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This piece has been authored by Saksham Gupta and Aditya Jain, 4th year students at National Law University, Jodhpur.
Introduction
Mandatory “quotas” in Board of Directors for women has been a much-debated issue since the overhaul of Companies Act in 2013. Section 149 of the Companies Act, 2013[i] and subsequent guidelines issued by the Securities and Exchange Board of India made it mandatory for all listed companies to have at least one woman on their boards—either as an executive or a non-executive director—before April 1, 2015. [ii]
The fact that overall percentage of women occupying senior roles in Indian boardrooms is merely 8.5% in 2019,[iii] is a testimony to the fact that many lacunae still exist in this policy. India ranks at 23 out of 56 countries globally in terms of presence of women in boardrooms.[iv] This is in contrast to the widely acknowledged trendsetter, Norway, where women directors make up nearly 40.9% of the boardrooms.[v] However, it is not just the western countries that perform better than India in this respect. The number of women in Indian boardrooms is lower than the average of developing countries.[vi] These dismal statistics signify that sociological factors are not the only hindrance to be blamed. There are several other factors that have simply never been recognized, let alone, analysed.
One of the most important reasons for this glaring disparity among the two countries is that India Inc. is still run by large family run companies. The authors in this paper will analyse why the one-woman director mandate has not been successful in India and will suggest further means by which this policy can be made effective.
Lessons from other jurisdictions: where are we lagging?
In developed countries, corporate law combines with other legal, market, and cultural constraints on the actions of corporate managers and controlling shareholders to achieve a sensible balance among these sometimes-competing needs.[vii]
Corporate Disclosures play a huge role in initiating desired changes in the company policies. In the United States, for example, the Securities Exchange Commission (SEC) requires disclosures to be made by each listed company with regards to their diversity policy wherein they have to declare their recruitment policy and its relation to board diversity.[viii]
On the other hand, in United Kingdom, corporate houses are expected to have women on the board. If they fail to achieve the same, they are expected to publish a statement explaining why they were unable to achieve diversity on their board, including with respect to gender.[ix]
Lastly, though it has been one of the most controversial ways, many jurisdictions end-up employing system of quotas, as done in India. Quota system has seen its fair share of criticism based on some very intriguing arguments which includes erosion of shareholder value and undermining of meritocracy. We’ll try to analyse the same in the next section.
Are women quota’s efficient?
The National Stock Exchange (NSE) recently reported that out of 1,723 listed companies, 1,667 companies had met the mandate of one woman director on board.[x] But out of this pool, women director in 425 companies belonged to the promoter group or family.[xi]
Reliance Industries Ltd (RIL) the biggest company by marketcap in India having Mukesh Ambani at its helm has only one woman director on its board, which is Nita Ambani.[xii] Kumar Mangalam Birla, amongst other sister companies has only one women director, Rajashree Birla mother of Aditya Birla, the chairman of the group. Nawaz Modi Singhania, wife of Gautam Singhania, chairman, Raymond Group, serves as a non-executive director on Raymonds Ltd.[xiii]
These examples are of few of the biggest companies in the Indian market. Therefore, the women directors who are being appointed to the board, are to merely meet the mandate and do not fulfil the purpose of the legislation in its essence. Further, as these women directors are not raising through the ranks, therefore the overall gander diversity of any such corporate hasn’t shown any significant improvement.
What has to be done?
One of the biggest reasons for the failure to increase women participation in Indian boardrooms is the way in which Indian companies have found a way to bypass the legal mandates. As we have stated in the previous paragraph that, female members known to the directors and/or the promoters are given a seat in the Board of Directors. This, in the opinion of the authors directly contravenes the purpose of Section 149 of the Companies Act. India Inc. does not merely need inclusion of women in their boards but they need inclusive and meaningful contributions from them.
A typical board of directors in India comprises of several types of directors, each of whom has a separate and well-defined purpose. For example- independent directors, directors appointed by small shareholders, government nominee directors etc. These categories of directors have specific qualifications in addition to the general ones under Section 152. It is therefore, not understandable that why norms for appointment of women directors are so relaxed.
