Finance ministry to chalk out code for corporate governance

Finance ministry to chalk out code for corporate governance

Santanu Saikia

NEW Delhi, May 7: The finance ministry has taken the initiative to evolve a code of "desirable corporate governance". A formal set of conduct rules, some of which may have to be compulsorily adopted by corporates, are expected to be announced by the BJP-led Government.

In an attempt to expedite the process, North Block has goaded the Unit Trust of India (UTI), the largest shareholder in the Indian corporate sector, to hold a roundtable conference on the code on May 17.

Corporate chieftains, top-notch bankers, representatives of financial institutions (FIs), foreign institutional investors (FIIs), the Reserve Bank of India (RBI), Sebi and the department of company affairs will attend the conference. A finance ministry team will fly to Mumbai to coordinate the discussions.

A fact sheet of sorts has been drawn up for the discussions by the Sebi-UTI duo. The consensus in the Government is that the objective of good corporate governance is maximising long-term shareholder value and the ability to takeinformed managerial decisions vis-a-vis its claimants -- in particular, its shareholders, creditors, customers, employees and the state.

Some of the issues that are to be taken up in Mumbai are:

Possibility of prescribing a minimum percentage of non-executive directors in a listed company with a minimum turnover of, say, Rs 100 crore. The non-executive directors could have clearly defined responsibilities within the board such as in audit committees. Payment of commissions over and above the sitting fees to these directors has been a suggestion.

Outlining a transparent set of disclosures which should be placed before the board on a routine basis. These could include segregated financial statements, internal audit reports, default in payments of interest and inter-corporate deposits, issues concerning public or product liability, transactions that involve substantial payment towards goodwill, brand equity, recruitment and labour policies, quarterly details of foreign exchange exposure,etc.

Necessity of setting up audit committees, with a good representation in these committees of non-executive directors. The mandate of these committees should be clearly defined.

Detailing financial and non-financial disclosures. For example, inappropriate treatment of an item in the balance sheet should be dealt with by the directors' report. Disclosures with regard to sole selling agents and requirement of a register which discloses the interests of directors, and role of their relatives, in any contract or arrangement of the company.

Issues relating to the relationship between corporates and the stock markets and how to make them transparent and self-governing.

The main point of conflict, however, will be over the role of nominee directors of financial institutions. Lending institutions such as IDBI, IFCI and ICICI hold substantial debt-cum-equity positions in the Indian corporate sector. But these institutions have not pushed for corporate governance in the manner they weresupposed to, especially when a stakeholder is both a creditor and owner of equity. The kind of consensus that can be hammered out over this crucial issue will determine how far the North Block initiative will succeed.

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