PSUs & Clause 49: The unaddressed anamolies

The chairman of SEBI M. Damodaran released a statement on 3^rd January, 2008 stating that public sector companies will also have to comply with Clause 49 of the listing agreement for stock exchanges. Clause 49 of the Listing Agreement was added as late as in 2000 after the recommendations of the Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities Exchange Board of India (SEBI) in 1999 and has been subject to amendments and revision ever since.

In 2002 the Narayana Murthy Committee was constituted by the SEBI to assess the adequacy of current corporate governance practices and to suggest improvements. Based on the recommendations of this committee, SEBI issued a modified Clause 49 on October 29, 2004 (the ‘revised Clause 49’) which came into operation on January 1, 2006.

The Clause 49 of the listing agreement stipulates that 50% of the boards of listed companies should comprise of independent directors in case they have an executive chairman and one-third in case of an non-executive chairman, which in turn promotes the original intent of Clause 49 by protecting the interests of investors through enhanced governance practices and disclosures. The stated clause aims at a corporate governance requirement which needs to be met by all listed companies, in all Indian Stock Exchanges, including the NSE and BSE.

But, Mr. M. Damodaran’s claim that PSUs are not exempt for not complying with Clause 49 of the Listing Agreement, looses weight as one systematically examines the revised Clause 49 which the SEBI announced vide its circular no. SEBI/CFD/DIL/2004/12/10 dated October 29, 2004 which has acted as an amendment to Clause 49 of the Listing Agreement.

The starting paragraph of the circular itself states that the revised clause 49 shall apply to all the listed companies, in accordance with the schedule of implementation given in the revised clause 49 however for other listed entities, which are not companies, but body corporates (e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the revised clause will apply to the extent that it does not violate their respective statutes, and guidelines or directives issued by the relevant regulatory authorities.

Therefore, it is hard to imagine, with such a provision in the revised agreement, on how the original intent of the entire basis of the formation of Clause 49 would be upheld, as any PSU which is a body corporate, would only be required to seek refuge under their statutes against the implementation of Clause 49 in their respective companies. Such, an exclusion also includes the directives issued by the relevant authorities, which in turn means that any directives issued by the regulatory authorities, would have more binding value over the body corporate, rather than the compliance with Clause 49. Such, exemption clauses like the one in Clause 49, only gives both the private as well as the public sector units, a loophole in the regulation which can be exploited. Then what purpose does the law serve, if it provides a shield that can be used, against its own implementation at the time of need?

Clause 49 acts, not as a regulatory measure imposing the ideal of corporate governance and transparency in the operations of various organizations, but in turn has been turned into another piece of law, which would not be able to implemented effectively and efficiently, due to the gaping hole by which, most of the body corporate can escape. It in effect merely becomes a skeleton legislation which, could in turn only be abused and not effectively used.