INDIA BUSINESS WORLD - JANUARY 1^st - JANUARY 15^th - 2008

CLAUSE 49 WON'T BE EASED FOR PSUS, SHORT SELLING BY INSTITUTIONAL INVESTORS FROM FEB 1: SEBI

SEBI chairman M Damodaran has ruled out flexibility for public sector companies in complying with Clause 49 of the listing agreement, which states that listed companies have to fill 50% of their boards with independent directors in case they have an executive chairman and one-third in case they have a non-executive chairman. Government-owned companies should be on the same footing as private players when it comes to corporate governance, he said.

Mr. Damodaran also said institutional investors, including domestic mutual funds, will be allowed to short sell from February 1. The statement comes a day after RBI allowed foreign institutional investors to lend, borrow and sell shares of Indian companies with some safeguards.

Retail investors are already doing it, Mr Damodaran said on the sidelines of a seminar on corporate governance organised by the Institute of Company Secretaries of India. Short selling was banned in 2001 in the aftermath of the Ketan Parekh scam.

The Sebi chairman also said he will review the 10% limit on stake held by directors or other shareholders to be considered as an insider for the purpose of the new insider trading norms. The regulator had said purchase and sale of shares by insiders would be considered insider trading if the transactions happen within six months. Profits made through such deals have to be returned to the company, the regulator said.

"What we have put out on is a paper for discussion. We will get views on that over the next month or so. After that, we take all views on board and a clear position will emerge," Mr Damodaran said.

Whether the 10% limit on stake held by officers or promoters was too high or low would be finalised after receiving public comments, Mr. Damodaran told reporters after the conference.

Mr. Damodaran ruled out any relaxation for PSUs for complying with Clause 49 norms, saying he was aware of the difficulties faced by PSUs in appointing directors-a bureaucratic hurdle that private sector companies do not face. "I am aware of the lack of level playing field that places undue stress on PSU managements. But the solution suggested-corporate governance norms for PSUs a little easier than for other entities-is something I cannot persuade myself to agree with. The solution lies elsewhere. It is only in corporate governance where there is a level playing field between PSUs and private sector companies. The solution is not to dilute the system where both have to contend with the same prescription. Let us not throw away that advantage. Let us build on it," Mr Damodaran said. Notwithstanding the difficulties PSUs face, a solution must be found somewhere else and not in diluting corporate governance norms, he said.

The Sebi chief was responding to a demand from ONGC chairman RS Sharma that PSUs should be allowed to function with independent directors accounting for just one-third of their board of directors as recommended by the JJ Irani panel on company law. Mr Sharma had sought a softer regime for PSUs, which are already over-regulated as they are accountable to Parliament, CAG, CVC and now the RTI Act. ONGC has four independent directors on a board of 15.

"Today, India is recognised as a great investment destination... It is because of the commitment of Indian corporates who, with a few exceptions, have seen value in corporate governance and who know that over time, not just markets but investors will also be valued," the Sebi chief said.