National Round-up

Good leadership and belief in simple rules (is it Eisenhart speak!) contribute greatly for the development of corporate governance, Mr. N. R. Narayana Murthy, said while delivering the sixth commemorative FedBank Hormis Memorial Foundation lecture. He defined globalisation as the most cost-effective way of production and selling, managing transaction / agency costs, in a profitable manner, in a world without any barriers.

Best standards of corporate governance and behaviour is required to mobilize resources internationally and to maximize shareholding value on a sustainable basis.

He said that the key difference between developed and developing countries lies in leadership; leadership which is interested in the country's progress rather than that of its own.

Transparency and fairness are the key words of corporate governance and it should be evident in all dealings with those who have a stake in the equity, be it the customer, Government, society or employee.

Service is the key word for the company, which should provide service better than the best available in the market.

After the customer, the duty of a corporation is towards its employees. And each employee has a responsibility to the organisation greater than that to himself.

(Source: Business Line)

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The Union Minister for Law Justice and Company Affairs, Mr. Arun Jaitley, has released the Institute of Company Secretaries of India's (ICSI) second secretarial standard, SS-2 namely, "Secretarial Standard on General Meetings" and a "Monograph on Position, Duties and liabilities of Directors".

The standard seeks to prescribe a set of principles for the convening and conduct of general meetings of companies. It seeks to integrate and standardize the diverse secretarial practices prevalent in the corporate sector regarding the conduct of general meetings and seeks to achieve uniformity of practices for attaining sound corporate governance principles, Mr. S. Gangopadhyay, President, ICSI, said. Besides, the standard also seeks to further the shareholders democracy by laying down principles for shareholders benefit.

(Source: Business Line)

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Relatives of directors may no longer find it easy to secure board-level posts. The Department of Company Affairs (DCA) proposes to further strengthen the norms pertaining to the appointment of relatives of directors on the board of a company.

"The move is with an intention to safeguard public interest," official sources told Business Line. Brushing aside the speculation that the department has initiated such a move based on certain complaints received against some companies, the sources said that the purpose behind further strengthening of the provisions is to ensure that public money is not misused.

Section 314 (1) of the Companies Act, 1956 provides that a director and others will not hold office or place of profit without the consent of the company accorded by a special resolution.

Besides, Section 314(1)(b) further states that no partner or relative of such director; no firm in which such director, or a relative of such director, is partner; and no private company of which such director is a director or member; and no director or manager of such a private company, shall hold any office or place of profit carrying a total monthly remuneration of such a sum as may be prescribed.

The department had asked the Institute of Company Secretaries of India (ICSI) to examine the issue and give its recommendation. ICSI is understood to have submitted its suggestions to DCA on May 3.

The institute is said to have suggested setting up of a selection committee comprising a non-executive director and professional among others, to look into such cases. Further, it has also recommended that the relatives of directors should be treated on the same grade as the other employees of the company.

"The department wants to be more transparent, and therefore, it proposes to set out these broad parameters. The intention is to ensure that similar prerequisites are applied for the appointment of relatives as well", sources said.

Meanwhile, industry sources argue that the existing provisions of the Act are clear on the issue and there was no need for the department to bring in any further changes.

(Source: Business Line)

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A study of the suggestions recently made by the Institute of Company Secretaries of India (ICSI) with reference to some of the key recommendations of the reconvened Justice P.N. Bhagwati Committee on takeovers shows that ICSI wants the Securities & Exchange Board of India to consider certain modifications "to make the regulations more meaningful in the interest of investors".

As for the plea for 100 per cent exit to small shareholders, the reconvened Bhagwati committee has expressed the view that it will not be equitable to have a 100 per cent exit option for one class of shareholders.

Acceptance of the plea will mean that the other shareholders including mutual funds, which represent small shareholders, will be deprived of an equal exit opportunity. Against this backdrop, ICSI has suggested to SEBI that small shareholders offering up to 200 shares should be allowed 100 per cent exit.

The institute has welcomed the committee's recommendation that banks and FIs should be encouraged to consider financing of takeovers, as that will facilitate development of an active market for leveraged buyouts.

Therefore, SEBI may consider taking up the issue with RBI. However, according to ICSI, RBI should be urged to prescribe checks and balances.

In the context of approval for competing offers, the committee has recommended that if an offer has to be withdrawn for lack of shareholders' approval, the escrow account shall stand forfeited. ICSI has contended that forfeiture of escrow will be rather harsh. Therefore, "some more time with per day penalty" may be stipulated in case of "reasonable delays".

As for creeping acquisition by acquires holding 75 per cent and above, the Bhagwati panel has recommended that any acquisition by acquires holding 75 per cent and above should be "in a transparent manner through open offers for minimum 20 per cent". In the opinion of the institute, the term "transparent manner" is subjective and may lead to varied interpretations. Therefore, certain parameters should be laid down to determine the transparent manner.

In a suggestion, which is not related to any of the recommendations of the committee, ICSI has observed that FIs singly or jointly holding voting rights or shares up to 10 per cent and more should be treated as a group of management irrespective of the fact whether their nominee director(s)is /are on the board or not of the target company.

Prefacing the suggestions, the institute has referred to a study by SEBI on the impact of the takeover regulations. The study revealed that over the last couple of years there has been a substantial increase in takeovers. Since the SEBI takeover code came into existence, 1,011 companies have been taken over for various purposes, which include consolidation of holdings, change in control of management and substantial acquisition.

Change in control of management has been the most important objective and accounted for 61 per cent of takeover cases".

(Source: Business Line)

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The normally staid company board meetings may become hi-tech with the Department of Company Affairs (DCA) taking a decision in principle to allow board and committee meetings through video/teleconferencing.

Bust some of the crucial board meetings would have to be held with the physical presence of the board members, according to the DCA Secretary, Mr. Vinod Dhall.

Speaking at a meeting in Coimbatore organised by the Indian Chambers of Commerce and Industry (ICCI), he said DCA also wanted to change with the times. It recently decided in principle to allow board meetings through video and teleconferencing.

However, DCA wanted to adopt a cautious approach towards conduct of board meetings/committee meetings through video and teleconferencing.

However, DCA wanted to adopt a cautious approach towards conduct of board meetings through video conferencing. Certain subjects should still be reserved for physical meetings for decisions, like annual accounts and subjects, which were to be dealt with through special resolutions.

These would be governed through rules and DCA could progressively liberlise them. But at least a certain number of meetings in a year must be physical meetings. The department wanted video conferencing be permitted to attract best talent from abroad in view of long travel involved, others wanted physical presence of directors to discuss finer points.

Mr. Dhall said the DCA wanted to make a beginning. But some subjects were sacrosanct, which were the heart of the company administration like annual accounts. When a person accepted the post of company director, he should agree to attend the meetings at least once or twice a year even if placed at a far away place, he reasoned.

(Source: Business Line)

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Most urban cooperative banks (UCBs) are not following the RBI directive of having at least two professionals on boards of banks, according to Reserve Bank of India officials.

After the Madhavpura scam a year ago, the RBI had directed all UCBs to have a minimum of two professionals on their boards.

One of these officials should be necessarily a chartered accountant while the other could be any professional such as an MBA, economist or ex-banker, the RBI had said in a notification to all UCBs.

However, only a negligible number of UCBs have followed the RBI guidelines. According to UCB officials, having professionals on board would not necessarily ensure that the bank is well-run; but what is essential is to ensure there is no political influence in the management of those banks.

Meanwhile, a clutch of multi-State urban co-operative banks were seeking more powers for their boards so that these bank would be in a position to clean up their balance sheets through speedy write-off their bad loans and to enable swifter recovery of debts.

Said one bank official, "Unlike commercial banks we cannot completely write off any bad account with just a board okay. We have to get the approvals of a special auditor, the annual general meeting and them the Registrar of Co-operative Societies". The entire process is long and painstaking and special powers to the board would help the bank clean up balance sheets.

Urban co-operative banks are also not allowed to approach the Debt Recovery Tribunal for settlements of loans and have to approach the co-operative court for settlements of these debts. Officials said that if co-operative banks could access DRTs like commercial banks, they would be in a position to settle their bad accounts more quickly.

Officials said that the banks were also seeking relaxations in the mode of compromise settlements. Officials said that the banks could not settle their bad loans across the table unlike co-operative banks and were restricted in their compromise settlements.

(Source: Business Line)

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The Department of Company Affairs (DCA) is in hot pursuit of companies which duped gullible investors by floating public issues and vanished subsequently, according to Mr Vinod Dhall, Secretary, DCA.

Speaking at a meeting organised by the Indian Chamber of Commerce and industry (ICCI), Coimbatore, he said many of the companies during the stock market boom in 1990s sported fancy names and allured investors into parting with their savings. Some simply vanished after that and these could not be even traced now.

He said this issue was being seriously discussed at the monthly conference of Regional Directors of DCA. He said "we are very serious. Never mind it has been many years. But we are going to try and pursue this".

He said the DCA would "find out where they were, capture them and prosecute them" not under the small procedural sections of the small procedural sections of the Companies Act, but under sections dealing with fraud, misrepresentation, where the punishment was imprisonment and not merely a penalty of Rs.5,000, he said.

Mr. Vinod Dhall said he also felt that the penalty under the Companies Act was too small to be a deterrent to erring people.

He said the penalty should be stringent and there should be a healthy respect for law.

He said DCA "became too much withdrawn into itself" and it "needs to be a little bit more proactive".

