Articles

Corporate Governance Norms for Listed Indian

Companies – Have They Changed Corporates?
Dilip Kumar Sen, ACS, Vice President & Secretary, Tata Tea Limited, Kolkata.

Since corporate governance norms were first introduced, SEBI has made several
amendments. The purpose of this article is to examine whether functioning of Indian
e-mail : corporates have changed due to Clause 49 of the Listing Agreement since these norms
dilip.sen@tatatea.co.in were first introduced about 7/8 years ago.

For listed indian companies corporate governance (CG) norms
were first introduced through amendment of Listing Agreement
with Stock Exchanges by the addition of a new Clause 49. The
schedule of implementation of Clause 49 was as under :
(a) For all entities seeking listing for the first time at the
time of listing;
(b) Within financial year 2000-01 but not later than 31st March
2001 for entities which were either in Group ‘A’ of BSE
or in S & P CNX Niftyindex as on 1st January 2000;
(c) Within financial year 2001-02 but not later than 31st
March 2002 for all presently listed companies with paid-
up capital of Rs.10 crores or more or net worth of Rs.25
crores or more;
(d) Within financial year 2002-03 but not later than 31st
March 2003 for all presently listed companies with paid-
up capital of Rs.3 crores and above.
Corporate governance is all about ethical conduct of business.It
is concerned with code of values and principles which guide a
person to select between right and wrong. Good CG is about
selecting that course of action amidst various alternative options
and conflicting interest of various parties which seeks to benefit
greatest number of stakeholders. This is easily said than done
and often requires handling pressures from many levels. As a
new concept one cannot expect any dramatic change in the
standards of corporate governance practised by Indian
corporates to take place just because of legislative compulsions.
When there is a conflict of interest between the company and
its principal shareholder or the promoter group the dilemma
is compounded. One must remember that there are large
number of companies in India which are managed by the
promoter/founder family who may be holding only 30/35%
of the voting power. Historically these companies have operated
with the interest of the promoter/founder family in mind and
what benefits largest number of stakeholders had not always
been the criterion for decisions. In this scenario enforcement
of corporate governance norms will indeed pose great difficulty
and the role of independent directors will naturally be very
challenging. Only when the culture and mindset of the
management gets changed(which indeed is a time consuming
matter) the standard of CG practices will improve in such
companies. Therefore even though in terms of framing rules
and regulations we in India may not be lagging far too behind
western countries in so far as Corporate governance norms
are concerned what is actually practised by the Indian corporates
will have to be seen as time passes. Here again change of
mindset and culture of the organisations originally founded
by a Family which has over the years been converted into a
public limited company will be the key factor to bridge the
gap between regulatory standard of corporate governance and
what actually happens in the organisation. Perhaps independent
directors in such companies will have to play even larger role
which may at times lead to unpleasantness.
Some of the improvements which good CG practices could
bring about in an organisation are:
„ transparency & trust
„ maximise long term shareholders value
„ accountability and responsibility
„ greater disclosure
„ stability and growth of the enterprise
„ strengthens investors confidence
„ reduces risks to the enterprise
„ commands respect in market place.
Some of the benefits of good governance practices are often
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Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates?
not quantifiable or measurable but they indeed make significant
impact on the image and reputation of the organisation as
perceived by outsiders. An example could be that an
organisation consistently following good CG practices should
be able to raise funds from the market without difficulty or
command higher premium.
Let us now examine what we see in real life with regard to
Indian corporates. The readers may consider the following
statements and think whether they are appropriate in the
Wonderland of indian corporates. Are these the general rule
or exceptions only.
1. Corporates are run like Chairman/Managing Director/
CEO’s personal fiefdom.
2. MD/CEO/powers that be, do not care at all for welfare
of all shareholders but only care for promoter/principal
shareholders’ interest – any benefit that may flow to
other shareholders is only incidential.
3. Majority of directors are unaware that they are agents of
shareholders and not of promoters and their position is
one of trust and faith.
4. Participation of a non-executive director in meetings –
whether of the board or any committee thereof is
inversely proportional to the health of the bottom line –
better the bottom line lesser the participation.
5. Most directors of companies do not consider it necessary
to update themselves on changes in laws, regulations etc.
which affect responsibilities and liabilities of directors.
6. So long as the financial results/performance of the
company is satisfactory, directors will not object or refuse
to approve any proposal that the management may put
up for approval.
7. Non-executive directors do not see themselves as
watchdog of all categories of shareholders.
8. Board rooms are invariably filled up with yes men who
do not raise relevant questions and assent to whatever
proposal the management puts up.
9. No one can join a board unless the appointment is endorsed
by promoter/principal shareholder or by the Chairman/
CEO – how can any such director be independent if he/
she will have to look for the support of the principal
shareholder for his election as a director. A person is invited
to become director of a company only if he/she enjoys
the confidence of Chairman/CEO through old school
connection/social circuit or golf club etc.
10. Except in a crisis even nominee directors tend to play a
passive role at board meetings and do not dissent to the
proposals of management! The principle which they
follow perhaps is ‘do not rock the boat when the company
is having a smooth sailing’.
11. The general rule followed by Indian corporates is that
what you preach need not necessarily be practised in
your own company.
12. Some non-participating directors can become extremely
inquisitive and start questioning the moment financial
performance of the company becomes unsatisfactory.
If the readers agree with these statements then they can ask
themselves: “does this augur good corporate governance?”
Having said these it is essential to emphasise that –
„ there are always exceptions to the general rule(as some
of us may perceive) outlined above;
„ such exceptions are still few but hopefully the number
is on the rise;
„ with the introduction of Clause 49 in the listing agreement
a transformation of board room culture has started though
the pace of change may be somewhat slow;
„ if the Companies Bill 2009 is passed by the Parliament as
drafted there could be further improvement in the scenario.
Some of the visible changes that CG norms have brought into
the lives of listed companies in India are :
1. Setting up of Audit committee under the Chairmanship
of an independent director and holding of at least 4
meetings of the committee in a year;
2. Setting up of Investors Grievance committee under the
Chairmanship of a non-executive director to resolve any
grievance of investors;
3. Changes in composition of the Board in some companies
in order to meet the requirement of Clause 49 of Listing
Agreement. In 2008 this requirement was changed
following clarifications issued by SEBI by circulars dated
8th April 2008 and 23rd October 2008. However SEBI
granted time upto 31st March 2009 to comply with the
board composition requirement. Effect of this change
will be visible from 2009-10;
4. Greater disclosures in annual reports including a separate
report on corporate governance;
5. Review of related party transactions and transactions
not on arms length basis by the Audit committee;
6. Introduction of Code of Conduct, whistle blowing policy
and annual declaration on compliance from Directors
and senior executives;
7. Risk assessment and minimisation ;
8. Review of legal compliances by the Board;

Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates?
9. CEO/CFO certification of financial results;
10. Review of financial statements of subsidiaries by the
Audit committee of the parent company.
Readers are aware of the unfolding of events on Corporate
Governance issues in a large IT company some months back.
These events are an example of role of Independent Directors in
Board meetings of Indian corporates. One must remember that
the Board of this company had high profile Independent directors
including eminent academicians from India and abroad. These
eminent personalities had approved proposals to acquire at a price
of about Rs. 7,000 crores by the company shares of two firms
managed by the sons of the promoter. While the very next day
the company announced that it will not go ahead with these
investment proposals in light of feedback received from investor
community it is perhaps still not public knowledge who had carried
out the valuation of the two companies whose shares were intended
to be acquired. Some of the comments of Independent directors
of this company which appeared in national press (upto 5th January
2009) as given below are worth noting.
1. Business Standard – 24 th December 2008 –
“….independent directors had objectively evaluated the
proposals placed before them and after being convinced
that the proposals will add to shareholder value , approved
them with appropriate modifications and conditions.
…..The Board has definitely given in-principle clearance
but the final valuation will have to be validated by the
formula I have spelt out. The amount of $1.3 billion
was the maximum but the actual value is to be determined
by the conditions stipulated.”
Comments – The intimation given to Stock Exchanges
by the company on 16th December 2008(as available
from NSE website) does not mention anything either
about ‘in-principle’ approval or that $1.3 billion was
the maximum value while actual value could be lower
as suggested by the Independent director in the press
statement. It is not known what has been recorded in the
minutes of the Board meeting at which the proposals
were approved which the Independent director feels was
only an in-principle approval.
2. Business Standard – 24th December 2008 (comments of
a Professional) - “Like morals in life cannot be codified,
nuances of governance cannot be legislated through a
rule book. Implicit to good governance is the notion
that the board’s conduct ought not to invoke widespread
apprehension about the board’s bias in favour of some
select constituent group of shareholders and against the
wider body of shareholders.”
Comments - Nothing can perhaps be more truthful on this
episode. More so when one considers that shareholding
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of promoter group in the company was 8.61%(as on
30.9.2008 as per NSE website) compared with 61.57%
held by FIIs/Insurance companies/Mutual Funds.
Subsequent press reports suggest that promoter’s
shareholding was even lower as some of the shares had
been pledged by them which had been sold by the pledgee.
3. The Economic Times – 26 th December 2008 – An
Independent director of the company (US-based
academician) who has been on the board since 1991
decided to resign from the board taking moral
responsibility. It was stated in the letter of resignation
(as reported in ET) –“..while I raised many of the issues
related to the procedures and had expressed my
reservation during …. board deliberations, I had not cast
a dissenting vote against the acquisition of ….., for which
I take moral responsibility.”
Comments - As it appears from press reports the proposals
were to acquire shareholding in two companies. In terms
of Section 372A of the Companies Act, 1956 such
proposals require consent of all directors present at the
meeting. Since the independent director mentioned in the
preceding paragraph had clearly mentioned about not having
cast a dissenting vote one can assume that no other director
present at the meeting had voted against the proposals as in
that case the investment proposals would not have been
validly passed.It is however not very clear whether the
company had available limits under Section 372A of the
Companies Act, 1956 to make these investments keeping
in view its paid-up capital & free reserves, investments
already made and investments already committed as
disclosed in the Annual Report for 2007-08. However full
details on this issue are not available so as to make a definite
comment on the limit available under Section 372A of the
Companies Act, 1956. It is also not known if the directors
of the company had considered the issue of available limit
under Section 372A of the Companies Act, 1956 vis-à-vis
the amount of proposed investments.
4. Business Standard -30th December 2008- Three
independent directors on the Board of the company resign.
In the context of corporate governance following issues deserve
to be noted. There are certainly exceptions to the undernoted
points as some independent directors do raise valid questions
at meetings and will be prepared to exit from the Board if
they believe that the concerns raised by them are not adequately
addressed by the management.
1. Introduction of Clause 49 in the Listing Agreement has
made some changes in the lives of Indian corporates but
only to a limited extent. It may not be very unfair to say
that in most companies compliance with clause 49
