couple of points - first, I donít think that combining this position has created a huge problem, thatís one point. The second important point is that Chairman is not a defined position. The Companies Act says you have to appoint a Chairman for a board, or for a meeting etc... And Managing Director is a key managerial person under the Companies Act. Chairman you can appoint from time to time to chair board meetings General body meeting etc... What has traditionally happened in India is that person (MD) is a permanent or a long term person and therefore I think a Chairman is sort of a different stature.
Singhvi: I can give an example like Ambuja, where we always had a separate Chairman and Managing Director and as Mr Deosthalee said there were well defined roles...
Doshi: So we have a divided house on this
Deosthalee: I am not suggesting that this is bad, this is also coming from the corporate governance perspective. Many of these provisions or suggestions have come from that, so I am not saying that this is bad but what I am trying to say is that this combined status has not created harm.
Doshi: It is just a move to a better level of governance. Being able to separate out these roles and therefore allow better supervision in board meetings, allow for independence when the Chairman examines proposals...
Deosthalee: Possibly. And the point which Mr Rathi made, I think we need to make sure that is properly taken care of. All these provisions of 6 year tenure etc... they should be prospective otherwise there will be big chaos. I am sure this will be taken care of but I think itís important to register this point.
Rathi: I think as far as we know, and earlier they said it, it is going to be from the day the law is enacted.
Doshi: I suspect they are going to make it prospective.
Doshi: Now let me come to one issue that I am sure all three of you agree on and that is the auditor rotation issue. The Committee proposes that companies should rotate the audit firm every five years, and the audit partner every three years. And here is what I like about this Report, it proposes joint and individual liability in the case of collusion in corporate fraud. But I have a feeling that audit firms and companies are going to say none of this is feasible! But I suspect that this is a good way of breaking the familiarity that builds up between audit firms and companies.
Rathi: I think you are one who is against familiarity. You ask the question and you give the verdict also!
Singhvi: I like this rotation suggestion very much. Only one caveat here - that I think our institute (ICAI) and the three of us are members of that institute, has failed miserably in its job. This provision has come largely on account of the failure of the institute. They have not been able to take any action against any of the members because of a 'you scratch my back, I scratch yours' culture. It is high time that the institute takes up this issue and rather than having elected members and President, there should be a CEO. Had the institute taken care of this I do not think this rotation provision would have been there. It is not for the Companies Act/Bill to correct the situation. Because we have not set our house in order, the proposed regulation has done it.
Doshi: I agree there needs to be reform at the ICAI, but that notwithstanding do you agree that there should be a rotation of both firms and the partners?
Singhvi: I agree because of the mess the ICAI is.
Doshi: Do you agree Mr Rathi?
Rathi: You wanted someone to differ, so let me respectfully differ with Mr Singhvi. First let me make one common point. Whenever we are debating this provision let us keep in mind that what we are discussing is half the law. There are 235 issues which have been delegated for further framing of rules. I think a meaningful debate on this Bill is feasible once you have those rules in place. Now rotation of auditors, according to me, is not something which should be made mandatory; it is not desirable. Because if you look at various scenarios in the world, hardly one or two developed countries provide for rotation of auditors. Rotation of partners - yes. There should be rotation of partners, but again you should not have one set of rules for all types of companies.
Some of the firms said that our partners and directors take a lot of time to understand the business and Mr Deosthalee pointed out that even six years is not enough for a director to deliver the best. He needs a longer term. The same applies to audit partners.
Doshi: This will then become a club of independent directors and auditors who say that you canít change us because we have depth of understandingÖ
Singhvi: Agree. It is like a visiting a doctor but he is not going to be familiar with your body. You go to a doctor for a surgery and say he should have complete familiarity of the body and only then he can operate?
Rathi: I believe there should be a longer period for rotation of partners. Maybe 5 years could be more realistic. But that said, internationally there is rotation of partners, so I do not think that's a big issue.
Doshi: No rotation of firms?
Rathi: I do not think rotation of an audit firm is desirable. Let us also look at this - after all how many large firms do you have to audit large corporates. What will companies do?
Doshi: That is a valid point. It is a market dominated by the Big Four and many Indian smaller firms have not managed to scaleÖ
Singhvi: But how do we break the Big Four monopoly unless you have this kind of a regulation. Smaller Indian firms are on the scene but they do not get enough audits. Because once the audit is given, it goes on for 25 years...and smaller firms never get work. In fact that's why they were taken over by others.
Doshi: Your views Mr. Deosthalee, on the audit firm and partner rotation issue?
Deosthalee: I do not think auditor rotation is a desirable provision. I think there are three important points here. One what Mr Rathi mentioned about international practices. Rotation is not an international practice. I think what's happened is, just because of one or two instances (Satyam), we believe that we need to bring about changes. There are thousands of companies being audited year after year without any problem whatsoever.
Doshi: Or maybe we havenít discovered the problem
Deosthalee: I do not agree with you.
Rathi: It cannot be hidden permanently.
Deosthalee: Right, it cannot be hidden, that is one. The second important point is, it is a fact that we donít have enough number of large and good quality firms, that is very clear.
Doshi: Thatís true, I understand that limitation.
Deosthalee: And the third and the most important point is that, as we talked about directors, it is important for auditors also to understand the business of the organization, the accounting policies, the internal control systems, the geographies in which we operate. So for the auditors to understand a business and its practices it takes enormous amount of time and by the time..... (Interrupted)
Doshi: I am not surprised you are making this point because the familiarisation argument is an eternal one. Audit firms too argue that they need time to understand a company, to create infrastructure to serve it in several geographies...
Deosthalee: I am only trying to say is that itís a disruption. If you keep changing the auditors, every time a new auditor comes in you will spend time training that auditor and by the time you train the auditor his term will be over.
Singhvi: And what happens to a Managing Director and a CFO when you recruit him? Even if he doesnít know the industry you hire him, right? When a CFO leaves then what happens?
Rathi: But no CFO is recruited with a three year horizon and no CEO is recruited with three year horizon.
Deosthalee: We are not arguing for the sake of argument. It is genuinely difficult for a firm to rotate auditors. And the Committee says there will be a list of audit firms from whereby there will be a rotation.
Rathi: This panel is another very disturbing thing. Today you have panel for auditors, tomorrow you will have panel for CFOs, day after for CEOs..... (Interrupted)
Doshi: The Committee has also proposed a list/panel of independent directors that companies have to choose from.
Rathi: So we will keep having panels. Is there a list of Chartered Accountants?
Doshi: Mr. Rathi on the phone you suggested there should be a panel for TV anchors as well.
Rathi: Why single one class of people for panels?
Deosthalee: By the way there are other ways in which you can also achieve the same objective. If you want to really bring about auditor independence you have other processes like a peer review, which has been introduced and which can be practiced more vigorously and rigorously.
Singhvi: Satyam had a rotation of partners and the new partners came in 2007 and they are the one who did this.
Doshi: I admit that Satyam has cast a long shadow over the Parliamentary Committee's Report. The Satyam issue comes up everywhere and clearly they have designed several recommendations based on the Satyam experience. I also buy that we cannot design a law based on one case of fraud. But something needs to give. You canít say no fixed tenure for independent directors, no rotation of auditors, let all things be as is and yet we will have better governance in this country.
Deosthalee: No, we are not saying that. I think you are exaggerating. I am sorry, but you are exaggerating. What we are saying is that there should be other mechanisms which should be introduced and which should be followed rigorously.
Doshi: Peer review also comes under the ICAI..... (Interrupted)
Deosthalee: No, not necessarily. SEBI did peer reviews recently, didnít it?
Doshi: In an emergency situation.
Deosthalee: But that can be formalized.
Rathi: Letís come to the basic issue - corporates are to be run by their management. Are we moving back to nationalization, taking private undertakings back to being public undertakings? What are we aiming at? We are seeing what privatization has done. Take any field. Take your own field, that will make you more happy..... (Interrupted)
Doshi: I buy your point Mr. Rathi. There is nobody here from the government, so I am playing the devil's advocate. I am not trying to run anybody out of business. Since we have limited time I want to take up one more issue and that is inter-corporate loans and investments. Loans/Investments/Guarantees in wholly owned subsidiaries as well as investments in Rights Issues, as of now enjoy exemption. But the Parliamentary Committee proposes that companies get shareholder approvals for such actions. Bharat Vasani, Corporate Counsel, Tata Group said to me that this proposal will hamper or impede M&A type of action. Because companies need to be able to raise money or move it to wholly owned subsidiaries, quickly. And that's not possible if shareholder approval is needed. Would you agree that this is a sticky issue?
Singhvi: I think itís complete nonsense to say that every time you have to go to the shareholders to seek approval.
Doshi: But why not? Itís very good. You should get approval from shareholders if you are lending big money to group companies, right?
