source Business standard
CS A Rengarajan
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Unlisted firms may have to demat shares by Sept |
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New Delhi, 14 June The government plans to make it compulsory for unlisted companies to get their shares dematerialised by September, according to officials. The corporate affairs ministry wants all unlisted companies with paidup capital of more than ~50 million to digitise shares by Juneend. Others can do so by September. The aim is to make transactions more transparent. “The National Securities Depository Ltd (NSDL) and the Central Securities Depository Ltd (CSDL) will have preverified shares in electronic mode, which will help settle transactions in an effective manner,”asenior government official said. When shares in electronic form are available with the depositories, it acts as primary evidence for those who hold the shares. It is not always possible to track the ownership of shares in the physical format. The move is likely to bring an end to benami transactions, according to experts. The government is also in discussion with the NSDL and the CSDL to fix enrolment rates for these companies. The ministry has asked these registries to reduce joining fees. At present, companies have to pay around ~30,000 as joining fee in addition to goods and services tax (GST). Companies are also required to pay an annual custody fee of ~ 8 per folio in NSDL. The NSDL and the CSDL are registered with the Securities and Exchange Board of India (Sebi). Sebi rules require all listed companies to dematerialise shares. There are around 70,000 public limited companies that are unlisted. More than one million private limited companies are registered with the corporate affairs ministry. Dematerialisation, or demat, involves converting physical stocks into electronic form. India has around 6,000 listed companies, and almost all shares are held in demat form. When shares in electronic form are available with the depositories, it acts as primary evidence for those who hold the shares |
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CS A Rengarajan
Don´t threaten
independent directors
We need arevolution in thinking beyond the legalities of board decisions. Good
governance is aproduct of teamwork!
The largescale resignations of independent directors in 2017 as reported in Business
Standard seemsamanifestation of the pentup anxieties that have been
building up in the light of the notifications of the Ministry of Corporate
Affairs (MCA) about independent directors.
Coming in the wake of cases against Nirav Modi and the Rotomac promoters and mounting nonperforming assets (NPA) of banks, the authorities seem to pass over the oversight responsibility entirely to independent directors.
With extended liability for any untoward happenings in organisations, capable outside directors are more likely to avoid accepting such positions unless they know the promoters very well and are willing to risk their own reputation for promoters´ sake.
Limitations of an outside director In most Indian companies, boards meet onceaquarter, with very limited structured interactions otherwise.
Even such interactions get limited to specific areas where only the particular director´s opinion is sought.
With board level discussions limited toaprefixed agenda and prioritisation of items for discussion and discretion of what specific inputs need to be provided to the board decided by the management, in most cases, the discussion takesacourse that is designed by the promoters and management.
Also, given that most board meetings do not go beyondafew hours of deliberations, it is difficult to expectanonexecutive independent director to know anything beyond what the management wants that person to know.
Even efforts made by independent directors to gather further information may not makealot of progress beyond the purdah of information the management is ready to share willingly.
More often than not, first time independent directors notice that the "way the game is played" is different from the way it was envisaged in corporate governance principles! There are activist and otherwise independent directors playing the watch dog role in some of the advanced western economies.
New roles and expectations defined by regulators in such societies have made some positive impact.
However, importing such approaches as panacea for our governance challenges, being oblivious to yeomen differences in the institutional and sociocultural realities, will be myopic, to say the least.
We need to remember that most independent directors in India are handpicked appointees of promoters.
Our own research on some of India´s largest companies had clearly shown that promoters look for polite advisors and not forceful decisionmakers /influencers in independent directors.
They tend to do adequate background check to see the individual´s "need for independence" and style of functioning before inviting to beaboard member.
They will get rid of individuals who try to cross the Lakshman Rekha in different ways.
For many independent directors, visibility, status and connections are also attractions beyond the sitting fee.
Our research shows that in NSE listed firms, the average age of independent directors is 66 while that of executive directors is only 56. While age is necessarily not an indicator of competent independence, but social and economic perks do matter for some beyond their prime productive age.
Also, friends and relatives who fulfill the conditions of “independent” are natural choice to fill the quota of independent directors.
So much about the “independence” of independent directors in India! The concept ofalead independent director has been getting wider acceptance in the US. By designating one independent director as the lead director, the expectation in the US is that company boards will function more independently.
Unfortunately, none of these will work in an environment where promoters continue to be operating managers or hold sway over operations, with the freedom to appoint independent directors of their choice.
Promoters´ attitude towards corporate governance is alsoavital issue.
An enlightened promoter can attract better independent directors and allow them to function independently.
Hence, any substantial change at the fundamental level of corporate governance should begin withachange in the mindset of Indian promoters.
What will make independent directors effective Some of the current initiatives such as making directors aware of their fiduciary responsibilities and legal implications of any wrongdoing by the company are timely and important.
But that is not good enough.
Actually, much of the tone of the governmental messaging is highly threatening, making people think several times before agreeing to be board members.
In fact, there is an increasing trend of such people agreeing to be advisors (and not directors) so that while the organisation benefits from their expertise, they do not have the uncertainties of the legal shadow following them.
Most boards tend to find common ground among varying viewpoints of their members.
It is rare that voting is taken or dissent expressed and minuted.
Hence, while it is easy to say that independent directors should record their dissent to insulate themselves from prosecution, it is unlikely to have any such thing happening in the Indian context easily.
We should go beyond the mindset of compliance and “somehow” meeting the regulatory requirements of governance.
We needarevolution in thinking beyond the legalities of board decisions.
Good governance cannot be legislated, it isaproduct of teamwork! That will mainly depend on the promoters´ enlightened actions and not by threatening to take the heads of the independent directors.
Ramachandran is professor and executive director, Thomas Schmidheiny Centre for Family Enterprise, ISB and Ray is professor, IIM Calcutta
KAVIL RAMACHANDRAN &SOUGATA RAY