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December 03, 2005

Are India's listed cos. prepared for Clause 49?

Knowledge@Wharton has an article on how India's public companies must meet a January 1, 2006, deadline to comply with sweeping new corporate governance standards.

Extracts:

The reforms, ordained by the Securities and Exchange Board of India (SEBI), are laid out in amendments to Clause 49 of the companies' listing agreement with Indian stock exchanges, a section that pertains to corporate governance.

...Infosys pays its directors one of the highest annual retainers in India -- nearly $45,000 a year. In return, it demands a lot of its directors, including requiring them to participate in a peer review and an annual self-assessment of their contributions to the company.

...Harbir Singh says that one key area in which Indian companies generally lag the best international standards is in "the amount of disclosure of strategies and priorities" to shareholders. He attributes that to a corporate culture in which Indian chief executives have greater longevity and therefore wield more influence than their Western counterparts. A shorter tenure, or at least the fear of it, encourages more accountability. Singh also cites the relative lack of influence exerted by institutional shareholders. There just aren't that many yet.

..And what about that alleged shortage of candidates for independent directorships? Under the new Clause 49, one-third of the board must be composed of independent members if the chairman of the board is not also an executive of the company, and half of the board membership must be independent if the chairman is an executive. According to rough estimates, just the top 500 listed companies, with an average of nine members on their boards, will need to find 2,500 new board members. They would qualify as independent only if they have no material financial relationship with the company and were not employed by the company in the previous three years.

Godrej says he is not concerned about the lack of qualified people to fill the post of independent directors. A website has been set up to recruit independent directors. The effort has been sponsored jointly by the Bombay Stock Exchange, the National Stock Exchange and the Confederation of Indian Industry. It already has identified about 3,000 candidates, Godrej says, and "more are being listed each week."

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.