Corporate governance

The deferment of the date for compliance with Sebi's amendments to Clause 49 of the stock exchange listing agreement is a tacit acknowledgment that many of the new provisions are impractical, difficult to implement, and will substantially raise the costs of compliance.

This is not the first time that amendments to Clause 49 are being deferred. After receiving the recommendations of the Narayana Murthy committee on corporate governance, and after a public debate on the subject, Sebi had issued a circular in August 2003 to make the changes.

However, when some of the more onerous clauses continued to receive corporate flak, Sebi issued a revised circular in October last year.

Some provisions against which opposition had been vocal were dropped or made non-mandatory. For instance, the whistle-blower policy, under which employees reporting unethical practices were to be provided protection, was made non-binding.

The new provisions were supposed to be implemented from April 1, 2005. That deadline has now been deferred to December 31, 2005.

In spite of some dilution, several stringent clauses remain. For example, the issue of personal liability of the CEO/CFO as well as all board members, including independent directors, has been the focus of much controversy.

Board members will have to take responsibility for a variety of legal compliance issues about which they cannot be expected to have personal knowledge.

That will result in their having to appoint a whole host of compliance officers who will then have to certify in their areas of expertise. And since the laws in question are diverse, the compliance officers appointed will also have to be diverse""accountants, lawyers, and engineers.

The upshot will be a big rise in expenditure on compliance. The same argument applies to board oversight of risk management systems. Again, costs will rise because new compliance officers who are experts in the field will have to be appointed.

Nor is it only a question of increasing costs. The definition of independent directors has been tightened so much that it would be difficult to find qualified people for the job, particularly given the higher responsibilities that they are now called upon to shoulder.

There has also been opposition from many family-owned companies which feel that giving up half the board positions to independent directors is hardly fair when they own the lion's share of the company.

It has been pointed out that the Sarbanes-Oxley and Cadbury committee guidelines""on which our corporate governance committees have based their recommendations""apply to companies with a very different ownership structure.

How, for instance, will the provision of having independent directors work for the public sector?

To take one example, will independent directors in oil companies force their boards to oppose the government's policy of letting these companies absorb the brunt of rising crude prices? In short, we need corporate governance codes that are rooted in Indian corporate reality.

Nobody can fault some of the proposed amendments to Clause 49, such as the requirement of oversight of unlisted subsidiaries. Recent media reports on Reliance Infocomm are pointers to the need for such conditions.

But perhaps Sebi needs to make a shorter list of mandatory provisions, with the more contentious proposals being left as non-mandatory recommendations.

That could set the stage for competition in corporate governance, with investors and the markets rewarding companies that voluntarily adopt a higher standard.