The Securities and Exchange Board of India is planning to propose to the finance ministry a two-tier board structure for public sector companies having large number of functional directors.
This, the regulator feels, will resolve the issue of availability of independent directors and also ensure that the board is not unwieldy.
The dual board structure will involve a first level of functional directors topped with a layer constituting the policy board, as is the practice in several European countries.
A focused internal group was working on the finer points and a proposal would be made to the ministry shortly, sources in Sebi said.
The dual board structure will enable companies to meet the regulatory requirement of having the requisite minimum number of independent directors while avoiding an unwieldy board.
The new proposal is a possible solution to the problem of getting enough number of independent directors in PSUs. According to Clause 49 of the listing agreement, at least 50 per cent of a board should consist of independent or non-executive directors.
In case of PSUs, Sebi had made it clear that the government nominees on the board could not be constructed as independent directors since they represented the interests of the majority shareholder.
Besides, the regulation also spelt out fairly stringent criteria for the selection of people who could be independent directors. All listed companies have been given time till December 2005 to comply with the regulations.
At present, there are PSUs with a very large number of functional directors as well as large number of government directors, apart from a whole-time chairman.
In such situations, the present prescription of 50 per cent independent directors means about 9-10 directors, which makes the board too unwieldy.
Earlier, Sebi had made its stance clear: because the board structure was unwieldy, it would not grant exemption to government companies or let them treat government directors as independent directors.
According to the Irani committee recommendations, one-third of the directors on the board should be independent. Even that may not really help significantly when there are numerous functional directors, which is typically the case in large companies.
In several European countries, companies are allowed to constitute a two-tier board structure with functional directors in the first level and policy directors in the second level. Independent directors are present in the policy board. India follows the American model with a single layer board structure.
