Sebi to act against 20 firms for Clause 49 breach

Securities and Exchange Board of India (Sebi) is cracking the whip on 20 companies, including five public sector undertakings, for their failure to comply with the Clause-49 norms which, among other things, require companies to have a minimum number of independent directors on its board of directors.

Adjudication proceedings have been initiated against five PSUs for non-compliance with provisions relating to board composition. Sebi, however, did not disclose the names of the erring companies.

Sebi has been maintaining that government nominees on board of PSUs cannot be considered 'independent'. A key stipulation under Clause-49 is that, if a company has an executive chairman (as is the case in PSUs), 'independent directors' should comprise half of its board. However, if a company has a non-executive chairman, the number of 'independent directors' on its board can be lower at one-third.

This is the first time that the capital market regulator is initiating action against companies on Clause-49 regulations of the listing agreement, after this rule came into effect from January 1, 2006.

Among 15 private sector companies, three are facing proceedings for non-compliance with almost all the major provisions of Clause-49. Proceedings are initiated against two companies for non-compliance with provisions like board/audit committee composition and CEO/CFO certification. The remaining 10 have been named for their failure to submit compliance reports on Clause-49 to the stock exchanges.

The clause introduced by the SEBI Act is the outcome of the recommendations of the Kumarmangalam Birla Committee on Corporate Governance. This committee highlighted the need for risk management by enhancing the responsibility of the board of directors. It points out various corporate governance criteria, which the listed companies are supposed to follow.

Every quarter, the regulator receives reports from exchanges regarding compliance with Clause-49 based on which it takes action.

Recently, public sector Power Grid Corporation of India inducted independent directors on its board to get the Sebi nod for its initial public offering, which opened for subscription yesterday.

Clause-49, which is applicable to all listed companies, require companies to have a minimum of three non-executive director in their audit committee (majority of them being 'independent'), and at least one member having financial and accounting knowledge. The rule also stipulates that the audit committee meet at least three times a year.