Non-compliance with corporate governance to attract daily penalty

The Securities and Exchange Board of India (SEBI) is considering a proposal to prescribe fine on a daily basis for delay in implementing corporate governance norms, according to M. Damodaran, Chairman of the board. "The longer the delay and bigger the company, the richer our coffers will be,'' he said here on Saturday, ruling out any extension of the deadline for enforcement of the revised Clause 49 of the Listing Agreement (between companies and stock exchanges) beyond December 31, 2005. "This matter has been debated for five years and I am not entirely convinced that Indian corporates need more time'' to implement the governance norms. Failure to comply with the norms might lead to delisting of some "big companies" which might give some people "shock.'' "I believe Indian markets can take some shock,'' he said, and added that "we are going to make non-compliance painful.'' Addressing a meeting organised by the Madras Chamber of Commerce and Industry (MCCI), Mr. Damodaran said SEBI was against any dilution of essentials of the norms (prescribed by the board on the recommendations of the Narayana Murthy Committee) and would "enforce them, straining every sinew, unless Parliament, in its wisdom, chooses dilution.'' Pointing out that the recommendations of the Irani Committee (appointed by the Department of Company Affairs) did not have a statutory status, he said the difference between the recommendations of the two committees on the matter of independent directors was not as wide as was commonly made out. The committee, while suggesting a minimum of one-third membership for independent directors "in general'' (against 50% decided upon by SEBI), had also said that the regulator could make special provisions in other cases. The committees had a common view in the case of companies not having a wholetime executive chairman. Declaring that India would miss a good opportunity if it failed to enforce corporate governance when the country had emerged as one of the fastest growing economies, Mr. Damodaran said SEBI had rejected suggestions that it should take advantage of the tendency towards "regulatory arbitrage,'' whereby companies were prepared to list themselves in countries which accepted lower standards of governance. The SEBI Chairman said a circular would be issued clarifying that "internal controls'' which managements would have to certify referred to financial controls. SEBI would reduce the minimum number of meetings of directors under Clause 49 to three a year from four. He rejected the "knowledge test'' (suggested by the Irani committee) for deciding culpability of directors, on the ground that such a norm would encourage companies to keep important matters away from the agenda of the board of directors, who could then plead ignorance of the matter concerned. Ravi Parthasarathy, Chairman, ILand FS, appealed to SEBI to facilitate listing of holding companies being formed in clusters of small and medium enterprises (SMEs), starting with Palladam and Hyderabad.