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Part 2: Salman Khurshid on the New Companies Bill

Published on Sat, Nov 13,2010 | 12:25, Updated at Sat, Nov 13 at 13:14Source : CNBC-TV18 |   Watch Video :

Last week in the first part of this exclusive interview with The Firm minister for Corporate Affairs, Salman Khurshid discussed the roles and responsibilities of Indian independent directors as laid out in the parliamentary standard committee report on the new Company's Bill.

Below is a verbatim transcript of part II of Menaka Doshi's one-on-one with Salman Khurshid. Also watch the videos.

Doshi: Let me to come to the other two issues which are in a sense fixed tenure- I know that you have proposed a six year fixed tenure period for independent directors. I also heard that in some of your interaction with industry, you said maybe we can consider looking at extending that to nine years with a cooling-off period in between, and then a maximum from another nine year time and thatís it. And fixed remuneration- if the voluntary guidelines released by your ministry last year were to become part of the legislation as the Parliamentary Standing Committee has recommended then independent directors can only be paid sitting fees, no commission and no stock options.

Khurshid: Yes.

Doshi: What is the final outcome going to be in the bill?

Khurshid: Its difficult for me to say what the final outcome will be till we have finally got it in black and white and we have said to law that this is now what we want to do. We are in the process of doing this. We have to weigh what is being said twiceÖ

Doshi:..what are you in favour of, personally?

Khurshid: I cannot Ė if I say something now I am actually showing disrespect to the standing committee. The standing committee is mini parliament and I must give the greatest respect and consideration to something that they have said. Fortunately for us, in many areas, they have given us a leeway, they have sort of indicated what they would like us to do but they have given us some freedom indicating some benchmarks with saying this is the kind of thing that you must do. So we are working on that, fine tuning it, tweaking it a bit when need be so that it becomes practical and acceptable more widely and then if need be we will tell parliament that these are the departures that we have made from their recommendations and then take them on board but I cannot simply sit here and say, this is what I will do against the wisdom of large number of my colleagues who institutionally have taken a view. It will not be fair.

Doshi: Does that mean that you donít necessarily agree with what the parliamentary committee has recommended because they have recommended a fixed tenure; they have recommended a fixed remuneration. So whether you fix the tenure at 6 or 9, can I then understand that yes, there will be a fixed tenure and whether you allow the commission or not there will be a fixed remuneration?

Khurshid: I think there will be a fixed tenure but we can stagger things, we can have a fresh start of nine years. These are all issues on which we have not been bound down by the standing committee. So we can work on many of these things. I frankly think if somebody at a ripe age with some experience becomes a director, nine years is a long time, there is not much use after nine years. But, of course, if you have picked up a director who is very young, nine years would mean nothing. But then all big companies would have other companies to move their directors onto- and donít we want a new crop of people coming in this country? Everyone is saying to me, "not enough good people to be independent directors." If there arenít, we must produce some more! People use to say you cannot get medals in the games in India when you play international sports but now we have got them. We have got medals in at least four areas so why donít we get some medal winners, why donít we get more women into the boards. There are just a handful of them and I am not talking about 33% reservation that we give 33% reservation. I know a lot of women directors today have said to me please donít do that, what we want is merit. Now letís create more merits, letís do something that will encourage younger people, brighter people, people waiting to have a go, to get into boards.

Doshi: I think that the wisest thing that can be done is to limit the tenure of independent directors because we have several companies in this country where independent directors have been on board for 20 years, 18 years, 15 years; I doubt you can be independent when you have that kind of familiarity with the promoterÖ

Khurshid: ...people do question that and they say I have had two kinds of people; one lot of people saying both about independent directors as well as audit firms, saying audit partners get a bit clubby after a while, we feel uncomfortable but you cannot say, go away because they have served you well for such a long time. Unless the law says they cannot be there any longer in which case it becomes easier for us. Again there are people who said we have had directors for 20 years but we find  them absolutely invaluable. We think that they are good, they are wonderful and now everybody gets clubby. Therefore I think possibly what we need is some final provision that says in exceptional circumstances, if you can justify, government would let you stay on for a little longer period. For instance, you are in a critical phase in a massive growth period and somebody has taken you through for a long time and you just want to hang on to them for another three years or two years or one year etc, I think there must be some flexibility particularly if the shareholders are saying we cannot do without this person. The trouble is how easily do shareholders' views get transmitted to us in government, and how easily is the totality of the information made available to the shareholder? So shareholder activism has to be encouraged and once shareholders are more active and better informed I think we can take a backseat.

Doshi: This opens up several loopholes for companies to come and lobby with the government. Maybe not this government, but who knows who will be in power for the next five years.

