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Rabindra Nath Sinha

KOLKATA, April 7

THE whistle blower policy recommended in the recent report of SEBI's committee on corporate governance and Clause 49 of the Listing Agreement, which was headed by Mr N.R. Narayana Murthy, Chairman and chief mentor of Infosys Technologies, seems to have evoked the sharpest response from veteran company secretaries, who have studied the key suggestions in detail.

In fact, judging by what they have to say, it is apparent that this particular recommendation, which is intended to curb unethical and improper practices in corporates, is being singled out by company law experts as simply impractical.

What is `whistle blower' policy? It is an internal policy on access to audit committees. What is the committee's recommendation? Personnel who come to know about unethical or improper practices, which may not necessarily be a violation of law, should be able to approach the company's audit committee "without necessarily informing their supervisors".

The committee wants corporates to take steps to see that this right of access is communicated to all employees through internal circulars. Further, a company's employment and personnel policy should provide a mechanism to protect whistle blowers from "unfair termination and other unfair, prejudicial employment practices."

Senior company secretaries Business Line spoke to said that this recommendation, if implemented, would be instrumental in breeding indiscipline as most likely the audit committee would be flooded with frivolous complaints and minor issues. Many complainants might go by their personal likes and dislikes and thus the possibility of the right of access to the audit committee being misused would always be there.

They noted that the committee had not said anything on providing evidence in support of a complaint, disclosure of the identity of the complainant and the maximum number of complaints that an employee could make in a year.

Elimination of unethical or improper practices is the responsibility of respective corporate promoters and management, for which they have to put in place systems for efficient administration and transparent transactions. Much also depends on the environment in which corporates operate and the policies that govern their operations. A whistle blower policy can't be a foolproof safeguard against unethical and improper practices, they contend.

The recommendation regarding composition of an audit committee has given rise to confusion. While this panel has suggested that audit committee members should be non-executive directors, the Naresh Chandra committee that preceded it suggested that only independent directors should be on audit committee. The reality is that while all independent directors are non-executive directors it is not so vice versa.

Regarding contingent liabilities, it has been suggested that management's views thereon and auditor's comments on management's views should be given in the annual report.

According to senior company secretaries, there are instances where contingent liability cannot be ascertained, such as, labour disputes, court cases etc. As the description suggests, it's all contingent upon future developments and, therefore, it can't be proper for a management to pass a judgement about the risk involved. Ideally, a management should only give the background of a contingent liability.

The Narayana Murthy panel is for restricting the tenure of non-executive directors to three terms of three years each, running continuously. The Naresh Chandra panel said that after a nine year-term the director would not be considered independent, but surely the concerned person would be able to continue as a non-executive director.

Company secretaries make two points: If the intention is to follow the Naresh Chandra committee's suggestion, the Narayana Murthy panel's recommendation should be redrafted. Representatives of a promoter remain on the board of a company as non-independent directors. The recommendation now made rules out continuation of promoter-directors on the board beyond nine years at a stretch.

It needs to be clarified whether a partner of an audit firm or a solicitor's firm can be treated as an independent director of a company if his firm is the auditor or legal advisor of another company in the same group.

On analysts and media role

THE Narayana Murthy committee on corporate governance also discussed reports brought out from time to time by security analysts and the media, specially the financial press.

As for reports of security analysts, the committee has desired SEBI to make rules for:

* Disclosure whether the company that is being written about is a client of the analyst's employer or an associate of the analyst's employer, and the nature of services rendered to such company, if any

* Disclosure whether the analyst or the analyst's employer or an associate of the analyst's employer hold or held (in the 12 months immediately preceding the date of the report) or intend to hold any debt or equity instrument in the issuer company that is the subject matter of the report of the analyst.

Regarding scrutiny of the media, particularly the financial press, it has observed the committee considered views expressed by members.

The Press Council of India has prescribed a code of conduct for the financial media. However, verifying adherence to the code is difficult. A detailed review by SEBI on the subject is desirable, keeping in mind issues such as transparency and disclosures, conflicts of interest, etc. before making any rule. SEBI should consider having a discussion with the representatives of the media, specially the financial press.

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