Abstract
Indian stock exchange holds a predominant place in the world’s economy as it is witnessing increase in its demand and has subsequently gained importance which requires strategies to govern smooth functioning. In light of the present globalization age and the ensuing rise in global investments. Listing agreement which is a part of corporate governance provide regulatory strategies for the listed company to follow and one such requirement is to have Independent Directors on the Board. The research paper will focus on the issue, are Independent directors really independent and how it has affected the corporates and the shareholders in India. It will delve into key factors which has affected the role of Independent directors in India over the years. The research paper will focus on the problem of the Indian stock exchange that need to be relooked and amended to eradicate the issue that India has been facing within the current legal system and analyse with jurisdiction that has overcome this problem which is New York stock exchange (NYSE). The comparison has been done taking into account the provision/ laws, Clause 49 laid down by Securities exchange board of India (SEBI) and 303A and 303B of New York Stock exchange (NYSE) and NASDAQ. And lastly, the paper shall cover what are the key takeaways that India can take for better implementation of listing agreements.
Keywords – Listing agreements, Securities and Exchange Board of India (SEBI), New York Stock Exchange (NYSE), Independent Directors, Promoters, Corporate Governance.
Introduction
Corporate governance serves as the cornerstone of modern business operations, providing a framework for effective decision-making, accountability, and stakeholder protection. One of the strategies being ‘Stock exchange listing agreement’ which is signed between the public company and stock exchange by adhering to their requirements. Clause 49 of the Listing agreement laid down compliance rules for all the companies whose equity shares have been listed on recognized stock exchange. Clause 49 of the Listing agreement was revised and amended by Ministry of Corporate affairs and laid down by Securities and Exchange Board of India (SEBI) in 2014 for companies to operate with the amended Clause. The circular has added clarifications regrading matters relating to appointment and qualifications of directors and independent directors. There have been several reforms in the regulations for corporate governance. But for the growth of the company and corporate governance compliance one of the most important promulgation was Clause 49 of Stock Exchange Listing Agreement by SEBI. It laid down the requirement of having Independent Director on the board and who is qualified as an Independent Director. It lays down all public companies which are listed on the stock exchange with paid up capital of Rs 3 crore must have one-third Independent Directors. Moreover, companies which are listed on the stock exchange and has an executive Chairman, then 50 percent Independent directors must be on board. At the heart of corporate governance lies the concept of independence, particularly embodied by independent directors. These directors, free from affiliations with company management or major shareholders, are tasked with overseeing corporate actions, ensuring transparency, and safeguarding the interests of all stakeholders, including minority shareholders.
However, the Indian corporate landscape presents a unique challenge to the autonomy of independent directors due to the dominance exerted by promoters, who often hold significant stakes and wield considerable influence over company affairs. Promoters, typically founders or major shareholders, may have vested interests that diverge from those of minority shareholders or the broader corporate community. Consequently, the presence of promoters can potentially compromise the independence of directors, raising concerns about conflicts of interest, undue influence, and governance lapses.
Research Methodology
The study uses a mixed-methods approach, combining quantitative and qualitative data. Quantitative data will be collected through study of statistical data whereas Qualitative data will be collected through a content analysis of various scholarly articles. The research has been narrowed down to an issue of listing agreement which focuses on the aspect of ‘independence of the board’ which is largely a part of corporate governance.
Literature Review
Threat to director’s ‘Independence’ in India
- Do family dominated firms possess threat to independence?
Indian firms are mostly family-run, with the promoters exercising significant control over the company. There is a natural inclination to select independent director who is more in line with the family’s interests than the company’s. It is important to note that what are the alternatives available for independent directors in case they have a dissent regarding any matter discussed in annual general meeting which is majorly family dominated board. What happens in such case? Generally, the independent director will ultimately resign from the post due to non-consideration of his/her views. However, the real reason of resigning of an Independent Director is never disclosed to the public and neither it is mandatory as per Clause 49 to disclose the reasons for resigning. It is secretly kept with the inner coterie which ultimately defy the essence of Listing Agreement laid down by SEBI. Therefore India needs to go beyond this for better corporate governance.
