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Age rule to keep bosses on edge

Mumbai, Sept. 21: Companies may be forced to show their graying managing directors the door after they turn 70.

Tucked away in the fine print of the Companies Bill of 2009 — which is now before Parliament — is a clause that seeks to place an age limit on chief executives who run day-to-day affairs at the companies they manage.

For the first time, the Companies Bill has proposed to set the minimum age for managing directors and key management personnel at 21 and the maximum at 70. The Companies Act of 1956 — which this bill seeks to replace — did not spell out an age criterion for chief executives.

There is a loophole of course: managing directors who cross 70 will be able to hang on to their positions if the shareholders pass a special resolution to that effect.

A special resolution has to be passed by at least 75 per cent of the shareholders present and voting.

The old Companies Act had only three conditions that made anyone ineligible to become an MD: the person cannot be an undischarged insolvent, should not have been convicted by a court for an offence involving moral turpitude, and ought not to have suspended payment to his creditors at any point of time.

The term of a managing director is being fixed for a period of five years. He can be reappointed to the position but only for a period of five years at a time. The re-appointment cannot be made “earlier than one year before the expiry of his term”.

The Tatas were the first to lay down an age limit for key positions: CEOs must step down when they turn 65; non-executive directors retire when they turn 75. The rule came into force in the mid-nineties when the group eased out several ageing satraps, including Russi Mody of Tata Steel. The bill doesn’t set an age limit for non-executive directors. Three top Tata managing directors have stepped down or are scheduled to step down later this year. They include Ravi Kant of Tata Motors, S. Ramadorai of TCS and Tata Steel’s B. Muthuraman.

Some professionally-managed organisations have tried to ensure that their chief executives remain young and effective managers. In April, ICICI chief executive K.V. Kamath shed his executive responsibilities when he turned 62.

Severance package

The bill also has an explicit clause relating to severance packages which are restricted to managing directors and whole-time directors. The payment by way of compensation for loss of office should not exceed the “remuneration he would have earned if he had been in office for the remainder of his term or for three years, whichever is shorter.”

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