Corporate Governance – SEBI Decision Vs Companies Act 2013 An analysis

Corporate Governance – SEBI Decision Vs Companies Act 2013 An analysis

CS. Mohan Kumar, Company Secretary, Chennai

SEBI Board on Feb 13, 2014 met and made a series of decisions. Most of them try to bring an alignment of existing SEBI regulations with Companies Act 2013. However there have been some small improvements or changes from Companies Act 2013 also.  

It is interesting to note that most of the changes that SEBI has made pertain either to Board meeting or Directors. We can see them one by one.

S. No	SEBI Board decision/ Direction as on 13 Feb, 2014	Companies Act stand/ Remarks
1	Performance evaluation of Directors A system has to be put in place to evaluate performance of Independent Director and other Board members.	Sec. 134 of Companies Act 2013 deals with Boards report and its subsection (3) (p) has a similar provision. Effectively  the end result is : Independent Directors need to be evaluated by Board; Whole time Directors need to be evaluated by Independent Directors.
2	Women Director One woman Director is mandatory for listed Companies.	Sec. 149 (1) of Companies Act 2013 has a similar provision. But while Act gives one year time to comply with appointment of a Woman Director, SEBI makes it mandatory to have woman Director from 1st October.
3	Max. No of Directorships A person can be Independent Director for 7 Companies only. In case the person is a whole time Director in any Company, he can hold Independent Directorship in three Companies only.	Sec. 165 mandates that a person can be a Director in 20 companies, out of which not more than 10 shall be Public Companies. The requirement by SEBI now is much stricter now, restricting it to 7  & 3 !
4	Disclosure on Remuneration More disclosure to be made with regard to remuneration of senior executives	Similar provisions exist in the Companies Act 2013.
5	No ESOP Independent Director not to be allotted shares under ESOP  plan.	Sec. 149 (9) of Companies Act 2013 prohibits Independent Director to be allotted shares under ESOP.
6	Total term of Independent Director Total term of Independent Directors will be 5 + 5 = 10 years. If he had already completed 5 years, he can be appointed only for 5 more years.	While the first part (Max 10 years) is there in the Companies Act 2013, the second part is a shocker. This makes this provision retrospective.
7	Nominee Director to be excluded Director nominated by Financial Institution cannot be considered as an Independent Director.	Similar to Companies Act 2013.
8	Committees of Board Listed Companies to have Nomination & Remuneration committee & Stakeholder relationship committee.	Current Listing agreement itself provides for such committees. The name alone is getting changed slightly now. Sec. 178 of the Companies Act also mandates these 2 committees.
9	Succession plan Companies need to have orderly succession plan to the CEO & top management	Additional requirement, which was not there in Companies Act 2013
10	Separate meetings of Ind. Directors Independent Directors need to conduct separate meetings where they alone will be present	Schedule IV of the Companies Act which gives the Code for Independent Directors has a similar provision saying “ There must be atleast one meeting of Independent Directors” without the presence of “non independent Directors and members of management”. (Whether Company Secretary attend such meeting? Or will he be considered as “members of the management?”)
11	Whistle Blower Whistle Blower policy is made mandatory.	The Listing agreement has been providing Whistle Blower policy as an optional one; now both the Companies Act  2013 (Sec. 177 (9))) and SEBI decision make Whistle Blower policy as mandatory. It is again to avoid cases like Satyam episode where crores of money were lost; an insider could have raised the whistle, had there been a good mechanism there.
12	Related Party transaction Prior approval of Audit committee is required for “All material related party transactions” Approval of shareholders by special resolution required for “All material related party transactions”	Similar provisions are available in Sec. 188; Audit committee approval is a new requirement. Now “Material” Related party transactions require Audit committee, Board and Shareholders approval.

As can be seen from the above analysis,  SEBI goes few miles more than Companies Act 2013 as far as compliance is concerned. There are some grey areas remaining which, hopefully SEBI will address when it comes with Final decision.

The good news is : With these developments. Government clearly shows that the Act will be implemented in full swing soon.