Divyanshu Divyam And Anushu Priya
INTRODUCTION
Corporate governance refers to the set of laws, customs, and procedures that ensure that a business is properly governed and managed. In essence, corporate governance balances the laws governing the distribution of power among members, employees, stakeholders, and the general public.
The SEBI Committee on Corporate Governance was established on June 2, 2017, with the goal of raising the standards of corporate governance for listed companies in India. Mr. Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank, serves as the committee’s chairman. Other members include academics, proxy advisors, professional bodies, lawyers, and other stakeholders. The Committee, which had 25 members in total, was asked to deliver its report to SEBI within four months.
In order to raise the corporate governance standards of India’s listed firms, the Committee was asked to make recommendations on the following topics:
1. Ensuring independent directors’ commitment to independence and their active involvement in managing the company;
2. Enhancing related party transaction controls and disclosures;
3. Problems with listed businesses’ accounting and auditing procedures;
4. Enhancing the efficiency of board evaluation procedures;
5. Addressing the difficulties investors have with voting and attending general meetings;
6. Concerns relating to disclosure and transparency, if any;
7. Any other topic relating to corporate governance in India that the committee thinks appropriate
The Committee met twelve times over the course of four months, with the first meeting taking place on June 14, 2017, and the final on September 29, 2017, following which the Committee delivered its report with various recommendations on October 5, 2017. In order to implement the recommendations, the report offers a few changes to the current rules and a few brand-new rules. In letters dated October 3, 2017, the Ministries of Corporate Affairs (“MCA”) and of Finance (“MoF”) provided the Committee with some feedback on the suggestions. MCA.[1] did not view the report favorably, particularly in light of the study’s proposal to change other fundamental principles of company law and to extend the jurisdiction to unlisted firms. The MoF2 added remarks along the same lines. The Report was then presented to SEBI for review along with the suggestions and remarks made by MCA and MoF.[2]
The Committee’s Report was published on the SEBI website for public comment, which must be received by November 4 at the latest. A wide range of stakeholders, such as the business community, the government, international organizations, institutional investors, attorneys, etc., submitted comments. SEBI gave the Committee’s proposals some thought after analysing the feedback from the general public and consulting with the Ministries in the manner previously mentioned.
Out of a total of 81 recommendations provided by the Committee, SEBI accepted 40 without modifications, 15 with adjustments, rejected 18, and recommended 8 to other regulatory authorities in its meeting on March 28, 2018.
On May 9, 2018, SEBI amended the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”); on May 10, 2018, SEBI issued a circular (the “May 10 Circular”), amending the regulations. Except where otherwise stated, the SEBI LODR Regulations modifications will take effect on April 1, 2019.
This Article addresses some of the main recommendations of the Committee, the approval or rejection thereof by SEBI and its impact on Corporate Governance of listed businesses in India.
THE BOARD OF DIRECTORS’ COMPOSITION AND FUNCTION.
The Committee felt that the board of directors as a whole should be held accountable to all stakeholders for upholding the necessary norms of corporate governance in a corporation. In light of this, the Committee worked to address concerns including board diversity, strength, and issues relating to independent directors as well as the disclosure of board members’ abilities and knowledge.
1. Number of Directors on a Board: Minimum and Maximum
A public limited company’s board must have a minimum of three directors in accordance with the Companies Act of 2013 (the “Act”) and the applicable rules, but no such need is set forth in the SEBI LODR Regulations. A minimum of 6 (six) directors on the board was proposed by the Committee, keeping in mind the necessity for a sufficient number of directors on the boards of listed firms with a variety of experiences and skill sets to fulfil their responsibilities.
This suggestion was approved by SEBI with changes, and a new clause (c) has been added to sub-regulation (1) of Regulation 17 that mandates a minimum of 6 (six) directors for the top 1000 listed entities by market capitalization (effective April 1, 2019) and the top 2000 listed entities (effective April 1, 2020).
Mid-sized and smaller listed firms, who would have otherwise been burdened with extra compliance, will benefit from SEBI’s decision to limit the minimum number of 6 directors to larger companies based on market capitalization.
2. Diversity of genders on the Board
Every listed entity’s board of directors must have at least one female director, per the Act and the SEBI (LODR) Regulations. The Committee suggested that every listed company’s board of directors include at least one independent woman. A minimum of one independent woman director must be present in the top 500 listed companies by market capitalization by April 1 of 2019 and in the top 1000 listed companies by April 1 of 2020, according to SEBI’s decision to accept the recommendation in stages.
