Clipped from: https://www.thehindubusinessline.com/opinion/editorial/doing-away-with-permanent-directors-the-right-step/article66986886.ece
This move will improve corporate governance in listed companies
The issue of some companies giving promoters a permanent seat on the Board using certain lacunae in regulations, had been flagged by the SEBI consultation paper on improving corporate governance at listed companies, published in February. It is just as well that the proposals made in this consultation paper have been accepted, as they will give shareholders the power to evict promoters who are not working in the interests of the company.
It has now been stipulated that from April 1, 2024, all directors need shareholder approval once every five years to continue serving on the Board. Further, if any director has not received shareholder approval for his appointment on the Board in the last five year, as on March 31, 2024, then such approval needs to be obtained in the first general meeting held after 2023-24. These rules will however not apply to directors appointed by the Court, tribunal or to nominee directors of the government or financial institutions.
This change has been necessitated by the experience in some companies where the promoters refused to give up their Board seats even after the company control had changed hands. In other cases, some promoters continued to retain the power to nominate board members despite diluting their stakes considerably. Promoters had so far been making themselves a permanent fixture in Boards through two routes. They could include their name as a permanent director in the company’s Articles of Association, thus ensuring that they retained their seat even after they had sold the company to some other entity. Some start-ups have also been using this route to keep their promoters on the Board. The other route was to exploit a regulatory gap. The Companies Act lays that that at least two-third of the directors on any Board should retire after a specified number of years. Of the two-third directors, one-third should retire every year through rotation. Since the law seems to permit some directors to not retire through rotation, the promoters are making the most of this gap by getting themselves appointed in this category. SEBI’s clear-cut directive will hopefully put an end to such malpractices.
That said, these rules assume that the shareholders will closely monitor the operations of the company and act speedily to oust promoters who destroy value. But while shareholder activism is increasing among large institutional investors, smaller investors generally remain indifferent to shenanigans of the management. Past trends indicate that less than 1 per cent of retail investors vote in critical decisions despite the introduction of e-voting, and prefer to sell the stock of a company reporting bad governance practices, rather than to stay and change matters by exercising their rights. SEBI should encourage participation of large investors in operational decisions of companies while trying to nudge smaller investors to do the same. Proxy advisors, who provide inputs to small investors on critical issues, should be encouraged to expand their activities.
Comments
aniltikotekar4sme.com 