The Hindu Business Line : Clause 49 is coming!

THE famous Clause 49 which the Securities and Exchange Board of India (SEBI) has prescribed for inclusion in the listing agreement of listed companies comes into force on January 1, 2006, with a warning from the Chairman, Mr M. Damodaran, of heavy penalties for non-compliance. The clause lays down that where the Board has an executive Chairman, at least half, and where the Chairman is non-executive, one-third, of the Board should consist of the so-called "independent directors".

The SEBI defines them as "directors who, apart from receiving director's remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which, in the judgment of the Board may affect the independence of judgment of the director".

The person brought in as `independent' director, may be all this, but still he would be one who has been carefully selected by the top management brass on the criteria of compatibility, if not pliability, willingness to play ball as a member of the team, and approach the proposals on the agenda in a spirit of giving the benefit of doubt to the management. No promoter or search committee will wittingly induct individuals who would take their independent role so seriously as to keep questioning the why's and wherefores of matters placed before them.

It is possible to compile any number of eminent names who will be `independent' as per SEBI's definition, but amiably supportive within the boardroom. Managements are also adept in `softening' those who start off being independent by various kinds of allurements and blandishments. One of the parties in a recent corporate feud made public the fact that two `independent' directors had no compunction in receiving a commission of Rs 3 crore each.

So, we are back to the old question of the Roman times: Who is to be the watchdog of the watchdog? The onus lies squarely on the shareholders who should meticulously scrutinise the credentials and track records of those whose names are placed before them for approval. The SEBI too cannot absolve itself of its responsibility: It should consider instituting a "listening post" within its precincts to gather intelligence on a selective basis on the goings-on in board rooms and act as a check on deviations from norms by issuing warnings in time.

B. S. Raghavan

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