Gender diversity on the board was intended to be achieved by the existing requirement of at least one female director. With the aforementioned reforms, it is anticipated that women will play a more active part in corporate India.[3]
3. Quorum
The Act now specifies that a quorum for each board meeting must consist of either two directors or one-third of the board’s total membership, whichever is higher. The SEBI LODR Regulations do not specify a quorum for board of directors meetings. The Committee believed that the boards of listed entities should have a stronger quorum threshold considering their expanded responsibilities. In addition, the Committee believed that in order to defend minority rights, a quorum of one independent director was a must.
The SEBI LODR Regulations were amended on May 9, 2018, adding a new sub-regulation (2A) to Regulation 17, which states that a quorum for board meetings of the top 1000 listed entities by market capitalization (with effect from April 1, 2019) and top 2000 listed entities (with effect from April 1, 2020) must consist of three members, or one-third of the board’s total size, with at least one independent director present.
Larger listed firms just need to meet the aforementioned quorum requirements, which will relieve the smaller and mid-sized listed companies of needless compliance burden.
4. Separation of Key Positions
The Act currently states that unless the company’s bylaws specifically state otherwise or the company doesn’t operate in more than one industry, an individual may not be appointed or reappointed as both the chairperson and the company’s managing director and chief executive officer (“MD” and “CEO”) at the same time. The SEBI LODR Regulations specify that it is a voluntary requirement and do not dictate that the chairman and CEO of a listed business hold separate positions.
The Committee recommended that, starting on April 1, 2020, all listed companies with further than 40 public shareholdings should separate the places of speaker and MD/ CEO. After the forenamed date, SEBI may consider extending the demand to all listed realities starting on April 1, 2022.
SEBI accepted the aforementioned recommendation with a small modification in that the newly added sub-regulation (1B) of Regulation 17 of the SEBI LODR Regulations states that, starting on April 1, 2020, the top 500 listed entities by market capitalization must ensure that the chairperson of the board of such listed entity is: (a) a non-executive director; (b) not related to the MD or the CEO as per the definition of “relative” under the definition of the term “relative”.
A number of the Committee’s recommendations on the make-up and function of the board of directors were adopted by SEBI without any changes, including, among others:
- lowering the maximum number of directorships for listed entities from 10 to 8 by April 1 of 2019 and to 7 by April 1 of 2020;
- Increasing the requirements for independent directors’ eligibility (described in section II below);
- disclosing the knowledge and abilities of directors in the annual reports of the listed entities (first disclosure without names by March 31, 2019 and detailed disclosure by March 31, 2020).
INSTITUTION OF INDEPENDENT DIRECTORS
An efficient corporate governance system must include the institution of independent directors since they are anticipated to increase the efficacy of the board by bringing objectivity to its operations. [4]According to Section 149(6) of the Act, an independent director is defined as a director who is not a managing director, a whole-time director, or a nominee director, who the board believes to be a person of integrity, who possesses the necessary knowledge and experience, and who is or was not related to promoters or directors in the company, its holding, subsidiary, or associate company. Protection of minority rights, balancing competing stakeholder interests, and providing an unbiased assessment of the effectiveness of the board and management are all made possible by independent directors.[5]
One of the Committee’s most important suggestions with regard to independent directors was to broaden their eligibility requirements. Certain objective standards for determining a director’s independence are set forth in the Act and SEBI LODR Regulations. At the first meeting of the relevant board in which he or she participates as a director, as well as at the first board meeting of each subsequent financial year or whenever there is a change in circumstances that could affect the director’s status as an independent director, each independent director is required to certify that they meet the legal requirements for independence.
The Committee believed that determining an independent director’s “independence” required both objective and subjective evaluations, as well as ongoing and sincere evaluations. The eligibility requirements that the Committee suggested be added to the current regulations are as follows:
people who make up a listed entity’s “promoter group” should be specifically excluded[6];
1. The requirement that an independent director provide an assurance that they are not aware of any circumstance or situation that exists or may reasonably be anticipated that could limit or have an adverse effect on their ability to carry out their responsibilities objectively, independently, and without being influenced by anyone outside of their immediate family.
