The Telegraph
Since 1st March, 1999
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Listing norm revamp runs into legal test

New Delhi, Sept. 10: The Securities and Exchange Board of India’s (Sebi) new rules on listing agreements with stock exchanges are in the danger of running afoul of the law.

The rules framed to foster a culture of good corporate governance among companies will have to pass the legal test to be posed by a rash of suits from firms soon.

B. Deva Sekhar, a corporate lawyer at the Supreme Court, is one of those planning to mount a challenge. Having represented many firms, including Amulet International, he is now bolstering his legal armoury to attack the August 26 Sebi fiat, especially clause 49 of the circular, that requires board minutes of subsidiaries to be reviewed by directors of the holding company.

“Articles of association ban this,” says Deva Sekhar. Arguing that records and board minutes can be seen only by directors, he says a review of the kind laid down by the regulator violates the articles of association.

According to him, a law cannot be at variance with the Constitution. If it is, it will be struck down by the Supreme Court as “bad in Constitution” or “unconstitutional”. At the same time, no directive can contravene the general principle of law. In cases it does, it is also liable to be rejected as “bad in law” or “illegal”.

There are two other aspects of the Sebi order that have raised many hackles. One limits the term of a non-executive director to nine years. The other says that stock options for non-executive directors can be claimed after 10 years. The contradiction is that while Sebi will not allow these directors more than nine years, it seeks to deprive them of stock options till 10 years.

Sebi defines an independent director as “a non-executive director who, apart from receiving a director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies”.

A non-executive director has been described as one who “has not been an executive of the company in the last three years” and is not a shareholder of the company owning 2 per cent or more of its share capital”.

If the regulator has its way, the directors’ report of the holding company would have to give an undertaking that the subsidiary’s affairs have been reviewed.

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