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Satyam scam prompts Clause 49 review

Prashant K Sahu, Sapna Dogra & Aditi Phadnis in New Delhi | January 14, 2009 14:54 IST

The Securities and Exchange Board of India is likely to come out with a concept paper on revamping Clause 49 of the corporate listing agreement to give independent directors more powers and strengthen disclosure norms.

"You can expect something in a few days," said a senior government official familiar with the development.

Discussions on the issue have been held at various levels between the government and the market regulator against the backdrop of January 7 disclosures by Satyam Computer Services [Get Quote] founder Ramalinga Raju of accounting irregularities going back several years and amounting to thousands of crores.

Raju's confessions followed a crisis starting mid-December, when Satyam was forced to retract a decision - approved by such high-profile directors as Krishna Palepu of Harvard and Rammohan Rao of Indian School of Business and former Cabinet Secretary T R Prasad, among others - to invest nearly Rs 8,000 crore (Rs 80 billion) in two promoter-related firms, which was followed by strong shareholder objections.

Both controversies have raised questions about the role and efficacy of independent directors.

Meanwhile, the government today expanded the mandate of the Serious Fraud Investigation Office to launch a formal investigation into the Satyam fraud. SFIO so far had only scrutinised documents.

The corporate affairs ministry took this step based on a report from the Registrar of Companies, which scrutinised the accounts of the Hyderabad-based software services firm, Prem Chand Gupta, minister for corporate affairs, said.

Directors to be more proactive: Sebi's concept paper aims to make the role of independent directors more proactive and would also require listed companies, auditors and credit rating agencies to make greater disclosures.

"Many outsiders (lenders, clients and investors) believe in the assessment or data given by listed companies. If this kind of fraud can take place in Satyam, which was thought to have the best people on board and world-class auditors, then clause 49 of Sebi's listing agreement is not enough," the official said.

Clause 49 mandates that at least half the board of a company listed on the stock market must have independent directors if it is headed by an executive chairman. For company boards headed by a non-executive chairman, the independent director complement must be one-third.

Clause 49 also mandates firms to constitute an audit committee, with one of the directors as its members, and submit quarterly compliance report to the stock exchanges.

"Independent directors are nominated by the management and are at the mercy of the promoters. So, the independence of the directors is more a myth than a reality," said Prithvi Haldea of Prime Database, which owns a website dedicated to independent directors.

Companies should appoint independent directors who can add value to the shareholders, and minority shareholders should seek value from such directors, he added.

Despite this, state-owned companies have flouted the corporate governance norms by not appointing independent directors. Two initial public offerings by state-run companies - NHPC and OIL India - could not get Sebi approval because their boards did not have the requisite number of independent directors.

SFIO report in three months: Gupta said the SFIO, which will submit its report in three months, will be "looking into the entire gamut of irregularities and other anomalies in Satyam's books of accounts and any other act of omission and commission".

He declined, however, to discuss the RoC's findings, based on which the SFIO probe has been ordered. The RoC was asked to examine Satyam's books on December 18 last year, after Satyam aborted its plan to acquire two promoter-owned companies.

The probe has been ordered under section 235 of the Companies Act, and SFIO will have the power to call all people associated with the company, including directors and auditors.

According to a ministry of corporate affairs official, SFIO can ask for transaction records and account books of Satyam not only for the last five years but also for any earlier date.

Last week, the government had asked SFIO to inspect eight Satyam group companies. "The inspection is on and there's no stipulated timeframe for this inspection." said a senior corporate affairs ministry official.

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