Khurshid: No. It will be done. We would want that for anything that the government has to take a view, there will be clear guidelines. There are guidelines today on remuneration, We have guidelines on loss making companies and you can ask for those guidelines. You can see and compare who has been given permission and who has not been given permission. You canít have pick and choose, you must be very clear. When you come to ministry for something like this, 90% of what you expect you should already know if you will get or not get. That is how ministry should work. It should be so transparent.

Doshi: Donít you fear that we will end up in a muddle? Because while you try and ensure that companies do in fact rotate their independent directors or bring blood on board and prevent familiarity and all of that Ė if you create windows of opportunity?

Khurshid: This is for directors, this is not for auditors.

Doshi: Directors, I am talking about independent directors, I am not talking about auditors.

Khurshid: Auditors is a different thing altogether. But for directors, this is a concern. Some people think they they have uniquely valuable directors. Let us see. As I said possibly we might be able to consider.

Doshi: And people will apply to you and say in the middle of a big growth cycle or we have been discussing acquisitions, I do not want to let this director go Ė how will the government sit in judgment?

Khurshid: We are not children. To date how do you decide cases? You have a precedent, and you say in such circumstances we have allowed it but if you do not have such circumstances we will not allow it.

Doshi: That give ministry discretionary powers in a space that ideally the government should not be dictating- whether you can keep this director for a few years or not or keep him on and sidestep the law?

Khurshid: Why should the law be saying 9 years?

Doshi: If you make the law say the term is 9 years then why create a window of opportunity for companies to sidestep it by lobbying people within government or lobbying ministry...

Khurshid: I wonít be able to lobby because everything is transparent. Everybody is subject to RTI, everybody would have to explain why you are doing this in this country. You have to trust. If we are trusting business, business will have to trust us.

Doshi: The fear is that in the attempt to enforce better governance standards, while the latter is clearly required, should we be enforcing them... and in the attempt to enforce, because all the lobbying back and forth and companies saying 'hey, give us windows of opportunity to be able to sidestep this,' we might end up with a muddle that does not help us this way or the other and creates a lot of bureaucracy?

Khurshid: Where is the muddle on remuneration? There is no muddle! Nobody complains that somebody lobbied so they got a higher salary, somebody could not lobby so they did not get a higher salary. You find me one case- we have told them if you are a promoter you want a very high salary, that's very difficult to clear. You are an outstanding technical person, professional that the company has bought from abroad, we have to give you a high salary. You are not going to leave job in New York, or leave in job in London or Paris and come to work in India for a pittance. You will obviously want at least the salary that you were getting there.

Doshi: So right now it is pertains to remuneration, it will then pertain to independent directors as well, maybe, you will have to create a window of opportunity with regards to audit firm rotation as well. That means it will mean more government in governance so to speak?

Khushid: Where is the audit firm? What example can you give in audit firms?

Doshi: If you do make it law to rotate audit firms for 5 years.

Khurshid: No. That will be fixed you will have to go every 5 years or 3 years or whatever the partner and the team will have to go and every certain number of years the whole firm will have to go Ė where is the problem? Of course people think, people think that you take three years to understand the business of a firm. By the time you learn the business of the firm you have time to move on. Maybe there is some truth in that but frankly an IAS officer comes into a district how long does it take for an IAS officer to become familiar with the district? And three years down the road the IAS officer has to go and another officer has to come. If we can learn and train ourselves to keep changing, to have new faces come in, to have fresh new ideas come in- we can do that in administration. I do not see reason why we canít come to that in company law. We can. We can but it has to be a balanced approach. It must not be one extreme or the other extreme. It shouldnít be like, you change every six months or every year and it should not be where you do not change at all.

In between, and my view is that you have to keep an escape route and exceptional escape route where the government has to be trusted. We are not doing it in order to control, so we wouldnít say you stay 3 years, you stay 5 years, you stay 11 years- that is not what we will do. Everybody will know what the normal route is, what the normal cut-off is. But if there is an exceptional case, perhaps we should have some freedom instead of then having to legislate because some exceptional cases have come up. Let us see, I think we should trust each other. My theme is that we must learn to trust each other.

Doshi: I have one more issue that several companies have opposed in India and that is the proposal to separate the roles of the Chairman and the CEO and I understand that there have been several requests by corporate chambers, by companies to the ministry saying, ďPlease donít make this mandatory.Ē What is your view on whether this will go through or not go through?

Khurshid: To tell you honestly there is almost an equal strength on both sides. My own personal understanding is that lot of Indian business is family driven and if you understand the structure of families then I think itís ideal to have the CEO and the Chairman separate because it gives the family a better way to express itself in the institution of the company. But thatís not necessarily...

