Independent directors in Indian companies
A case study is undertaken here, to examine the extent of adoption of corporate governance system concerning the independent directors in Indian companies, in the context of the provisions of the Companies Act (2013) and the new clause 49 of the Securities and Exchange Board of India and (SEBI) Listing Agreement, 2014. Selection of sample The study consists of BSE Sensex and NSE Nifty companies. The reason behind selecting these companies is that their scrips dominate and influence stock index movement. These companies also represent different industry verticals. The study is based on the 2013-14 annual reports of the companies. All the 30 Sensex companies are included in the list of 50 Nifty companies. Out of the 30 Sensex and 50 Nifty companies, annual reports of 25 and 38 companies, respectively, were received. The study was thus carried out on 38 companies listed under the two indices. The final sample of the 38 companies was classified according to their industries (table 1)
Table 1: Company classification
Analysis of position
The study was made based on the mandatory and non-mandatory requirements stipulated by clause 49 of the listing agreement as applicable for the financial year 2013-14. The reports were examined and ascertained and the actual position is discussed hereunder.
Board structure
It has been observed that all private sector companies listed in stock exchanges have greater number of non-executive (outside/part-time) directors as compared to executive (inside/whole-time) directors in the boards, thereby conforming to the SEBI guidelines. The listed public sector undertakings (PSUs) like BHEL and BPCL have large vacancies for non-executive independent directors on their boards which have not been filled up by the government yet. For instance, BHEL has eight, and BPCL has five vacancies for independent directors. It confirms that the government has failed to adhere to the SEBI guidelines. Four companies (11 percent) of the 38 are headed by the non-executive independent chairmen, one by the nominee chairman, and nine companies (24 percent) are chaired by ‘other’ non-executive chairmen.
Board strength
The study revealed that five public sector companies—SBI, Bank of Baroda, PNB, BHEL, and BPCL— failed to comply with clause 49 of the listing agreement because the proportion of independent directors in the boards of these companies are less than the minimum requirement of 50 percent of the full board strength. These companies are headed by the executive chairman-cum-managing directors (CMDs). The respective government ministries must seriously look into the matter. Only two public sector companies—ONGC Ltd and NTPC Ltd—complied with the SEBI clause. On the other hand, four private sector companies—ITC, L&T, DLF, and Jindal Iron & Steel—failed to comply with the clause.
Independent Sensex and Nifty companies
It was observed that there are 223 independent directors in the boards of the 38 companies (table 2), out of which, 195 and 28 directors were inducted in the boards of 31 private sector and seven public sector companies respectively. Out of 195 independent directors, 175 (90 percent) directors are in the boards of various private sector companies and the rest 20 (10 percent) independent directors are in the boards of private sector banks. Out of the 28 independent directors, 18 (64 percent) are in the boards of various public sector companies and the rest 10 (36 percent) independent directors are in the boards of public sector banks. Table 2: Independent directors in Selected Sensex and Nifty companies in 2013-14
Selection, appointment and tenure
It was observed that all the 38 companies have either inducted or are in the process of induction of necessary action to fulfil the criteria for selection, appointment and tenure of independent directors in line with the provisions of the new Companies Act.
Lead independent director
Only three (eight percent) listed companies out of the 38—Reliance, Bharti Airtel and Wipro— appointed a lead independent director to represent and act as a spokesperson for independent directors as a group in order to work closely with the chairman and the chief executive officer (CEO) and take a lead role in the board evaluation process, apart from other important board functions. This is considered to be a good governance practice exhibited by these companies at par with the international standard of corporate governance. Meeting The survey revealed that out of the 38 listed companies, only two companies in the public sector domain—BHEL and ONGC—and Hindustan Unilever in the private sector, formed a committee of independent directors and held one meeting each in 2013-14. Reliance and Bharti Airtel disclosed independent director meetings although no such formal committee was formed. The remaining 33 companies are required to constitute and disclose full information on the committee/meeting of independent directors to comply with Companies Act and SEBI clauses. Audit Three listed banks and PSUs—Bank of Baroda, Punjab National Bank, and BHEL did not comply with the revised clause of the listing agreement because of lack of minimum requirement of the number of independent directors in the audit committee. Nomination and remuneration Three companies—Lupin, PNB, and BHEL—failed to comply with the minimum requirement of the number of non-executive directors (NEDs) in the nomination and remuneration committee. Bharti Airtel, Bank of Baroda, SBI, and PNB failed to comply with the provision of independent director as chairman in the committees. Independent director committee BHEL, ONGC and Hindustan Unilever were the only companies that formed the independent director committee in 2013-14. Disclosure of remuneration PNB was the only public sector company that didn’t disclose the pecuniary transactions of its non-executive/independent directors with the organisation. All the 37 other companies disclosed it in their annual report 2013-2014. Seven (18 percent) of the 38 companies—PNB, SBI, Sun Pharma, Lupin, BPCL, ONGC, and Reliance—did not disclose the criteria for making payments to their non-executive/independent directors. On the other hand, nine (24 percent) of the 38 companies did not disclose the information about the number of shares held by their non-executive/independent directors. The companies include Maruti Suzuki, Axis Bank, ACC, IDFC, Cipla, BPCL, NTPC, Reliance, and Bharti Airtel. Also, not a single company disclosed information about the shareholding of non-executive/ independent directors in the company prior to their appointment. Details of training imparted Bajaj Auto, Maruti Suzuki, Axis Bank, PNB, Bank of Baroda, SBI, ICICI Bank, ACC, UltraTech Cement, IDFC, DLF, BHEL, Tech Mahindra, TCS, Tata Steel, Jindal Steel & Power, Sesa Sterlite, Cipla, Sun Pharma, Lupin, BPCL, and Bharti Airtel, did not disclose the details of training to independent directors in their annual report. Conclusion It is apparent from the micro-analysis of the 38 companies that their performance on the adoption of corporate governance system rather satisfactory in the light of the Companies Act and SEBI clauses. They, however, do not compare favourably with the international governance standards.