Additionally, it has been observed that expert lawyers or chartered accountants can be appointed as Independent Directors without even undergoing the proficiency test. The question of ‘independence’ arises once again if the chartered accountants and lawyers are providing their services to the company which proves that they have personal interest in the company. The reality is that the appointment and the role of independent directors is shady and complex.
- Promoter Dominated Companies
In promoter-dominated companies, independent directors often encounter multifaceted challenges that may compromise their autonomy and ability to fulfil fiduciary duties effectively. These challenges stem from the inherent power dynamics, potential conflicts of interest, and the complex interplay of personal relationships within corporate boards. Understanding and addressing these challenges are crucial for ensuring the integrity and independence of directors in such environments. Promoters, by virtue of their significant shareholding and strategic positions within the company, wield considerable influence over corporate decisions. Their dominant presence in boardrooms may exert implicit pressure on independent directors to align with their interests, potentially undermining their autonomy. Directors may face challenges in challenging or questioning the decisions or actions proposed by promoters, fearing repercussions or marginalization within the board. Promoters may employ various pressure tactics to influence independent directors, ranging from subtle persuasion to overt coercion. These tactics could include leveraging personal relationships, offering inducements, or threatening repercussions for dissenting views. Directors may find themselves torn between upholding their fiduciary duties and succumbing to external pressures, highlighting the delicate balance between independence and self-preservation.
Promoter-dominated companies often present a fertile ground for conflicts of interest, where directors may have personal or professional relationships with promoters or their affiliated entities. Such relationships can cloud judgment, compromise objectivity, and hinder the ability of directors to act in the best interests of the company and its stakeholders. Mitigating conflicts of interest requires robust disclosure mechanisms, ethical guidelines, and proactive measures to ensure impartial decision-making.
The composition of corporate boards, including the balance of executive and independent directors, significantly influences the dynamics within boardrooms. In promoter-dominated companies, where promoters may nominate individuals sympathetic to their interests as directors, maintaining independence becomes challenging. Groupthink, lack of diversity, and the dominance of promoter-aligned voices may marginalize independent directors, limiting their ability to exercise independent judgment and oversight.
While regulatory frameworks exist to promote independence and governance standards, their effectiveness relies on compliance and enforcement mechanisms. Inadequate enforcement, lax oversight, or regulatory capture may embolden promoters to flout regulations, further eroding the autonomy of independent directors. Strengthening regulatory vigilance, enhancing transparency, and imposing stringent penalties for non-compliance are essential to deter governance lapses and safeguard directorial independence.
Therefore, Securities and Exchange Board of India (SEBI) needs to have stringent policies to regulate the loopholes of the current corporate system. Despite having regulatory provisions we are yet too far to achieve the main objective of these provisions, these are just mere ritual that listed companies have been following. If listed companies want to grow they need to relook the role of Independent directors. Their dissent must be considered for the overall protection of shareholders and stakeholders.
Do Corporate Governance need stringent reforms after Satyam Scandal?
In Satyam Scandal: which was unfolded in 2009, serves as a stark reminder of the risks associated with compromised independence in promoter-dominated companies. Founder and chairman Ramalinga Raju confessed to orchestrating a massive accounting fraud, inflating profits and fabricating balance sheets over several years. Despite the presence of independent directors on Satyam’s board, they failed to detect or prevent the fraudulent activities, raising questions about their effectiveness and autonomy. The scandal underscored the importance of robust oversight, ethical governance practices, and the need for independent directors to exercise diligence and scepticism in fulfilling their duties.
After the Scandal, around 350 Independent directors have resigned from the companies from all over the country. This gave a signal to the investors that something is not well within the board of the companies. As mentioned above, Clause 49 of Listing agreement do not mandate disclosure of real reason behind resigning of Independent Directors from the company. However, resignation of Independent Directors in a considerable amount signalled that the directors are not willing to take the charge of the consequences of the company’s misconduct. This brings us to a paradox that –Can Independent directors be said to be independent if their jobs are in the hands of the promoters? India has family dominated structured companies and the interest of the promoters often overshadow the interest of the shareholders therefore, even Independent Directors lose their position to sufficiently influence the board.
