When William Donaldson, chairman of the powerful Securities Exchange Commission (SEC) in the US resigned last week, it was mainly because his effort to set high standards of regulation ruffled feathers and led to differences with other Republican (read more business-friendly) commissioners. Corporate America was especially upset at Donaldson’s habit of imposing harsh penalties to settle cases, his attempt to regulate hedge funds, to force mutual funds to appoint more independent directors (IDs) and give shareholders a greater say in electing board directors. He was immediately replaced by Christopher Cox, a politician, with a pro-business and anti-investor record, credited with steering the powerful Private Securities Litigation Reform Act of 1995, which made investor lawsuits extremely difficult.
The American developments have some interesting parallels here. The JJ Irani committee gave its report within days of Securities and Exchange Board of India (Sebi) chairman M Damodaran’s ultimatum to corporate India, of no relaxation or extension of the deadline for complying with the revised Clause 49 of the listing agreement. And of no alternative to complying with the stipulation that half the board must comprise IDs. India Inc is upset, because managements probably don’t have enough friends who would fit the definition of independence without upsetting their agenda.
In a direct snub to Sebi, the Irani committee says only a third of the board need consist of IDs. This is just one of many issues where its recommendations are contrary to Clause 49’s provisions and are, obviously, aimed at negating it.
Of course, a lot is positive in the Irani recommendations. Especially the proposal for a compact Companies Act, that enunciates broad principles and leaves rule-making to the authorities. Whether this delegation of power works, or only hurts the regulation of companies, will become evident only if converted into statute.
• Many of the Irani recommendations are contrary to the revised Clause 49
• It forgets the inaction by the ministry of company affairs on minority interests
• MCA had debated and discarded much of the investor protection suggestions
This column is limited to issues of overlap in the regulatory jurisdiction of Sebi and the ministry of company affairs (MCA). The amended Clause 49 is based on the Narayana Murthy committee report, which evoked vociferous opposition from industry associations (though they were adequately represented on the committee) and Mr Irani, in particular.
Many of the Irani pronouncements must be viewed against this background. For instance, it says, ‘while there is no requirement for the capital markets regulator to go into internal governance processes of the corporate, matters which are within regulation-making powers of such a regulator need not be subsumed within the rule-making powers under the Company Law.’ In other words, it is asking Sebi to not meddle in MCA’s domain. But Sebi was forced to expand its control over listed companies, through Clause 49, only because MCA repeatedly failed to protect minority interests, by forcing adequate and timely disclosure by companies. Turf battles between MCA and Sebi have prevented what Irani calls the ‘dove-tailing of the substantive provisions of the law with detailed regulations which may be issued by the market regulator.’
Similarly, Irani tries to scotch any move to bring listed companies entirely under Sebi regulation by stating, ‘We do not subscribe to the view that corporates seeking access to capital need to be liberated from their responsibilities under all other laws of the land and, thereby, the oversight by the State, and be subjected to exclusive control and supervision of a specific regulator.’ The specific regulator in this case is clearly Sebi.
The emphatic recommendation that ‘no age limit need be prescribed as per law. There should be adequate disclosure of age in the company’s documents,’ is also a direct reaction to the Narayana Murthy committee’s deliberations on an age ceiling for company directors. Irani is, however, silent about a limited term for IDs (Narayana Murthy had recommended a nine-year aggregate term).
Another view, directly contrary to Sebi’s, is ‘There should be no requirement for a subsidiary company to necessarily co-opt an independent director of the holding company as an independent director on its board.’ However, it insists, correctly, that nominee directors of institutions not be treated as independent.
Similarly, Narayana Murthy said IDs should have no material pecuniary relationship with the company. Irani says it ‘deliberated on this issue and opted for a disclosure-based system, which in certain cases may require shareholder approval.’ It makes no distinction between IDs and other directors.
Interestingly, the Irani committee, while commending Sebi’s role in its formative years, has questioned the “credibility of its processes” in ensuring interaction among various intermediaries, in order to be able to ‘deliver finance for corporate requirements’ in a ‘cost-effective manner and in keeping with changing requirements of new business models.’ Some of this criticism is justified. But MCA and the Company Law Board have been far more lethargic about regulating companies effectively and adapting to new market processes.
Finally, the committee makes a pious pitch for investor protection. However, many of its recommendations have been debated and discarded by the MCA in the past (such as insurance on deposits collected by companies). As for its support of class action suits and investor representation by NGOs, its success depends entirely on the attitude of courts. In fact, on the one issue that could actually protect investors—‘credit rating to protect investor interest,’ the committee seems supportive, but is actually evasive and negative, when it says ‘ratings must not be mandatory, except for companies accepting public deposits.’ Should one conclude it is against mandatory IPO ratings?