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THE
FINANCIAL EXPRESS
SUCHETA
DALAL
TODAY'S
COLUMNIST
Irani
panel hasn’t helped small investors
When
William Donaldson, chairman of the powerful Securities
Exchange Commission (SEC) in the US resigned last week,
it was mainly because his effort to set high standards
of regulation ruffled feathers and led to differences
with other Republican (read more business-friendly)
commissioners. Corporate America was especially upset
at Donaldson’s habit of imposing harsh penalties
to settle cases, his attempt to regulate hedge funds,
to force mutual funds to appoint more independent directors
(IDs) and give shareholders a greater say in electing
board directors. He was immediately replaced by Christopher
Cox, a politician, with a pro-business and anti-investor
record, credited with steering the powerful Private
Securities Litigation Reform Act of 1995, which made
investor lawsuits extremely difficult.
The
American developments have some interesting parallels
here. The JJ Irani committee gave its report within
days of Securities and Exchange Board of India (Sebi)
chairman M Damodaran’s ultimatum to corporate
India, of no relaxation or extension of the deadline
for complying with the revised Clause 49 of the listing
agreement. And of no alternative to complying with the
stipulation that half the board must comprise IDs. India
Inc is upset, because managements probably don’t
have enough friends who would fit the definition of
independence without upsetting their agenda.
In
a direct snub to Sebi, the Irani committee says only
a third of the board need consist of IDs. This is just
one of many issues where its recommendations are contrary
to Clause 49’s provisions and are, obviously,
aimed at negating it.
Of
course, a lot is positive in the Irani recommendations.
Especially the proposal for a compact Companies Act,
that enunciates broad principles and leaves rule-making
to the authorities. Whether this delegation of power
works, or only hurts the regulation of companies, will
become evident only if converted into statute.
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This
column is limited to issues of overlap in the
regulatory jurisdiction of Sebi and the ministry
of company affairs (MCA). The ame-nded Clause
49 is based on the Narayana Murthy committee report,
which evoked vociferous opposition from industry
associations (though they were adequately represented
on the committee) and Mr Irani, in particular.
Many
of the Irani pronouncements must be viewed against
this background. For instance, it says, ‘while
there is no requirement for the capital markets
regulator to go into internal governance processes
of the corporate, matters which are within regulation-making
powers of such a regulator need not be subsumed
within the rule-making powers under the Company
Law.’
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•
Many of the Irani recommendations are contrary
to the revised Clause 49
• It forgets the inaction by the ministry
of company affairs on minority interests
• MCA had debated and discarded much
of the investor protection suggestions
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In
other words, it is asking Sebi to not meddle in MCA’s
domain. But Sebi was forced to expand its control over
listed companies, through Clause 49, only because MCA
repeatedly failed to protect minority interests, by forcing
adequate and timely disclosure by companies. Turf battles
between MCA and Sebi have prevented what Irani calls the
‘dove-tailing of the substantive provisions of the
law with detailed regulations which may be issued by the
market regulator.’
Similarly,
Irani tries to scotch any move to bring listed companies
entirely under Sebi regulation by stating, ‘We
do not subscribe to the view that corporates seeking
access to capital need to be liberated from their responsibilities
under all other laws of the land and, thereby, the oversight
by the State, and be subjected to exclusive control
and supervision of a specific regulator.’ The
specific regulator in this case is clearly Sebi.
The
emphatic recommendation that ‘no age limit need
be prescribed as per law. There should be adequate disclosure
of age in the company’s documents,’ is also
a direct reaction to the Narayana Murthy committee’s
deliberations on an age ceiling for company directors.
Irani is, however, silent about a limited term for IDs
(Narayana Murthy had recommended a nine-year aggregate
term).
Another
view, directly contrary to Sebi’s, is ‘There
should be no requirement for a subsidiary company to
necessarily co-opt an independent director of the holding
company as an independent director on its board.’
However, it insists, correctly, that nominee directors
of institutions not be treated as independent.
Similarly,
Narayana Murthy said IDs should have no material pecuniary
relationship with the company. Irani says it ‘deliberated
on this issue and opted for a disclosure-based system,
which in certain cases may require shareholder approval.’
It makes no distinction between IDs and other directors.
Interestingly,
the Irani committee, while commending Sebi’s role
in its formative years, has questioned the “credibility
of its processes” in ensuring interaction among
various intermediaries, in order to be able to ‘deliver
finance for corporate requirements’ in a ‘cost-effective
manner and in keeping with changing requirements of
new business models.’ Some of this criticism is
justified. But MCA and the Company Law Board have been
far more lethargic about regulating companies effectively
and adapting to new market processes.
Finally,
the committee makes a pious pitch for investor protection.
However, many of its recommendations have been debated
and discarded by the MCA in the past (such as insurance
on deposits collected by companies). As for its support
of class action suits and investor representation by
NGOs, its success depends entirely on the attitude of
courts. In fact, on the one issue that could actually
protect investors—‘credit rating to protect
investor interest,’ the committee seems supportive,
but is actually evasive and negative, when it says ‘ratings
must not be mandatory, except for companies accepting
public deposits.’ Should one conclude it is against
mandatory IPO ratings?
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