requirements still remain a box-ticking exercise.
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Corporate Governance Norms for Listed Indian Companies – Have They Changed Corporates?
2. It is quite difficult for Audit committee members to
recommend to the Board adoption of quarterly and annual
results as they receive these statements either at the meeting
or a few hours before the meeting leaving no time for
them to study these statements in detail.
3. Most independent directors feel that it is bad manners to
ask too many questions during board meetings particularly
when the financial results of the company are good. If
they want to raise any issue they would prefer to do it
separately with the Chairman outside the meeting and often
such meeting with Chairman takes place after the Board
meeting is over.
4. There are only a handful of independent directors in India
who do not care for their directorship and raise questions
at Board meetings irrespective of the liking/disliking of
the Chairman.
5. In India Board membership as an Independent director is
considered more as a status symbol rather than a position
of responsibility.
6. If agenda papers were not received well in advance for the
directors to study them in sufficient details rarely an
independent director refuses to attend meetings. Many of
them hesitate to ask the Chairman to set a rule that placing
of agenda notes at the meeting should be avoided to the
extent possible. There are, however, exceptions and some
Independent directors do make a noise if agenda papers are
received late or too many agenda notes are tabled at the
meeting. It is a moot question why many independent
directors hesitate to ask questions at board meetings – is it
because (i) they feel their question might embarrass the
Chairman/Management, (ii) Items appearing in the Agenda
means the same have been cleared by the Chairman and if
some director raises questions the Chairman may not like
it, (iii) they fear losing their directorship if they become
too vocal at meetings, (iv) they believe that they are not
directly responsible for approving any proposal at Board
meeting which lies primarily with management, (v) they
do not want to be singled out as dissenting directors – in
other words is there a lack of peer pressure ?
7. Many Independent directors come to Board meetings
without carefully reading the Agenda papers. They also
do not systematically update their knowledge on changes in
laws and regulations including governance issues which affect
the operations of the company of which they are directors.
8. Most independent directors do not check whether concerns
raised by them at meetings are recorded in the minutes.
9. Most Independent Directors do not think it necessary to
familiarize themselves with the business model of the
company.
10. Most independent directors hesitate to ask uncomfortable
questions at Board meetings particularly when the bottom-
line is healthy. But the same directors become very vocal
when financial performance of the company deteriorates.
It would appear that not all Independent directors are certain
about the role that they need to play in deliberations during
meetings of the Board and Board committees. Independence is
a state of mind and how an independent director would behave
at meetings will depend on that person. Several high powered
committees which had in the past examined the issue of
independent directors did not attempt to lay down roles, duties
and responsibilities/liabilities of Independent directors in a
structured manner. In the UK the combined code of corporate
governance provides guidelines about how a non-executive
director should function. According to the suggested best
practices under the UK code an effective non-executive director
„ upholds the highest ethical standards of integrity and
probity;
„ supports executives in their leadership of the business
while monitoring their conduct;
„ questions intelligently , debates constructively, challenges
rigorously and decides dispassionately;
„ listens sensitively to the views of others, inside and
outside the board;
„ gains the trust and respect of other board members;
„ promotes the highest standards of corporate governance
and seeks compliance with the Code wherever possible.
The need of the hour is to frame similar guideline for non-
executive directors of Indian listed companies. It is understood
that in Singapore whenever a person is appointed to the Board
the Registrar of Companies while acknowledging receipt of
the prescribed form informs the director concerned about his
rights, responsibilities and liabilities as a director. This is a
good practice and the Regulator may consider whether such a
process can be introduced in India.
Hopefully recent press reports on governance issue will be an
eye-opener for independent directors on the boards of Indian
listed companies. The mindset and thinking of Regulators on
this issue is not yet known – in any case as the proposal was
dropped the Regulators probably cannot take any punitive action.
In Indian corporates very often the promoters manage the
company holding sometimes even less than 30% of the voting
power. While the extent of shareholding is one issue a matter of
far greater importance is the change of mindset of Promoters
and the desire and eagerness of Promoters to instill good
governance in the organization. Readers are the best judge to
opine whether there is any visible sign of change of mindset. ‰