Tuesday, November 11, 2008

Listed Government Companies - Violations of Corporate Governance requirements - early orders of SEBI

Gail, ONGC, Indian Oil Corporation, etc. have, as per Orders of Adjudicating Officer (see, e.g., Indian Oil order here and others available on SEBI site) allegedly violated Clause 49 of the Listing Agreement since they allegedly delayed the appointment of Independent Directors. These orders are perhaps of the earliest of orders of adjudication of violation of requirements in relation to Corporate Governance under the Listing Agreement.

Apart from revealing SEBI's approach in dealing with violations of Clause 49, these Orders bring out strange reasoning underlying the dropping of the proceedings without levy of penalty in any of these cases. Essentially, the reasoning is as follows. These companies are Government Companies. Appointment of Directors on these Companies, under Articles, is to be made by the President - effectively by the concerned Ministry. The Companies have been diligent in follow up with the Ministry for appointment of Independent Directors in accordance with Clause 49. The Company cannot be held liable for delay by the Ministry/majority shareholders. Taking these and other factors into account - using the euphemistic term "peculiar facts and circumstances" - the proceedings against these companies have been dropped without levy of any penalty.

To some extent one has undoubtedly to consider the underlying realities of a Government Company in which majority shares are held by the Government of India. However, one cannot leave it at that in view of the reasoning given. The point is, can a Company validly give a reason that it did the follow up required with its dominant shareholders who, incidentally, had powers codified under the Articles too. Would the same relief be given to, for example, an MNC whose majority shares are held by a foreign parent where the Company had made similar petitions to its parent company? Would the same reasoning apply also to a situation where a promoter family holds majority shares and also similarly neglects?

Further, for how long and to what extent can a Government Company continue escaping norms applicable to listed companies to which it bound itself by becoming a listed company in which the public have a stake and which stake is the resulting of raising of huge funds?

Generally, questions would also arise whether the Company as a corporate entity and/or its minority shareholders should suffer on account of defaults of majority shareholders more so when there are clauses in the Articles that make the Company helpless in taking any action?

I reiterate that Government Companies do have "peculiar facts and circumstances" and, on the positive side, perhaps it is commendable enough that SEBI initiated proceedings (interestingly, these proceedings were consciously started after receiving preliminary replies). But, then, such orders raise more questions than give answers.

- Jayant Thakur, CA

No comments: