Guru Mantra
mandatory and non-mandatory rules regarding the Board and its reporting system. It is believed by many thatthat compliance with this code helped save many Indian corporations from the depression of 1990s which wiped many organizations off the corporate globe. INDIA NOW: With the fast changing world scenario and the changing rules of the corporate game, new codes were evolved. K.M. Birla committee set up by SEBI had had the maximum impact. It was modeled on the Cadbury report but suited to Indian conditions. It made it imperative to compose the board with independent directors to accord maximum accountability in its dealings. A series of codes succeeded it like the Naresh Chandra Report, Narayana Murthy Report, the latest being the Revised Clause 49 under the listing agreement of SEBI which was brought into effect from 1st January, 2006. Revised Clause 49 is thought to be an off-shoot of SOX but the fundamental difference is not only in its definition but also in its scope of responsibilities in sections 302 and 404. The governance issues in India are very diverse too compared to those in U.K. and U.S.A, with its history and corporate culture being very different and addressing different issues relevant to a socialistic society. The Indian Companies Act four decades before the SOX Act required the statements to be certified by the Board of Directors and also endorsed by the external auditors about the robustness of the financial statements. The words ‘True and Fair’ depicted the state of affairs of the organization and needed the directors / auditors to certify it. Despite these restrictions, there were many loop holes which allowed unscrupulous people to manipulate the secondary market. India was forced to replicate many parts of SOX even when there were better remedial measures, which only reveals its helplessness when it needs to compete globally in business. Clause 49 is concerned with the independent directors, management responsibilities, Board responsibilities, audit committees, Disclosures and CEO/CFO certification. According to it, a Board should consist of ‘optimum’ number of executive and non-executive directors. Optimum means ideal. But then, who decides what ‘optimum’ is? Where there is an executive chairman, it is mandatory for at least half the Board to be composed of independent directors. If the chairman happens to be non-executive, it is sufficient for one-third of the board to be independent. The word ‘executive’ too has not been defined and has to depend on the local parlance.
iNM - Magazine Vol. 4 2
Independent directors can be referred to as the mythical angels of India Inc. and are considered as the sole keepers of their organization’s integrity. It is true that their expertise and skill would help steer the company to a better plane of governance which would ultimately lead to better financial performance. Then again, it is the Board which determines the ‘independence’ of directors. In a smaller organization or a promoter/family controlled one, it could lead to mutual back scratching. Let us be honest with ourselves. Though the CII has created a large database of professionals who would qualify to be independent directors, will a company be saddled with a perhaps ageing individual whose ‘abilities’ did not qualify him to be an executive director or has retired as one. Even if one with such requisite qualifications were to be found, he would certainly be known either to the top management or to the founding family. In such a case how ‘independent’ would he be? India is dotted with companies where the promoter family has a substantial stake or a minority share but with an unbelievably passive majority shareholders and has overwhelming influence over governments, institutions and people. It would be a near impossible task for the remaining shareholders to appoint a truly independent director without the promoters’ approval. It is accepted