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Will big companies have directors representing small shareholders?

Sebi's consultative paper on corporate governance norms proposes innovative measures, including not allowing independent directors to resign without citing a reason.

Suman Layak        Last Updated: January 8, 2013  | 21:20 IST

Will Sebi allow minority shareholders to elect a representative to company boards? There's a proposal to that effect - but the negotiations start now.

On Friday, January 4, Sebi had put out a consultative paper on corporate governance norms in India. Many of the proposals are designed to align the listing agreement between stock exchanges and public listed companies with the provisions of the Companies Bill, 2012, that was passed by the Lok Sabha in December.

There are also some original proposals in the paper:

The most interesting proposal, on page 12, asks if companies with a certain market capitalisation should have a director elected by small shareholders. The Companies Act, 1956, has a provision for election of a small-shareholder director but it is not mandatory.

The next proposal asks if small shareholders can be allowed to cumulatively vote for one candidate to elect him to the board of directors. So, if there are three board positions vacant and there are four or five candidates, shareholders may be allowed to cast all their votes for the three positions in favour of one candidate, ensuring his victory. This is something that is allowed in the Philippines and China.

BLOG:Lessons for independent directors

Another interesting proposal deals with recognition being given to proxy advisory firms. These are independent firms that advise shareholders on how to vote at annual general meetings. This is aimed at ensuring private-sector enforcement of corporate governance principles. There are three active proxy advisory firms in India right now: IIAS in Mumbai, InGovern in Bangalore and Stakeholder Empowerment Services in Chennai.

The paper's authors have gone to considerable length to define and fine-tune the role of independent directors on company boards. One of the proposals in this section suggests separate meetings by independent directors without any non-independent directors being present.

Independent directors often resign from company boards when they have differences with the management. The paper suggests that on resignation these directors will have to specify the reasons behind their resignation.

While they are allowed to cite "personal reasons" for quitting, in case they continue to be directors on boards of other companies, they will have to explain why the "personal reasons" are not affecting their duties there.

Responses to the paper can be sent to: anandr@sebi.gov.in/cfddil@sebi.gov.in

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