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Business News/ Market / Mark-to-market/  Corporate governance rules are good; now for some shareholder activism
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Corporate governance rules are good; now for some shareholder activism

Both shareholders and investors should realize that good corporate governance won't be achieved via legislation, but by increased activism by shareholders

Securities and Exchange Board of India’s attempt earlier this year to revise corporate governance guidelines under Clause 49 of the listing agreement was welcome. Photo: Abhijit Bhatlekar/Mint.Premium
Securities and Exchange Board of India’s attempt earlier this year to revise corporate governance guidelines under Clause 49 of the listing agreement was welcome. Photo: Abhijit Bhatlekar/Mint.

Poor corporate governance standards have been an area of major weakness in India’s capital markets. So Securities and Exchange Board of India’s (Sebi’s) attempt earlier this year to revise corporate governance guidelines under Clause 49 of the listing agreement was welcome.

However, the revised Companies Act, which was notified soon after Sebi’s new norms were announced, had its own corporate governance requirements, which were materially different. Not only would this lead to some confusion on which norms companies had to follow, but it was also felt that Sebi’s norms were too stringent.

In this backdrop, the securities market regulator has done well to back off on many of its original guidelines. In any case, as Aswath Damodaran, professor of finance at the Stern School of Business at New York University, said in an interview to this newspaper last year, “Good corporate governance cannot be legislated." Indian shareholders should learn to look after their own interests, rather than depend on the regulator to watch their backs all the time.

Sebi’s relaxations are welcome because it would have been pointless having rules which many companies aren’t able to follow in any case. The new rules will not apply to small-sized companies with a paid-up equity capital of less than 10 crore and net worth of less than 25 crore.

The deadline for listed firms to appoint at least one woman director on their board has been extended from 1 October 2014 to 1 April 2015. And rules on the tenure of independent directors have been relaxed and brought in line with the new Companies Act.

Besides, definitions on who are related parties have been aligned with the Companies Act and material related-party transactions will now be those that exceed 10% of turnover, compared with 5% of turnover earlier. All material related-party transactions have to be approved by a majority of minority shareholders. The new guidelines don’t insist on a prior approval of a related party transaction by an audit committee—the committee can grant an omnibus approval subject to certain conditions.

Of course, not all of guidelines have been relaxed and listed companies will have to invest resources in complying with them. While there will be a cost involved, the markets should gain as a result of the increased transparency for related-party transactions and the emphasis on having independent directors who are truly independent.

But having said all this, shareholders still need to exercise their rights and vote against proposals that are against their interests. Both shareholders and investors should realize that good corporate governance won’t be achieved through legislation; but by increased activism by shareholders.

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Published: 17 Sep 2014, 08:41 PM IST
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