INDIA

By Adrian Kosinda

The third quarter is typically the busiest of the year for the Indian market when the majority of companies hold their Annual General Meetings.

Proposed Amendments to the Companies Bill

In an effort to plug the loopholes prevailing in the Companies Bill to avoid fraudulent corporate misconduct and to protect shareholders, India announced its proposed amendments to the Companies Bill in July 2003. The amendments seek to include 16 new sections, substitute 34 existing sections, amend 123 and remove 21 existing sections.

Ironically, the proposed amendments aimed at liberalizing, deregulating and simplifying laws governing the corporate sector, have not been particularly well-received by all of corporate India, otherwise known as India Inc. In fact, at the time the amendments were announced, a large section of India Inc. expressed its dissatisfaction by suggesting that the government should refer the amended bill to one of the Parliament's committees.

Some of the more notable provisions included in the series of amendments stipulate that:

• A public company with paid up capital and free reserves of INR 500,000 ($10,284) or more or turnover of INR 5 million ($102,838) or more to have a minimum of seven directors. Majority of them shall be independent. However, a company with less than 50 shareholders and no borrowing does not need to have seven directors or independent directors.
• Companies must have women directors on their board.
• The maximum number of directors in any company shall be 15.
• Independent directors should not be a relative of the chairman or the managing director, the auditor or the consultant. A nominee director of a bank or a financial institution will not be considered as independent.
• Independent directors must undergo training in the institute notified by the Central Government within two years from his or her appointment.
• A person who is an executive director or a managing director in a company can be director only in a maximum of ten companies.
• A person can be a managing director, executive director, director or manager only up to the age of 75 years.
• Sitting fees paid to non-executive directors be omitted.
• An auditor who has direct financial interest in the company or who receives any loans or guarantee from the company or who has any business relationship (other than an auditor) with the company cannot be appointed as an auditor.
• An individual who was in employment of the company or whose relative is in employment of the company cannot be appointed as an auditor.
• An auditor cannot accept any other assignment from the company such as accounting book keeping, internal audit, broker, financial services, management functions, valuation services, etc. (the provision does not prohibit income-tax consultancy services to the company being audited).
• An Audit Committee of a company shall consist only of independent directors as opposed to the two-thirds of total members being independent required under previous law. The minimum shall be two and maximum shall be prescribed by the Central Government.
• If an entity acquires greater than 95 percent of the share capital of another company, that acquirer must make an offer to the minority shareholders to purchase their shares.

While some of the proposed measures appear to be practical in inducing a more secure climate for investors, questions arise over the effectiveness of other proposed amendments. According to a memorandum submitted to the Department of Company Affairs (DCA), the Federation of Indian Chambers of Commerce and Industry (FICCI) claimed that the amendment bill would “create unnecessary hurdles in the smooth functioning of the corporate sector and increase compliance cost without raising the standards of corporate governance.”

Part of the trouble is that with the country aiming for a ten-percent economic growth rate, some changes, most notably changes in the holding company structure, disposal of undertaking, restrictions on inter-corporate loans and investments, may convey discouraging signals to both domestic and foreign shareholders. In fact, several amendments in the new bill are not in conformity with policy initiatives directed at enhancing growth and development of India's competitive corporate sector.

The decision to impose an age limit of 75 years for managers and directors has not come without harsh criticism from India, Inc. Additionally, ISS believes that the establishment of a mandatory retirement age for directors can be a controversial move. Some believe that establishing a mandatory retirement age sends the message that older directors cannot contribute to the oversight of the company, when in fact mandatory retirement ages may force valuable, experienced directors to leave the board solely because of their age. Although establishing a retirement age for directors provides a mechanical or "bloodless" means for addressing a real or potential performance issue with a director, it makes the unwarranted assumption that a board member's effectiveness correlates with his or her age. The criterion of age is no substitute for a thoughtful evaluation of director performance and qualification.

The inclusion of a provision to require women directors on boards has also been a controversial issue. While the presence of women directors can add unique and valuable perspectives to a board, ISS does not support the implementation of quotas or arbitrary numeric goals. From a value-creation standpoint, what is of paramount importance is selecting the most qualified directors, regardless of gender or race. While ISS encourages board diversity, we do not believe that a mandatory provision to require a separate class of directors is the most effective or appropriate means of selecting the most qualified individual for directorship.

While the Companies (Amendment) Bill, 2003, shows India's dedication to establish higher standards of corporate governance to attract investors and enhance corporate growth and development, the initiative has brought about a certain amount of dissatisfaction among those who it had been designed to protect. At its present form, a motion to propose a redraft of the bill would be most pertinent and a truly welcome bid by India, Inc.