Get active on company boards, Bank-Fund tell FIs

The World Bank (WB) and the International Monetary Fund (IMF) have proposed that laws should ensure that financial institutions (FIs) like the Life Insurance Corporation (LIC), General Insurance Corporation (GIC) and UTI Asset Management Company, which hold significant stake in Indian companies, exercise their voting rights in a more meaningful manner.

"Financial institutions like Unit Trust of India, Life Insurance Company and General Insurance Company despite holding 15-20 per cent of the listed sector, seldom exercise voting rights. These FIs exert influence through nominee directors, who are generally past or present employees of the institutions that may be uncomfortable voting against the management," according to the Report on the Observance of Standards and Codes (ROCE) for 2004.

The report, which sets the benchmark for a country's observance of corporate governance principles against the Organisation of Economic Cooperation and Development (OECD) norms, has recommended that the law should ensure that institutional investors nominate independent directors on the board of the portfolio companies, to prevent any conflict of interest.

It said that judicial delays, complicated cross-holdings in family-owned businesses, institutional investors shying away from exercising their voting rights have affected corporate governance standards in the country, despite most of enabling regulations being in place.

The latest attempt at reforming the corporate laws for better corporate governance "" the concept paper on overhauling the Companies Act, 1956 "" released in August this year, has not been able to address this and many other concerns raised by the report prepared jointly by the World Bank and the International Monetary Fund.

The report has recommended increasing penalties for violations, specially monetary sanctions as well as granting preemptive powers like attachment of bank accounts to the ministry of company affairs.

It has appreciated new powers to fine that have been given to the Securities and Exchange Board of India (Sebi) as well as preemptive powers granted to the market regulator.

As regards increase in sanctions, the government proposes to increase the monetary fines substantially in the Concept Paper.

While fines of upto Rs 10 lakh have been proposed instead of the upper limit of Rs 50,000 at present, the preemptive provisions allowing attachment of bank accounts with respect to unlisted companies have not been introduced in the Companies Act.

While the report has recommended capping the maximum term of independent directors, the government's attempt in this direction has not been received well.

The amended clause 49 of the listing agreement of Sebi had capped the maximum term of the independent directors to nine years, but had to be withdrawn after it came in for a lot of criticism. The Concept Paper too has not included this clause.

The report has also suggested that respective roles of Sebi and the ministry of company affairs should be clearly demarcated to prevent overlapping, which creates room for arbitrage and weakens enforcement.

The report has stated that the recommendations of Naresh Chandra Committee on Corporate governance regarding non-audit services to audit clients and rotation of auditors should be pushed forward. The concept paper while retaining the clause prohibiting certain non-audit services has done away with rotation of auditors.