Mr. Uday Kotak, Chairman of the Committee with the team compiled and presented this report to the SEBI with their recommendation to ensure and strengthen corporate governance in India. In his letter to the SEBI he suggested that the “Custodian” model works on “Gandhian Principles”, and is relevant for both promoter managed as well as professionally managed entities. Under this model, promoters, boards and management wear the hat of “trustees” and act in the interest of all stakeholders – shareholders, investors, employees, customers’ et al, keeping stakeholder interests before self-interest. Corporate India needs to move in this direction.
Chapter I: Composition and Role of the Board of Directors
|Particulars||Companies Act||Existing (LODR)||Proposed Change through Committee Report||Recomme-ndation and Rationale|
|Minimum Number of Directors on a Board||Minimum three directors on the Board for public company||NO specific provision||Board of directors shall comprise of not less than six directors. Reg.17 (1) insertion clause “C”||Sufficient number of directors with diverse backgrounds and skill sets are available on the boards of listed entities|
|Gender Diversity on the Board||one woman director on the board of directors of every listed entity||one woman director on the board of directors of every listed entity||one woman as an independent director||To improve gender diversity on corporate boards|
|Attendance of Directors||Automatic vacation if a director is absent from all meetings of the BOD held during a 12-month period||NO specific provision||Ratification by Shareholders in AGM if Absent at least half of the total number of board meetings held over the Relevant Period i.e. Period of 2 consecutive FY on rolling basis.||Important for all directors to attend a minimum number of meetings in order to enhance their contribution of skill, time and value towards serving the long term interests of all stakeholders|
|Disclosure of Expertise/ Skills of Directors||Disclosure of a brief profile of a director on his/her appointment||No specific provision||An Annual Disclosure “A chart or a matrix setting out the skills/expertise/competence of the board of directors”||To make shareholders analyze that the board has a sufficient mix of diverse expertise/ skill-sets.|
|Approval for Non-executive Directors on Attaining a Certain Age||No such Provision only mandates for MD, WTD and Manager i.e. 70 yrs. Through Special Resolution.||No specific provision||No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years unless a special resolution is passed with justification||Checks and balances should be considered in connection with the age of Non-executive Directors similar to the provisions of the Companies Act for executive directors.|
|Minimum Number of Board Meetings||Four meetings of the board every year with a maximum gap of one hundred and twenty days between any two meetings.||Reg. 17 (2)
Four Meetings every year maximum time gap of 120 days between any two meetings.
|FIVE meetings every year,
at least once a year, the board shall specifically discuss strategy, budgets, board evaluation, risk management, ESG (environment, sustainability and governance) and succession planning.
|One Extra meeting to focus on other critical aspects of a listed entity such as its management and corporate governance including as suggested in the proposed clause.|
|Updating Knowledge of the Board Members||No specific provision||No specific provision||The listed entity shall, at least once every year, undertake a formal updation programme for the board of directors on changes in applicable laws, regulations and compliance requirements.||In order to fill this information gap relating to changes in laws, regulations, relevant judicial or regulatory orders, and compliance requirements.|
|NED Engagement with the Management||No Specific provision||No specific provision||The listed entity shall, at least once every year, undertake a formal interaction between the nonexecutive directors and the senior management.||Interaction between management and NED is Critical for a better understanding by NEDs of the company’s business and of the managerial capacity and capability of the company.|
|Quorum for Board Meetings||A quorum of one-third of the total strength of the board of directors or two directors, whichever is higher, for every board meeting||No Specific provision||The quorum for listed company – one-third of its total strength or three directors, whichever is higher, including at least one independent director. Participation through audio video conferencing shall be counted as well.||In view of the increased obligations of the board and in the interest of all stakeholders, especially minority shareholders, the presence of at least one independent director is required for every board meeting.|
|Separation of the Roles of Non-executive Chairperson and Managing Director/CEO||An individual shall not be appointed/ reappointed as the chairperson of a company as well as its MD/CEO unless the articles provide otherwise.||Discretionary Requirements:-The listed entity may appoint separate persons to the post of chairperson and managing director or chief executive officer||I. Listed entities with more than 40% public shareholding should separate the roles of Chairperson and MD/CEO with effect from April 1, 2020.
II. After 2020, SEBI may examine extending the requirement to all listed entities with effect from April 1, 2022.
|The separation of powers of the chairperson (i.e. the leader of the board) and CEO/MD (i.e. the leader of the management) is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management. Such separation, at least at the stage of introduction is more relevant where public shareholders constitute a large portion of the shareholding.|
|Matrix Reporting Structure||The BOD shall be entitled to exercise all such powers and to undertake all such activities as the company is authorized to and is responsible for all decision making in relation to the company.||No specific provision||A confirmation that the BOD has been responsible for the business and overall affairs of the listed entity in the relevant financial year and that the reporting structures of the listed entity, formal and informal, are consistent with the above||Informal matrix reporting structures may dilute the powers and the role of the board of a listed entity.|
|Maximum Number of Directorships||The maximum number of public companies in which a person can be appointed as a director shall not exceed ten.||A person shall not serve as an independent director in more than seven listed entities and if the director is a WTD in one listed entity, then he/she can’t serve as an independent director in more than three listed entities.||No person shall hold office as a director, including any alternate directorship, in more than eight listed entities at the same time (of which independent directorships shall not exceed seven), with effect from April 1, 2019 and not more than seven listed entities with effect from April 1, 2020:
Provided that any person who is serving as a whole time director/managing director in any listed entity shall serve as an independent director in not more than three listed entities.
|Multiple directorships beyond a reasonable limit may lead to a director not being able to allocate sufficient time to a particular company, thus hindering their ability to play an effective role.|
|Disclosures on Board Evaluation||Broad provisions on board evaluation i.e. evaluation of the performance of: (i) the board as a whole,
(ii) Individual directors (including independent directors and Chairperson) and (iii) various committees of the board.
|A guidance note on board evaluation issued by SEBI vide circular dated January 5, 2017.||A guidance note stating as under:
“All listed entities may consider the following as a part of their disclosures on board evaluation:
a) Observations of board evaluation carried out for the year
b) Previous year’s observations and actions taken
c) Proposed actions based on current year observations.”
|The concept of board evaluation is at a nascent stage in India and prescribing detailed requirements in this area may not be desirable at this stage however in order to strengthen disclosures on board evaluation, a guidance should be issued.|
DISCLAIMER: The information given in this Note is based on the analysis of the facts and my understanding and interpretation of applicable laws as on date. I expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this note.
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018