The authors in this regard have two suggest that norms similar to “fit and proper criteria” can be utilised for making of certain norms for women directors. Fit and Proper Criteria has been laid down by the RBI for election of individuals to the post of directors in the board of directors in all nationalised as well as private banks in India.[xiv]
The criteria prescribe several educational and experience based qualifications along with other parameters such as integrity and track record. Whilst such a high standard is required for assessment of individuals who’ll take up role of directors in Banks, the authors understand that such a high threshold cannot be made for appointment of women directors.
Hence, we suggest that a minimum threshold of certain years of experience in the business that the company is undertaking either in the same company or at another company must be mandated.
A definite policy, in regards to appointment and recruitment especially in regards to the gender can be mandated. In addition to these modalities, the fit and proper criteria also mandate that a nomination committee comprising of three non-executive, ideally independent directors must be formed who’ll review the appointment of new directors. A similar plan of action can be devised for appointment of women directors.
Another way to resolve this quagmire is to extend the concept of related party transaction to appointment of directors. A bare reading of Section 188(1) (f)[xv] of the Companies Act, 2013 read with Section 2(76)[xvi] suggests that appointment of all directors apart from independent directors[xvii] is regulated by the definition of “related party” and is considered a related party transaction. According to the law, these transactions must be done at an arm’s length, i.e., in a manner as if the parties were unrelated[xviii]. In context of appointment of women directors, it is clear however, that this has not been the case in India. Hence, we suggest that the threshold of appointment of women directors must be kept at an equal pedestal to that of independent directors. This will ensure that only genuine candidates, who are not related to the directors of the company and the company itself, are appointed in the role of women directors.
Conclusion
India is distinctive: on the one hand, women CEOs lead some of the largest banks in India, a phenomenon that is a rarity even for Wall Street; while on the other hand, it ranks abysmally low in women’s economic participation. In our paper, we have attempted to understand these competing realities and have tried to identify the subtle forces that have helped and prevented women from being leaders of India Inc.
It is clear that getting female talent to the boardroom has a solid business case, as well as an ethical one. The current policy framework, under the Companies Act, in its status quo cannot achieve the desired results. Hence, a more concrete effort which can show tangible results is required. The authors have tried to demarcate one such way.
[i] Companies Act, 2013, Acts of Parliament, No. 18, 2013, §. 149 (hereinafter “Companies Act, 2013”).
[ii] Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 17.
[iii] Credit Suisse Research Institute (“CSRI”), The CS Gender 3000 in 2019: Changing Face of Companies, Oct. 2019, 62.
[iv] Id., 10.
[v] Id.
[vi] Women on Board 2016: India ranks a lowly 26th, Norway leads, The Economic Times, Mar. 7, 2016.
[vii] Black, B. & Kraakman, R., A Self-enforcing Model of Corporate Law, 109 Har. L. Rev., 1914, 1920.
[viii] Speech by SEC Commissioner, Luis A. Aguilar, Diversity in the Boardroom is Important and, Unfortunately, Still Rare, available at https://www.sec.gov/news/speech/2010/spch091610laa.htm.
[ix] Financial Reporting Council, The UK Corporate Governance Code, Comply or Explain, Section B.2 (June 2010).
[x] Accessed at http://www.primedatabasegroup.com/primegrouplogo/Women%20Directors%20In%20India.pdf.
[xi] Id.
[xiii] Accessed at http://www.raymond.in/boarddirectors.
[xiv] Reserve Bank of India (‘Fit and Proper’ Criteria for Elected Directors on the Boards of PSBs) Directions, 2019, Master Direction, Reserve Bank of India, RBI/DBR/2019-20/71 (issued on Aug. 2, 2019).
[xv] Companies Act, 2013, § 188(1)(f).
[xvi] Companies Act, 2013, § 2(76).
[xvii] Companies (Specification of Details) Rules, 2014, Rule 3.
[xviii] Iljin Automotive Private Limited v. Assistant Commissioner of Income, 2011 16 Taxman 225.