It was an unexpected move — the proposed amendments to the Companies Bill 2009 (Bill) on the requirement of the Parliamentary Standing Committee Report. The changes addresses issues on Corporate Governance – the objective being making the proposals mandatory by inclusion in the Bill itself, instead of reliance on the MCA Voluntary Guidelines envisaged initially.
It appears that the intent of the Bill is to turn the searchlight on compliance by public companies, which currently under law are only required to have an Audit Committee of the Board under Section 292A, of which at least two-thirds of the number of members have to be non “whole time”, but not necessarily independent. Many unlisted “closely held” public companies function as private companies or personal fiefdoms paying lip service to corporate governance.
Of these, some issues are more a matter of proper drafting and referencing, as for example the separation of the offices of Chairman and the Chief Executive Officer (CEO). As such, the draft Bill provi-des for a somewhat vague definition of CEO which will now have to be properly structured as many organisations are accustomed to the Managing Director concept which will now be synonymous with the CEO. It is important to provide for the distinction of areas of operation between the CEO and the Chairman who under the New Bill retains the role of the Chairman of Board meetings, and not merge the offices, the language as it stands does not cla-rify whether the Chairman can be authorised to carry out executive duties additionally. Again, these are more drafting issues than corporate governance and need not be absolutely refined.
The Audit Committee as well as the role of Auditors have assumed considerable significance. The Audit Committee is to be the first point of reference for engagement of Auditors, as well as be responsible for the overall risk identification, minimisation and management policies of the Company. Audit firms will be subject to five year rotations in engagements, and Audit Partners every three years, with a cooling off of three years. The latter restriction is verges on being onerous – a three year cooling off can actually destroy a bona-fide client advisor relationship irreparably. Joint and individual liability for collusion in corporate offences is envisaged, and while no professional can remain insulated from culpability if facts so warrant, Auditors will demand indemnification and insurance cover effectively escalating audit costs immensely.
The role and participation of independent directors was already envisaged in the Bill under Clause 132(5) constituting 1/3rd of the total strength providing for the benchmarks for determination of independence, and disentitling such director from receiving remuneration, other than profit related commissions, stock options, reimbursements, etc., The Standing Committee’s requirements are that the provisions for appointment, qualifications, roles, extent of independence should ideally be covered under a separate section and not under Directors en masse.
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What has sparked off the debate on the proposed amendments is really the Committee’s decision to import all safeguards as provisions in the Bill in order to be meaningful, and not be subjected to voluntary action on part of the company and its Board. Since Sarbanes-Oxley and more recently in India since Satyam’s scam, the independent directors” role has been under a lens. Satyam had the required proportion of representation of independent persons on its Board including the person who chaired the meeting and were members of the company’s Audit Committee. Nonetheless they did nothing to prevent the fraud, or record their protests, demonstrating that the existing safeguards were not adequate. Clearly, that is what the Standing Committee’s Report is trying to ensure. The proposal of the Committee is that any one person can be an independent director only in five listed companies and ten public companies against the MCA’s seven listed companies and fifteen public companies is also a requirement that these members devote due care and attention to the watchdogs.
As in case of Auditors, no independent director is to serve on the Board of the Company for more than six consecutive years and then have a three year cooling off period. This has been criticised as an unreasonable restriction, given that a persons who meet the lit-mus test can qualify as indepen-dent directors are not easy to locate, and then to deny the company his good office after having invested time and effort is simply unfair to the person and the company and requires a rethink.
Kumkum Sen is a Partner in Rajinder Narain & Co. and can be reached at Kumkumsen@rnclegal.com