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UNLISTED public limited companies will have to gear up for greater corporate governance standards. The proposed new company law seeks to empower the government to make it mandatory for unlisted public companies to reserve at least a third of its directorships for independent directors. Today, only listed companies need to have independent directors on their boards.

The government’s idea is to eventually introduce the requirement through administrative orders when it is confident that unlisted public companies too could graduate to higher governance requirements. As the economy grows at close to 8% and companies climb up the corporate ladder, the government would introduce the requirement without having to go to Parliament. The new law, however, proposes to let private limited companies continue to function without independent directors.

The company law, which has been cleared by the Cabinet and awaits Parliament nod, defines independent directors differently from the way it has been defined by capital market regulator Sebi in the listing agreement that companies seeking to go public sign with stock exchanges. First, as per the company law, directors nominated by institutions are not independent though Sebi deems them as independent. Being a regulator, Sebi can stipulate tougher standards than what the new company law would provide for, but cannot soften the provisions in the law. The area may need harmonization.

While Sebi would disqualify independent directors if they had a material relationship with the company, promoters, directors, management, subsidiaries or with its statutory or internal auditors or legal consultants in the preceding three years, the company law goes a step further and insists that even their relatives should not have been in the employment of the parties concerned. The new company law, however, will not mind if the concerned individual or his relative has worked with a legal or a consulting firm that had a transaction with the company for up to 10% of the gross turnover of the company.

Sebi norms disqualify independent directors if they are material suppliers to the company while the company law does not. As per Sebi norms, a prospective independent director cannot hold 2% of the voting rights in the company while the company law disqualifies one who holds 2% in the company together with his relatives. The company law also stipulates that one who is heading a non-profit organisation getting 25% of its income from a company cannot be an independent director in the company. The company law Bill, 2008, is expected to be tabled in Parliament soon.

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