Promoters, directors or employees of a company are increasingly involved in taking key business decisions in wake of complex corporate environment. There are various corporate regulations which define ‘related parties’ of a company. In a recent correspondence with Securities and Exchange Board of India (Sebi), Kolkata-based ferro alloy maker Maithan Alloys has sought to clarify the definition of ‘related parties’ under the Listing Obligations and Disclosure Requirements (LODR) of stock exchanges.
Cousins in Question
A Cousin of Shareholding Promoter, a Vice President & Shareholder of Maithan Alloys (a Kolkata based manufacturer of high value ferro alloys) Can Be Appointed as Independent Director on Board of Maithan Alloys: Sebi. Maithan Alloys had recently approached Securities and Exchange Board of India (Sebi) for clarification on the rules to be followed by the company for appointment of independent director on the Board of the Company. Interestingly enough, Siddartha Shankarth Shankar Agarwalla, the Vice President of the Company and Shareholder of the Company had suggested name of his cousin (PhD from Stanford University and assistant professor in a well-known university) for being appointed as an independent director on Board of Maithan Alloys. Whether such cousin would qualify to be called as a ‘related party’ under Listing Obligations and Disclosure Requirements (LODR) of Securities and Exchange Board of India?
Regulatory Clarity
A related party as defined under LODR includes a long list of relatives of an individual. However, Maithan could have argued that the word ‘relatives’ would only mean those specified in the said regulation. After informal clarification from Sebi, it emerges that cousins of a person would not be considered as ‘relatives’ under the said regulation. Therefore, Siddhartha’s cousin is eligible to be appointed as independent director of Maithan Alloys.
The SEBI guidance has been appreciated by the legal experts as the same has been interpreted by the SEBI only in terms of the statutory definitions without reading into the same any personal relationship which may impact the independence of a directorship.
The Debate on Compliance
However, for India to practice corporate governance as practiced in other countries, a lot more needs to be done. Sebi’s formal guidance issued to deal with such cases in future would be a good beginning. However, Sebi needs to educate all the stakeholders on absolute compliance required to practice corporate governance in the country. As Subramanian pointed out the first level of three levels of compliance is apparent, the second level is adequate and the third level is absolute. For normal circumstances apparent and adequate levels of compliance are required to be followed but for extraordinary circumstances absolute compliance is required to be followed.
JN Gupta, Founder, Stakeholders Empowerment Services has expressed his skepticism on this issue and said that this is against the stance of Sebi which maintains that the objectivity of independent directors would get compromised only after a decade on the board of a company and now cousins, who are deeply connected with each other, would compromise the independence of the director.
Moving Forward: The Importance of Context
While formal guidance has been given by Sebi to a specific set of circumstances, to clarify its position with respect to definition of “related parties” and thus independence of a director, many more issues and their implications for corporate governance and compliance will get generated and need to be addressed.
In order to strengthen corporate governance framework in India, Indian Institute of Corporate Affairs is endeavoring to empower companies with database of over 19,000 Independent Directors who are willing and ready to be considered by companies for being inducted as Independent Directors on their Board.
In conclusion, Sebi has to walk a tight rope while enforcing laws and rules and ensuring that companies are complying with same. On one hand, there is a need to ensure that Companies are governed in accordance with Rules and Regulations framed there under and on other hand, there is also a need to recognize the practical reality of family ties and how they can be supervised by independent directors including independent directors. Whole corporate world is now watching this space to know how family ties would interfere in Independent Oversight of directors of the Company.