[1] minimum number of audit committee meetings was also

1 Jitendra Singh, Mike Useem & Harbir Singh, Corporate Governance
in India: Is an Independent Director a Guardian or a Burden, February, 2007,
available at http://knowledge. Wharton.upenn.edu/India/
article.cfm?articleid=4157 (Last visited on March 19, 2010)

 As already discussed, Cl. The clause lays down
an inclusive definition according to which independent directors are those who
do not have any pecuniary relationship with the company, management, its
promoters or its subsidiaries, which may affect the independence of their
judgment. This is in contrast with the British definition based on the Higgs
report, which is an exclusive definition specifying who cannot be appointed as
an independent director. The latter appears to be more appropriate as it
clearly provides who is not acceptable as an independent director while the
Indian definition seems too restrictive.

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The new Cl. 49 lays down a
more stringent qualification for independent directors than the old clause and
took away the discretionary power conferred upon the board to decide whether
the independent director’s material relationship with the company had affected
his independence apart from increasing the number of mandatory board meetings
from 3 to 4. The minimum number of audit committee meetings was also increased
from 3 to 4.


In India, the SEBI
monitors and regulates corporate governance of listed companies through Cl. 49
of the Listing Agreement. Influenced by the Sarbanes-Oxley Act of 2002 in the
United States of America and the New York Stock Exchange regulations in 2003,
SEBI launched a landmark initiative towards achieving higher corporate
governance standards. SEBI issued Cl. 49 of the Listing Agreement which was to
apply to companies in a phased manner. It applied first to all Group-A
companies and then to other listed companies with a minimum paid-up capital of Rs.
10 crore / net worth of Rs. 25 crore and finally to companies with paid up
capital of Rs. 3 crore / net worth of Rs. 25 crore. Later, SEBI amended the
original clause and issued a new Cl. 49 with several changes.


The New Clause 49: Independent
Directors Get a Boost

In the past, the Indian corporate sector has faced major
criticism for its poor corporate governance compliance record, as the presence
of large family-dominated businesses has posed serious threats to transparency
and accountability. Traditionally, the major stakeholders in most of these
enterprises have been family members who did not find it compelling to reveal
sufficient information to the independent directors. It became an arduous task
for the independent directors, to  check
on accountability and transparency, as only a few meetings, which in fact were
ceremonious in nature, were attended by them per year. This did not make it
possible for independent directors to fully comprehend the issues before the
board and to be accountable in large business structures which were often
conglomerates having diverse interests and investments. This may be contrasted
with the more efficient western enterprises where independent directors are
viewed as partners of management and as “outside guardians1”,
whose job is to make sure that the management stays focused on delivering
shareholder value.

Conventionally Wrong: The Past Record