Nomination and Selection Process for Independent Directors
The nomination and selection process of the independent directors in controlled firms of the company defy the independence of the independent directors. The reason being controlling shareholder may propose to vote for the person who is beneficial for them, and remove any member of the board of directors, including the independent directors, at its discretion since it either it has majority control over the board or voting control.
The FICCI Grand Thornton (FICCI – GT) report, the survey determines that around 56% of the respondent (it includes CEO, CFO’s Independent directors and leaders) do not have a nomination committee for appointment of the independent director. The job is in the hands of the promoters and is more likely that promoters will elect a person as per his discretion (personal interest) or they might elect a person who is known by people for increasing the integrity of the board. This clearly restricts the choice to a smaller group of people and straight violation of the purpose of the listing agreement.
Additionally, as per AAH survey Report they researched about board composition and observed that more than 90% of the companies appoints independent directors through CEO’s/promoters social network.
The study if Indian companies comply with the clause 49 of Securities & Exchange Board of India (SEBI).
The findings done by the authors is with respect to the secondary information disclosed by the companies in their annual reports under the compliance of corporate governance. Information consisted of size of the company, total assets of the company, number of non-independent and independent directors, board meetings held and attended by the members. The sample and size are S&P CNX index 500 as the sample; it is a diverse representation of various Industries.
Figure – Distribution of companies based on presence of promoters on the Board.
(Source – Calculation of author based on the secondary information disclosed by the company)
The figure above captures the data of distribution of companies based on the presence of promoters on the Board of Directors. It shows 8% companies promoted by Government of India. 2% of companies are promoted by foreign corporate promoters. 13% of companies are promoted by Indian corporate promoters. It is often observed that presence of corporate ownership reduces the chances of individual as an insider. Companies where Indian individual promoter is non-executive consists of 21% and majority of the sample displays where individual promoter is executive of the board of directors which clearly indicates that he/she acts as a managing director of the company. The above figure clearly indicates that Indian companies are occupied by the insiders who are promoters cum manager.
| Nature of Promoter | Number of members on board (Min) | Number of members on Board (Max) | Number of Independent Directors (Min) | Number of Independent Directors (Max) |
| Government | 6 | 26 | 4 | 16 |
| Foreign Corporate promoter | 5 | 12 | 2 | 5 |
| Indian Corporate Member | 5 | 23 | 3 | 12 |
| Indian Individual Promoter (Non-executive member) | 5 | 22 | 3 | 10 |
| Indian Individual Promoter (executive member) | 5 | 22 | 2 | 11 |
Table shows us the board of directors in the company based on the promoters in the company. Independence is the highest in a company where promoters are usually Indian corporate promoter and lowest in the company where promoter is Indian individual and the executive member of the board. Additionally, it is observed from the above table that companies which have Indian individual promoter (non-executive) have less than one-third independent directors and some government companies also have less than one-third independent directors this is clear violation of Clause 49 of the Listing agreement. The study gives an idea that even though we have best regulatory strategies for corporate governance but due to lack of poor implementation the main objective of these regulatory strategies fails.
Regulation that governs New – York Stock Exchange Listing Agreement
303A.01 of the New York stock exchange mentions the criteria of having majority of independent directors on the board. The requirement of having majority of independent directors on the board is to reduce the conflict of interests and increase the quality of management and key managerial decisions.
303A.02 lays down independent test which ensures to serve the purpose of these standards, firstly, director needs to affirmatively determine that they do not have any material relationship with listed company either directly or indirectly and in addition, while determining the independence of the directors who will serve on the compensation committee of the listed company, the board of directors shall take into account all the factors, whether a director’s relationship with the company is material to the ability of being independent. The commentary of the statute mention that when the materiality of the director relationship with the company listed on the stock exchange is determined, it should not be judged solely from the standpoint of the directors but also from that person or the organization with whom the director has relation with.
Moreover, section 302A.02(b) explains any person who is an immediate family member cannot be an independent director and therefore, the disclosure shall be made on the website by the company for the shareholders. To qualify as an independent director under New York Stock Exchange and NASDAQ any director shall not hold position of management and moreover, any former director is not considered independent for three years after their retirement.