Doshi: But thatís not the driving force between separating the two! Because in several countries, like for instance in the USA, I think they now make it a requirement of companies to explain why they havenít separated the two roles.

Khurshid: Yes, there the reason is different. There the reason is of checks and balances.

Doshi: I am guessing thatís the reason why you are hoping to implement this in India as well.

Khurshid: But you donít do checks and balances when you bring all business to a halt! We have to keep in mind, for instance why donít we do this in the public sector? This is not just an issue of private sector. Why do we have Chairman + MD, CMD in public sector? Because the perception in public sector is that you canít have people pulling in two different directions and itís possible that two top minds put to look after the company will pull in different directions. So the public sector wisdom is that you should have a CMD, Chairman and Managing Director. That's the wisdom as of now but I think that if we want to apply a formula that is a refreshingly new thing we should apply equally to public sector and private sector as well. So letís see, we will take a view on this. I think there are.....

Doshi: You havenít firmed your view on this?

Khurshid: There are strong arguments on both sides.

Doshi: You sound as if you have almost firmed your view on this, that you are not going to push it down the throats of the Indian companies...

Khurshid: No I havenít. To tell you the truth that I said, there are equally strong arguments on both sides but ultimately it should be a user-friendly law. We must make a law that is suitable and which is accommodative of the aspirations and manner in which people conduct themselves so long as that is not against the public interest.

Doshi: There are several procedural issues as. Let me point out one which I thought was a slightly odd one if I may use that word to describe it. For instance, an independent director needs to submit a certificate of independence. I am not really sure of what thatís going to achieve, why would you need a certificate of independence and by signing that does he really become independent because he has submitted a certificate? So at several points in the law while the intent is clear and the intent is admirable, its implication in the compliance requirements is quite onerous.

Khurshid: Let me just tell you this. We take oath of office. How many times have you known a minister be prosecuted for having violated the oath of office? Itís pretty meaningless, because you are either going to do the right thing or you are not going to do the right thing and the oath doesnít prevent you from doing the wrong thing if you are intent upon doing the wrong thing. But what the oath does is, it helps you focus in a formal institutional way in front of the whole country that you have said that you will do the right thing and abide by the constitution and I think it helps. Itís the way you dress to go to a formal function. It changes your demeanor, it changes your attitude because you are well dressed. If you are sloppily dressed, you function differently. So therefore, sometimes, something that might appear to be meaninglessly symbolic has a significance in your attitude that is necessary for you to function properly. So even if signing a little piece of paper doesnít do anything, I think what it does at least is it focuses your mind on your responsibilities and therefore itís important. But I think what's more important is for an independent director to say ĎI understand what my functions are. I have understood the basic format of the functioning of a board and I understand my functions.í And for this purpose, frankly if directors, independent directors go through a module of one day or two days or half a day or a few hours just to familiarize themselves with their responsibilities and then sign a statement saying Ďyes, thank you very much, I am familiar.í I think it might not do too badly

Doshi: One final question on the Companies Bill and this is to do with the non-governance aspect, itís the commercial aspect. There have been some new restrictions placed on inter-corporate loans and investments. For instance, the bill in the Parliamentary Standing Committee's report seems to suggest that step-down subsidiaries will not be allowed, companies will have to restrict themselves to one investment company and several of the exemptions that are available right now with regards to inter-corporate loans where you donít need to go back to your shareholders to get approval, those exemptions would go away. I get the need for more transparency with regards to inter-corporate investments and I donít see any reason for why companies should complain with regards to having to get shareholder approval (though they claim it will make, the timing process becomes very difficult if you are trying to acquire a company abroad and time is a crucial essence). But if you have to go back to your shareholders, thatís not the cor- the core here is the step-down subsidiary. Several infrastructure companies will in fact....

Khurshid: We will find that, I assure you, we will find a solution to this.

Doshi: No, what will the solution be?

Khurshid: I think there is still some need to rework the formulation. I think cases of takeover of companies abroad there will be companies that will come with subsidiaries and you canít say "look, just wrap up your subsidiaries." That canít be done and there are even infrastructure companies, Special Purpose Vehicles, etc. So I think there are some practical issues here that we will address. You could be certain that we will address them.

Doshi: So let me then come to the other issues outside of the Companies Bill, which you indicated to me at the beginning of this conversation, is unlikely to be presented and passed in the winter session- your ministry will require a little more time for the final draft and may likely come up in the budget session?
Khurshid: I hope that we will be done by the end of November and that the law ministry will take some time to rate it so hopefully the budget session. The budget session is normally a tough session, a busy session but we will try to push it through.


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