Independent directors not independent, says Sebi chief

New Delhi: Sharply critical of the existing corporate governance practices, Sebi chief Ajay Tyagi today said "independent directors are not independent" and audit committees are not working but admitted he does not have a solution to fix the lacunae.

Pitching for a "common stewardship code" for institutional investors, he said the worrying part is that there is no such code for these entities once they become significant shareholders in companies.

Tyagi, who took over the reins as markets regulator last month, said there are too many lacunae with respect to the concept of independent directors with many having "no commitment to any cause".

"I must admit I have no solutions on what should be done but it will be anyone's case that existing system has lot of lacunae," he said here.

Mincing no words, Tyagi said, some independent directors are appointed at the mercy of promoters "(with) no prescribed qualifications or procedures, favouritism, (many are from) closed clubs (such as) only those people being in all boards, no commitment to any cause".

There are people appointing friends just to "fulfil the requirement of Companies Act (and) Sebi's listing regulations is not at all working... One needs to really think through these", he noted.

Taking a strong note of independent directors resigning from boards of companies without giving proper reasons, the Sebi chief said some of the reasons given are actually fake.

"Many times they conveniently resign, independent directors just resign and I mean that is very odd... You should give reason as to why you are resigning and people say health reasons. Some of the reasons are fake reasons actually," he said at an event organised by industry body CII.

Touching upon the area of auditors, Sebi chairman said the SRO (Self Regulatory Organisation) structure is not working for them.

"With due respect, I know that auditors have SRO structure but the same is not working. I will say that... Auditors committee is not working, independent directors are not independent and there is no stewardship code, then definitely there are serious issues," he said.

Emphasising that corporate governance is a serious issue that is engaging the attention of Sebi, Tyagi said the regulator would come out with more discussions on it soon.

His candid remarks also come against the backdrop of rising concerns over corporate governance practices, especially in the wake of recent boardroom battle at Tata group and the controversy surrounding the reported differences between some promoters and the top management at Infosys.

According to Tyagi, the worrying part is that there is no code of conduct for the institutional investors which are regulated by Sebi, IRDA and PFRDA as to what are their responsibilities once they are significant shareholders in a company.

"Our experience is that in many companies promoters prefer having such institutions which have passive interest and have no active interest on how the board is working or how the company is working. That is actually a sad part," he said.

Emphasising the need for having a common stewardship code, Tyagi said just by increasing the institutional investment share in the companies with no code of conduct does not really serve any purpose.

In India, ownership pattern of equities is still about 50 per cent by the promoters but encouragingly, institutional investments have been increasing, he added.

There are lot of "prescriptions" provided in the Companies Act rules and Sebi regulations for corporate governance, Tyagi said even as he admitted that majority of people might not satisfied with the way things are working.

"If you ask rationally and think yourself is the system working really satisfactorily, I think majority of people say no. That is what is the answer," Tyagi said.

Under the existing norms for companies, there are various requirements that need to be fulfilled with respect to board composition, independent directors and audit committee, among others.

Tyagi said the topic of corporate governance is very interesting, intriguing and also an area where "much needs to be done".

Stating that corporate governance is a topic that never goes out of fashion, he observed that there is always a debate on whether it should be based on principles or rules.

"It (corporate governance) is a global issue. It is a issue not only in India although in India there are specific reasons," he added.