Financial Daily from THE HINDU group of publications
Friday, Nov 25, 2005
Corporate - Corporate Governance
Most PSU cos yet to comply
WITH the deadline just over a month away, public sector companies that are listed have yet to comply with the requirements of Clause 49 of the Listing Agreement on composition of the board of directors.
Of the nine PSUs in the Nifty, only one Bharat Heavy Electrical (BHEL) has complied with the norm. The Government, on November 16, appointed four independent directors to the BHEL board, which takes the total to five, exactly half its total strength. However, others such as Oil and Natural Gas Corporation (ONGC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), GAIL (India) Mahanagar Telephone Nigam Ltd (MTNL), National Aluminium Company (Nalco), Steel Authority of India Ltd (SAIL) and Shipping Corporation of India have yet to comply with and are awaiting instructions from the Government.
As per the amended Clause 49, at least 50 per cent of the board of directors of all listed companies with an executive chairman should be made up of independent directors.
Where the Chairman is a non-executive director, at least a third of the board should be made up of independent professionals.
The deadline for all companies to fall in line with Clause 49 is December 31.There is a peculiar problem in the case of ONGC, which has already written to the Government on this issue according to Mr R.S. Sharma, Director (Finance).
To meet the 50 per cent requirement, ONGC would need eight more independent directors. At present, it has three independent directors on a board that consists of 14 directors. However, appointing eight more directors would take its total boardstrength to 22, while its Articles of Association provides for a total strength of 21 only.
The solution would be for the Government to withdraw one of its 3 nominees or get Indian Oil to withdraw its lone representative on the ONGC board. GAIL (India), which has a board strength of 12 including 3 independent directors, needs 6 more to fall in line with the 50 per cent norm.
That would take the total strength of the board to 18. Similarly, HPCL has only four independent directors on its 11-member board while in the case of BPCL only three out of the total 12 directors are independent.
The problem with public sector companies is that including functional directors and Government nominees, when more independent directors are appointed, the size of the board would turn large and unwieldy.
Indian Oil has already drawn the Government's attention to this problem.
Private companies on track
However, all the private listed companies in the Nifty index are either already compliant with the norm or have taken steps to fall in line. Some of these companies satisfied the requirement even before the SEBI notification. For instance, at HDFC, nine out of total board strength of 13 directors are independent professionals.
A HDFC official pointed out that a large contingent of independent directors has always been the norm at HDFC even before it became mandatory. "It is one of the reasons why so many foreign investors have found us so attractive," said the official.
Another example is ACC. "We have always had a majority of independent directors. The Chairman himself is independent," said an official of the company. So is the case with Gujarat Ambuja Cement which has more than the required number of independent directors.
"We were among the first corporates in India to have independent directors in large numbers even before compliance was required," said an official of the company.
The Tata group companies are all already compliant with the norms as are Reliance Industries, ICICI Bank, HDFC Bank and Oriental Bank of Commerce.
The Chairman of Punjab National Bank, Mr S.C. Gupta, said that an EGM has been called for on December 12 to elect independent directors.
"After that we would be compliant with the requirement under Clause 49 with 7 independent directors in a total board of 14, " he said.
Booming demand for professionals
With the deadline nearing, there is a big demand for high quality independent professionals who are scarce, especially from public sector companies that have large board strengths.
The scarcity of independent directors available for appointment is evident for the number of directorships that such professionals are already holding.
For instance, Mr Deepak Parekh, one of the most sought after professionals, is an independent director in 12 companies while Mr Keshub Mahindra holds seven directorships.
Mr B.S. Mehta, Mr Ram S. Tarneja and Mr Nasser Munjee, who are independent directors on the HDFC Board, hold 14, 13 and 13 other directorships respectively.
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