Capital markets regulator SEBI could make it mandatory for all listed companies to buy directors' & officers' (D&O) liability insurance to shield them from the risk of huge liabilities in the event of frauds stemming from poor corporate governance practices.

Less than 10% of companies listed on the BSE now have any kind of D&O policies, which typically cover top executives from being held personally liable in the event of misleading financial statements and mismanagement of funds. It also guards companies in case of litigation payments made on behalf of its directors or officers

A SEBI official said such policies could help corporate governance in firms. "Risk management is part of corporate governance,"adding that the move would ultimately protect shareholders and provide companies with a hedge against uncertain situations.

The Rs 7000-crore scandal at Satyam Computer Services has brought the issue of corporate governance into sharp focus. For years, the senior management of Satyam led by its founder and former chairman cooked the books of the company under the noses of the company's board, comprising luminaries from the world of academia and business. The Satyam scandal has resulted in more than 500 directors stepping down from boards amid fears they could be held responsible in case of frauds at companies whose boards they sit on even if they are no way responsible.

For the general insurance industry, it could mean additional business of at least Rs 125 crore, based on an average insurance cover of Rs 5 crore taken out by every listed company. "Anything which is mandatory increases the penetration," said Rajive Kumaraswamy, head of reinsurance at ICICI Lombard.

Such D&O policies are common overseas. Romania was the first country in the European Union (EU) to make D&O insurance compulsory for all corporations. Brazil requires foreign companies to compulsorily purchase a locally-issued D&O insurance policy to protect their local subsidiary's directors and officers from litigation. In the US, a survey revealed that 46% of those suing the directors were shareholders, 30% were from employees while customers and clients constituted 12%.