Singhvi: The issue is that you already have Sec 372(A) which listed a complete of set things you could do and what you couldnít do. And I think it has withstood the test of time beautifully well. One more issue in this proposal - they say you canít have a step-down subsidiary company. What is wrong with having a step-down subsidiary company?
Doshi: They have also said you can have only one Investment Company.
Singhvi: Yes. How can you have just one Investment Company? This is exactly what Mr. Rathi is saying - who has to run the company? The government or the Board?
Doshi: You donít think this is an effective way of ensuring a certain level of scrutiny? All they are saying is, go to shareholders for approval. They are not saying that you cannot loan money.
Singhvi: It takes a minimum 30 days to get shareholder approval.
Rathi: You are making theoretical provisions! We need meaningful laws. Also I think I need to clarify what the proposal says - if you exceed the limit, you take shareholders' approval. I can take advance approval for a large amount.
Singhvi: No. You need specific approvals, not a general approval. Every proposal has to be approved by shareholders. You cannot say that, for the next 10 years I will invest Rs 10,000 crore, so give me approval now. Otherwise it would be very easy.
Deosthalee: Actually, this particular provision is not necessary, because the same objective can be achieved through disclosures in the Directors' report. I am in agreement with Mr Rathi, what this bill is attempting to do is that, today we have certain limits of investments of upto a percentage of networth (100% of the networth and paid up capital etc.) and those limits do not include investments in subsidiary companies. Therefore you could invest any amount in subsidiary companies and that is now being attempted to be corrected through this proposal. It is not really required. According to me, this objective can be achieved through disclosures as opposed to asking for shareholder approval.
But the other provision, which is more harmful, is the step-down subsidiary provision because it is going to impact businesses. Today the Government insists on private sector participation in infrastructure projects so I'm talking from an infrastructure industry perspective. What companies do is, they create a holding company for investing in various infrastructure projects. Every project is a separate entity, a separate SPV and so it is a second step-down subsidiary.
Doshi: Which would be disallowed if this came into force?
Deosthalee: Yes. Every project has different lenders, every project has a different concession period. Sometimes projects have different shareholders.
Doshi: So it is not a feasible, practicable proposal?
Deosthalee: It will be impossible to operationalise this.
Doshi: Lastly, I wanted to discuss the issue of CSR. I still believe itís not mandatory and that they have designed it as a 'comply or explain' regime. But I know that you Mr Deosthalee think otherwise and are not happy that they trying to make CSR mandatory. What is defined as CSR? Who are you going to give the money to? How will it be invested? I know there are several questions but I'm not discussing the issue as we are out of time. Instead I want last comments from each of you. Mr. Deosthalee, do you think we are headed in the right direction with this law?
Deosthalee: There are lots of provisions which are good provisions. They are well intended from a governance perspective but the effect of that maybe not desirable, and in a sense they will probably undermine shareholder rights. There are several things which shareholders must approve, but these proposals have you going to the Government for approvals.
Doshi: So it could lead to a layer of bureaucracy?
Deosthalee: That is the sense I am getting. It can easily be resolved through different provisions.
Doshi: Minor alterations, without taking away from the sprit of this?
Deosthalee: The spirit should be maintained.
Doshi: Mr. Rathi, where do you think we are headed with this Bill?
Rathi: As I said, directionally no one objects that it must focus on stringent, good governance practices. You are taking somebody's money and you are the trustee, so appropriate law is desirable. What worries me most in this is that, they are changing the entire language at many places. It takes, in this country, several years to get a judicial pronouncement to settle the law. I hope that adequate clarity will be achieved in this bill as well as through the legislation which is going to be prescribed, to see that we donít end up in a new set of litigations.
Doshi: Mr. Singhvi, as someone who also wears the 'activist investor' hat nowadays, your heart should be gladdened by the thought that the broad thrust of this bill is better governance!
Singhvi: The intent is good but the execution is very poor, pathetic. Actually what the Government is trying a backdoor entry of License Raj - saying that 'for whatever you need to do in the Boardroom, you come back to the government'. In fact in many cases even the shareholders' rights have been taken away. It is the government who shall decide. For instance the panel of the independent directors...
Doshi: It is only a suggestion as of now and shareholders will still vote on appointing Directors.
Singhvi: It is an intent, that all the babus in Delhi should get jobs in the Boardroom, which is a disaster and which is going to be pathetic. The Panel will comprise of who you know in Delhi and they will get jobs. That is what I am saying. Intent is noble but execution is poor.