2. After carefully evaluating the accuracy of the aforementioned undertaking, the board of the listed entity officially records it.
3. Exclude “board inter-locks” brought on by shared non-independent directors on the boards of listed entities (i.e., a non-independent director of a company on the board of which any non-independent director of the listed entity is an independent director cannot be an independent director on the board of the listed entity).
SEBI has accepted the Committee’s recommendations regarding the expansion of the requirements for independent directors without making any changes.[7]
BOARD COMMITTEE
Given the wide range of activities and obligations of the board, it is essential to delegate tasks to its committees in order to effectively control listed corporations. The group made suggestions regarding representation in board committees, minimum meeting requirements, quorum requirements, and an expansion of both the number and scope of board committees.
1. Minimum Number of Meetings in a Committee
While the SEBI LODR Regulations do not specify the minimum number of meetings for other committees, [8]the Audit Committee must hold at least four sessions annually. The Committee suggested that the minimum number of Audit Committee meetings be raised to five annually in order to give committees the time and opportunity to discuss issues outside of the quarterly reporting. The Committee further suggested that all other required board committees convene at least once annually.
SEBI accepted the committee’s recommendations regarding the minimum number of meetings for the Nomination and Remuneration Committee (“NRC”), the Stakeholders Relationship Committee, and the Risk Management Committee without making any changes, even though it did not accept the recommendation to increase the minimum number of meetings for the Audit Committee. The Nomination and Remuneration Committee, the Stakeholders Relationship Committee, and the Risk Management Committee shall each convene at least once a year, pursuant to the modifications made to Regulations 19, 20, and 21.
2. Enhancing the Functions of the Audit Committee, Nomination and Remuneration Committee, Stakeholders Relations Committee, and Risk Management Committee
The Committee believed that the audit committee should also examine how funds from the holding company were used in subsidiaries when the total amount of loans, advances, and investments made by the holding company in the subsidiary exceeded INR 100 crore or 10% of the size of the subsidiary’s assets, whichever was lower. By amending Schedule II, Part C, Clause A of the SEBI LODR Regulations, SEBI accepted this idea with a slight modification. New sub-clause (21) was added. Loans, advances, and investments that were in existence as of the effective date of this clause were included in SEBI’s revisions.
The Nomination and Remuneration Committee’s duties, according to the Committee, include finding candidates for senior management positions who meet the established requirements and recommending their appointment and/or dismissal to the board of directors. According to the Committee, Regulation 16( 1)( d)’s description of elderly operation should be changed from the current description, which reads” elderly operation shall mean officers labour force of the listed reality who are members of its core operation platoon banning board of directors and typically this shall comprise all members of operation one position below the administrative directors, including all functional heads,” to read
“Senior management” refers to the officers and employees of the listed entity who are a part of its core management team and are not on the board of directors. Typically, this group includes all managers one level below the chief executive officer, managing director, whole-time director, or manager (including the chief executive officer/manager if he or she is not a member of the board), and it includes the company secretary and chief financial officer in particular.
Administrative personnel will not be included, though.
The recommendation described above was approved without the caveat mentioned in the recommendation above.
The Committee further highlighted that in some businesses, pay paid to select Key Managerial Personnel was not being recommended by the NRC because there were no specific provisions under SEBI LODR Regulations.
The Committee’s suggestion was adopted by adding a new sub-paragraph (6) to clause A of Schedule II, Part D that read: “(6) recommend to the board, all remuneration, in whatever form, payable to senior management.”
The Stakeholders Relationship Committee’s role has undergone major change, and clause (B) of Schedule II, Part D has been updated as follows:
The following, among other things, will be part of the committee’s duties:
(1) Addressing the complaints of the holders of securities in the listed entity, such as those involving the transfer or transmission of shares, the non-receipt of annual reports, the non-receipt of declared dividends, the issuance of new or duplicate certificates, general meetings, etc.
(2) A review of the steps taken to ensure that shareholders’ voting rights are effectively exercised.
(3) A review of the Registrar & Share Transfer Agent’s performance in accordance with the service standards specified by the listed organisation.
(4) A review of the different steps and activities implemented by the listed corporation to lower the amount of unclaimed dividends and ensure that shareholders of the company receive dividend warrants, annual reports, and statutory notices on time.
