New Delhi: Stressing on a need for better governance practices at listed companies, Sebi Chairman U K Sinha said things are changing for good and shareholder meetings should not be like a "chai and samosa party".
Sinha gave credit for this change to growing activism of institutional investors, stronger regulations and an improved surveillance mechanism at Sebi, while asking independent directors to act like "an extended arm of the regulator" when companies discuss business matters in their board meetings. The Sebi chief also asserted that the onus needs to be put more on the promoters or the top executives, rather than the companies as a whole, when it comes to penalties.
Speaking at a session on 'Improving Board Effectiveness' during a KPMG event, Sinha said that positive changes are also been seen at board meetings where compensation proposals for top executives are being rejected almost on a regular basis -- a trend which was "unheard of" till about 4-5 years ago. He also rejected the criticism that regulators were becoming activists and praised the institutional investors for adopting an effective activism to put shareholder proposals for proper discussions.
"There is a feeling that regulators are becoming activists. In fact one particular corporate leader made a remark that Sebi is becoming a dragon and may be we will have to move to other parts of the world to do business," he said. About positive changes taking place, Sinha said: "In boards after boards, compensation proposals are getting rejected. Five years ago, I think it was unheard of.
"Many people even didn't go to attend board meetings and it was granted that it (their renominations) was going to happen. In fact the general meetings of corporates of India were mainly a 'chai and samosa' party," he added. "There is an alliance now of institutional investors and activists. Previously this alliance did not exist and because of that even if there were some murmurs... It was not proven to be effective. Now, in countries after countries this alliance is proving its worth and they are proving they can be effective," Sinha said.
The Sebi chief also said that the regulations are getting amended across many countries and the rules were being tightened to remove the loopholes and to empower regulators. "More and more resources are placed before the regulators. Between 2006 and 2013, the US market regulator SEC has increased its expenditure by 62 per cent and employee strength by 22 per cent.
For the FCA in the UK, the numbers are 48 per cent and 15 per cent. Similarly it is happening in many other countries," Sinha said. He added: "In India, for example, in 2006 we had only 440 employees and today we have 760 employees... We are now recruiting chartered accountants from the campuses, we are recruiting statisticians, system analysts and IT professionals. "I would like to tell you that not only in India but also in other parts of the world, huge amount of money is being invested by the regulators on surveillance mechanism.
Here in India, in Sebi, we have the surveillance system which I would like to believe is one of the best in the world. Everyday we get almost 100 alerts." In the last three to four years, the trend is shifting away from penalising the company to penalising the executives concerned, Sinha said. "Every company feels that if there is a penalty on the company, then it is an additional cost for doing business in the country. Why not penalise executives who are responsible. This is a very recent trend," the Sebi chief noted.
According to him, an independent director is an extended arm of the regulator as well as a trustee for all the shareholders. Noting that related party transactions "are something we really frown upon", Sinha expressed hope that independent directors would do due diligence on such matters. With regard to regulations for listed companies, Sinha said strict action would be taken against those entities violating the norms. "Our attempt now is that we will first see that there is penalty on the company, there is a penalty on the directors and how we can deprive the promoters of the company from getting economic benefits.
"Only as a last resort we have said that we will go for suspension of trading," he said. At the end of March, there were 1,100 companies that were in violation of listing agreements and 900 entities were not in compliance with corporate governance norms, he added. Sebi has come out with new guidelines to look at the quality of disclosures made by listed companies. "The mandate has been given to the stock exchanges and we are now inspecting the stock exchanges to find out whether those mandates are actually followed or not," Sinha said.
"We are now getting into listing regulations. Violations of listing norms will invite prompt penalties and prompt actions from Sebi. We are going to do it as early as next month," he added.
