The Securities and Exchange Board of India (SEBI) is likely to tighten corporate governance norms pertaining to related-party transactions, and practice of nominating independent directors and auditors by promoters.
Some examples of such transactions include loans to group companies, standing guarantee to loans taken by group companies, purchase or sale of products within group companies, purchase or sale of products to companies in which the director of the parent company has an interest. Industry players say corporates, for long, have side-stepped the legal framework to engage in a web of transactions with group subsidiaries controlled by the management.
"It''s an unhealthy practice of diversion of funds from the main company to a non-core business activity of a subsidiary at high valuations, at the cost of minority shareholders...there is a need to make disclosures and approvals of such related-party transactions more stringent," said a person close to the development.
At present, related-party transactions are covered under accounting standards, Clause 49 of the listing agreement and under Companies Act. All related-party transactions are expected to be disclosed by the parties, especially directors.
In the case of appointment of independent directors, many companies have constituted nomination committees -- some entirely of independent directors and in others, a combination of non-independent and independent directors. Many companies have not set up nomination committees, as it is not mandatory under Clause 49. However, Clause 49 mandates nomination of auditors by an audit committee. It stipulates that the audit committee should constitute a minimum of three directors, with the majority being independent directors. Recommendations of the audit committee/board have to be approved by shareholders. "
According to the rule book, independent directors or auditors are to be appointed by shareholders. However, in most companies, they are appointed by promoters, and approved by shareholders.
Source:-Economic Times(25-Mar-09)
Some examples of such transactions include loans to group companies, standing guarantee to loans taken by group companies, purchase or sale of products within group companies, purchase or sale of products to companies in which the director of the parent company has an interest. Industry players say corporates, for long, have side-stepped the legal framework to engage in a web of transactions with group subsidiaries controlled by the management.
"It''s an unhealthy practice of diversion of funds from the main company to a non-core business activity of a subsidiary at high valuations, at the cost of minority shareholders...there is a need to make disclosures and approvals of such related-party transactions more stringent," said a person close to the development.
At present, related-party transactions are covered under accounting standards, Clause 49 of the listing agreement and under Companies Act. All related-party transactions are expected to be disclosed by the parties, especially directors.
In the case of appointment of independent directors, many companies have constituted nomination committees -- some entirely of independent directors and in others, a combination of non-independent and independent directors. Many companies have not set up nomination committees, as it is not mandatory under Clause 49. However, Clause 49 mandates nomination of auditors by an audit committee. It stipulates that the audit committee should constitute a minimum of three directors, with the majority being independent directors. Recommendations of the audit committee/board have to be approved by shareholders. "
According to the rule book, independent directors or auditors are to be appointed by shareholders. However, in most companies, they are appointed by promoters, and approved by shareholders.
Source:-Economic Times(25-Mar-09)
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