Listed public sector companies that are fighting shy of complying with the provisions of Clause 49 of the listing agreement may well get a reprieve. The finance ministry is likely to intervene in the matter of appointment of independent directors to their boards.
According to sources familiar with the situation, the ministry is likely to allow government-nominated directors on the boards of such companies to be considered independent directors for a short period till the companies are able to fulfil the revised criteria laid down by the Securities and Exchange Board of India.
Clause 49 of the listing agreement was amended late last year with Sebi saying in cases where the company had an executive chairman, at least 50 per cent of the directors should be independent. Where the chairman is non-executive, a third of the company's board should comprise independent directors. Sebi had set a June 2005 deadline for companies to fall in line.
Public sector companies have, however, stated their inability to comply with the deadline while private sector companies have been quiet on the issue.
While the regulator had not gone on record on the issue and has stuck to its deadline, sources said Sebi was likely to give PSUs sufficient time to comply with the norms.
Non-compliance with the deadline will be tantamount to violating the listing agreement and such companies can face penal action from the stock exchange, including suspension of trading and even de-listing in extreme cases.
B K Vatsaraj of Vatsaraj & Co, a Mumbai-based firm of chartered accountants, said there were not enough independent directors to go around.
In the case of private firms, it is more of an invitation based on personal relationships with the promoters, while in the case of government-owned entities, it is a formal appointment, which takes time to process.
In 2002, Sebi, in response to a query by a public sector company, had clarified that nominees on PSU boards were not to be considered independent directors. The amendment to the clause also clarified that nominees of institutions that had invested in or lent to a company should be deemed independent directors.
However, the refurbished clause has also further tightened the definition of independent directors. According to the norms, a shareholder with more than two per cent stake in the company, former executives who left the company less than three years ago and partners of current legal, audit, and consulting firms, as well as partners of firms that had worked in the company in the preceding three years, cannot be independent directors.
Further a relative of a promoter, or an executive director or a senior executive a level below an executive director, too, cannot be called independent directors. All these restrictions have reduced the scope of finding independent directors.
In addition to this, the company board will not have the discretion to decide whether there is a materially significant relationship between the director (who is being nominated) and the company, thus affecting his independence.
On board
What is Clause 49?
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If a company has an executive chairman, at least 50 per cent of the directors should be independent
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Where the chairman is non-executive, a third of the company's board should comprise independent directors
Relief for PSUs
- Government-nominated directors to be considered independent directors till the companies fulfil the listing norms