Additionally, any director who has received money more than $1,20,000 in past three years from the company shall not be an independent director as per the regulations, these standards are regulated so that the independent director are not relied financially on the company and have a distant from the management of the company and moreover there is no influence in controlling the company.
The company shall make disclosure as per 302A.02(b)(v) about the charitable relationships. Gifts given by the company to the director shall be disclosed and moreover, any amount received in excess to the remuneration they are not an independent director.
How has New York Stock surpassed Indian Stock Exchange?
If any director has become an independent director as per the statute, he/she is not an independent director once and for all it shall be reassessed from time to time as per the circumstances as individual and company changes with time. Moreover, if a concern is raised by the shareholders for the ‘independence’ of the directors, that a director has an ulterior motive to associate with the company there shall be specific litigation procedure in Delaware.
In the United States, steps have been taken to address this issue by mandating that each company establish a nomination committee comprising independent directors responsible for recommending candidates for independent director positions. However, in India, Clause 49 does not require companies to establish such a committee consisting of independent directors. The appointment of independent directors in India is typically determined by shareholders, leading to varying degrees of control and influence over the decision-making process depending on shareholders’ holdings. This incongruity in the appointment process poses significant obstacles to the appointment of truly independent directors in India, unless measures are taken to remove the authority of controlling shareholders in selecting independent directors.
Moreover, the incongruity in the role of independent directors extends further. It is evident that the concept of independent directors has been transplanted from an outsider system to an insider system, such as India, without sufficient consideration for differences in corporate structures. Unlike in the United States, where both the New York Stock Exchange (NYSE) and the NASDAQ do not require a majority of independent directors on the board for “controlled companies” – those where a single entity controls over 50% of voting power. This exception is justified on the basis that in companies with a controlling shareholder, independent directors may not provide sufficient protection to minority shareholders. Additionally, this exception explicitly acknowledges that independent directors primarily address the agency problem between managers and shareholders, rather than the agency problem between controlling shareholders and minority shareholders.
Evolving Jurisprudence of ‘Independence’ in corporate world
The concept of independent directors has been centered on financial independence globally, but the jurisprudence has evolved since then; in country like USA where the independence of directors has a broader meaning. In Oracle the Delaware Chancery court held that ‘independence’ is just not limited to financial aspect but invokes to investigate other aspects like connections and social relations of the Independent Director with the company.
The Chairman of SEBI M. Damodaran reflected on the similar concern and gave a different perspective and said that ‘although friendships are not defined as material relationships that will ensure independence of the directors. Additionally, if an Independent Director acts as a watchdog for the public shareholders, then the directors will attain the true essence of it. Moreover, the directors must have the willingness and ability to bring a change in the company for the sake of company’s interest and not personal benefits. The regulations which are set forth is not sufficient and do not guarantee independence in their performance. Therefore, the selection and nomination process of the company needs an attention by the committees for the performance-based independence.
Method
This research is based on primary and secondary information. Primary information includes comparing the guidelines laid down by Securities Exchange Board of India (SEBI) and New York Stock exchange (NYSE) for listing their companies on the stock exchange. Furthermore, research delves in secondary information disclosed by the companies in their annual reports as compliance procedure of corporate governance. The sample and size are S&P CNX Index 500 which is a diverse representation of various industries.
Suggestion
The study mention above shows clear violation of clause 49 by few companies, India is at par with major developed countries in regulatory strategies for corporate governance but the root problem lies in implementing it. The disclosure requirement in India has very low impetus for the companies to voluntarily disclose material facts which shareholder needs to know, as mentioned above that the real reason behind resigning of independent director is never known to the public.
Conclusion
Independence of the director is an important aspect of the company which protects the interest of minority shareholders. The comparison of Indian stock exchange and New York Stock Exchange clearly shows that New York Stock Exchange has surpassed in reforming their corporate governance regulations and implementing them. There are certain takeaways that India can take for their swift operations of stock exchange. The dissent of independent directors must be heard and disclosed by the company, usually it has been neglected or their decision is influenced by the board in their favour. The lack of poor implementation of these regulation takes away the main objective of these regulations. Securities and Exchange Board of India shall make stringent policies where they can prosecute the management of the companies for involving in fraud and non-disclosure of material facts.
By Samiksha Singh
Student of Jindal Global Law School