Come October, the retail investor will have more power over his investments in listed companies than ever before. He can block promoters using company resources to enrich themselves, have greater confidence in the independence of the board running the company and participate more easily in company decisions through a provision for electronic voting.
Sebi's new framework requires shareholder approval for divestment of subsidiaries which are a significant portion of the company's operations. It also calls for a succession policy. In addition, Sebi has said that independent directors who have completed 10 years already, can continue for a maximum of another five years. The new Companies Act requires independent directors to be rotated after completing 10 years starting from the time of implementation. These are some of the steps not specified in the Act, according to a note by proxy advisory firm Institutional Investor Advisory Services India Limited (IiAS).
Amit Tandon, founder and managing director of IiAS, said the regulator has attempted to take away some of the powers of the promoters through giving independent directors a greater say on what is happening in the company.
"All related party transactions will be approved by the Audit Committee, of which at least 2/3rd will comprise independent directors. The new guidelines require an independent director on the board of the listed company to also be on the board of an unlisted company…These measures reign in the hitherto unlimited powers that promoters enjoyed with unlisted subsidiaries," he said.
Abusive related party transactions are expected to take a hit as a result of the changes in the framework. "One of the most important changes for retail investors is the fact that related party transactions can only be decided by a majority of the minority shareholders. Those who stand to benefit from the transaction have to recuse themselves," said Shriram Subramanian, managing director of InGovern Research Services.
The new clause also requires the implementation of e-voting, by which investors can vote on company resolutions electronically. It also requires better accounting disclosures and improved governance standards when it comes to transparency on executive pay and board appointments.
The new regime defines the responsibilities of company officials and holds them accountable for lapses. Tandon said areas where the Clause 49 sets a higher threshold than the Companies Act will be the ones where implementation will be delayed, as will the appointment of woman directors on company boards.
"As companies have woken up a bit late and are now scrambling to find the directors, many will end up appointing 'non-independent' woman directors to their boards. We will so much prefer the woman directors to be independent - and will urge Sebi and MCA(ministry of corporate affairs) to modify its regulations," said Tandon.
Proxy advisors don't expect that their roles shrinking. Subramanian said that companies could have bad governance despite being in technical compliance of the law, such as a recent case in the auto industry where the investors had to oppose a proposal detrimental to shareholder interest but in keeping with the rules.
"Adhering to the framework is a matter of compliance. Governance goes beyond compliance," he said.
SHOT IN THE ARM
| Limits tenure for independent directors, gives them more powers
| Whistle-blower policy to help uncover fraud and unethical practices
| Clear roles and responsibilities of officials