He said a company law advisory committee consisting of "extremely good professionals" had been constituted to suggest ideas to bring about improvements, changes in law and services provided and improve corporate governance and make the sector globally competitive.

The DCA Secretary felt that DCA should be more concerned about the issues in the corporate world.

One of the tasks of DCA was to usher in an era of good corporate governance so that Indian corporate sector was respected and enjoyed the confidence of not only domestic, but also foreign investors.

Speaking about the role of non-executive independent directors on the board of companies, he said there was " no company which really welcomes these independent directors". Some companies were interested merely in adding some of the distinguished persons to their directors' list.

He said the role of independent directors and audit committees should be given "genuine authority" to scrutinize the accounts. If the "board of directors only consist of management and the cronies of management or the relatives of the management", such companies, at some stage, may fail the stakeholders.

Mr. Vinod Dhall said his department was coming out with a "strategic action plan", the draft of which had been prepared. It outlines what the DCA should do in the next few years and it would be given a final shape after intense discussions.

It would touch upon several issues such as good corporate governance; the kind of relationship between the companies and their auditors and how did the auditors discharged their work.

He also wanted the responsibilities of company secretaries to be codified in a certain way so that proper responsibility was fixed. (Source: Business Line)

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The norms for appointment of auditors for public sector banks are expected to be tightened.

A working group appointed by the Reserve Bank of India is studying the existing practices, formulated about 20 years ago. The idea is to make the norms relevant in the current scenario.

According to sources familiar with the developments, there are two issues, which are being examined. These are eligibility criteria for auditors to be included in the RBI's approved list of included in the RBI's approved list of auditors and the number of auditors to be appointed by a bank.

Currently, there are around 400 auditors in the RBI's approved list for Central-level audit. If a bank's deposit exceeds Rs.10,000 crore, the bank will have to appoint six auditors.

According to the working group, the previous criterion for appointment of auditors based only on the liabilities of banks must go and a more holistic picture based on assets and liabilities must be taken into account. The group is also examining the possibility of tightening the norms for auditors.

For the past 20 years or so, the criteria for appointing auditors for banks had not been changed and it was felt that with various developments that had taken place over the period, the criteria for appointing auditors should also be changed.

Currently, if a public sector bank crosses the threshold limit of Rs.10,000 crore in deposits, the bank will have to appoint six auditors. Officials said that of the 29 public sector banks, few fell below the limit of Rs.10,000 crore. So while a bank such as Bank of Baroda bad six auditors, so will a bank of the size of State bank of Travancore.

The working group is exploring the possibility of appointing auditors based on the total balance sheet size of the bank i.e. advances plus investments plus deposits.

Bank officials said that the old method of appointing auditors was outdated and the working group would try and update the procedure for appointment of auditors to a particular bank.

All banks have two sets of auditors - branch level auditors. The criteria for appointment of both these auditors will be changed.

On an average, 400 auditors become eligible for appointment of Central level auditors, while round 180-186 auditors are selected.

The group is also looking to prune the wide gap between auditors eligible and those selected, tightening selection procedures for the auditors. This will be based on the number of partners, number of chartered accountants in the firm etc.

Selected auditors to be appointed to banks are decided by the Comptroller and Auditor- General, the Government and the RBI. Auditors are appointed for a maximum period of four years and after this duration there is 1-2 year period of "cooling-off" when the auditor is taken off the list of eligible auditors.

(Source: Business Line)

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The Reserve Bank of India (RBI) has asked all listed commercial banks to follow SEBI's committee report on corporate governance.

According to a circular issued by RBI to the chiefs of all commercial banks, this follows SEBI's suggestion to RBI that the apex bank should issue appropriate guidelines to banks and financial institutions in order to ensure that all listed companies have uniform standards of corporate governance.

Some of the important recommendations of the SEBI committee on corporate governance that will henceforth be applicable to listed commercial banks include, that all pecuniary relationship or transactions of the non- executive directors should be disclosed in the annual report.

The committee bas suggested that emphasis must be laid on the calibre of the non-executive directors, since non-executive directors help bring an independent judgment to bear on the board deliberations, especially on issues of strategy, performance, management of conflicts and standards of conduct.

It has been recommended that the board of the company have an optimum combination of executive and non-executive directors with not less than 50 per cent of the board comprising the non-executive directors.

The number of independent directors depends on the nature of the chairman of the board. In case a company has a non-executive chairman, at least half of the board should be independent (mandatory recommendation)

According to the RBI circular, the audit committee of the board may look into the reasons for default in payment to depositors, debenture holders, shareholders (non-payment of dividends) and creditors, wherever there are any cases of defaults in payment.

All listed banks may provide un-audited financial results on half yearly basis to their shareholders with summary of significant developments.

(Source: Business Line)

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