The Risk Management Committee’s responsibilities have been expanded to include cyber security in particular.[9]
3. Composition of the Committee on Stakeholder Relations and the NRC
According to Regulation 19(1), only 50% of the NRC members must be independent directors, contrary to the Committee’s proposal that at least two-thirds of the NRC members serve in such capacity. The NRC’s recommendation regarding the quorum requirements has been accepted, and a new sub-regulation (2A) has been added to Regulation 19 that states that a quorum for a meeting of the nomination and remuneration committee must consist of at least one independent director in addition to two members, whichever is greater.
A new sub-regulation (2A) has been added to Regulation 20 to specify that the Stakeholders Relationship Committee must consist of at least three directors, with at least one of them being an independent director.
SEBI has mainly embraced the Committee’s recommendations with regard to Board Committees. The expanded and substantive involvement of independent directors in the operations of listed businesses is one of the most important lessons learned from the changes made to the SEBI LODR Regulations.
IMPROVED SUPERVISION OF GROUP ENTITIES
1. The Board of the Listed Entity Has a Duty to Consider Subsidiaries
The SEBI LODR Regulations, 2015 put certain requirements on the board of the listed business with regard to its subsidiaries, contrary to the Act. The Committee believed that these abroad subsidiaries should be treated equally to a company’s Indian subsidiaries in the era of globalisation where many Indian enterprises operate through their overseas subsidiaries. [10]The Committee further noted that, in order to protect the interests of public shareholders, the board of the listed business must exercise a sufficient level of scrutiny and oversight over its unlisted subsidiaries. As a result, it provided several recommendations about the duty of the board of a listed firm with regard to its subsidiaries, which SEBI approved without any changes. The following are the most significant adjustments made as of the SEBI Board Meeting on March 28, 2018:
- Regulation 16( 1)( c)’s description of a” material attachment” has been changed to encompass accessories whose income or net worth exceeds 10( rather of the previous cap of 20) of the consolidated income or net worth of the listed reality and its accessories in the incontinently antedating account time;
- In agreement with an correction to Regulation 24( 1) of the SEBI LODR Regulations, at least one independent director of the holding listed business must be appointed to the board of an unrecorded material attachment, whether it’s located in India or abroad. still, the expression” material attachment” must relate to a attachment for the purposes of Regulation 24( 1) if its income or net worth exceeds 20 of the consolidated income or net worth, independently, of the listed establishment and its accessories in the incontinently antedating account time.
2. Administrative audit
The requirement of a secretarial audit for listed businesses and their significant unlisted subsidiaries was advocated. As a result, Regulation 24A has been added to the SEBI LODR Regulations. As of the fiscal year ending March 31, 2019, this regulation mandates that every listed entity and its significant unlisted subsidiaries conduct a secretarial audit and annexe a report from that audit in the prescribed form to the auditors report. This report must be provided by a company secretary who is currently in practise.
TRANSACTION BETWEEN RELATED PARTIES
According to the SEBI LODR Regulations, “Related Party” is defined as a related party as that term is used in Section 2(76) of the Act; however, this definition does not apply to the units issued by mutual funds that are listed on a recognised stock market (or exchanges).
According to the Committee’s recommendations, Regulation 2(1)(Zb) of the SEBI LODR Regulations was changed, and a proviso was added before the definition and after the already-existing proviso, reading: “Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of the shareholding in the listed entity shall be deemed to be a related party.”[11]
The Committee recommended that, in order to increase transparency regarding related party transactions, a new sub-regulation (9) be added to Regulation 23 of the SEBI LODR Regulations. This new sub-regulation (9) calls for the half-yearly disclosure of related party transactions (RPTs) on a combined basis on the listed entity’s website within 30 days of the publication of the half-yearly financial results. A copy of the same must be sent to the stock exchanges as well. This modification will take effect beginning with the March 31, 2019, half-year.
The Committee reviewed the disparity between the Act and the SEBI LODR Regulations, noting that the former permitted related parties to vote on a related party transaction (though not in favour of it), whereas the latter obliged such parties to abstain. The SEBI LODR Regulations should be simplified to the Act, the Committee advised. As a result, related parties are now permitted to vote down important related party transactions under Regulations 23(4) and 23(7). The Act’s and the SEBI LODR Regulations’ compliance criteria are now easier for listed businesses to meet thanks to this revision.
PARTICIPATION OF INVESTORS IN MEETINGS OF THE LISTED ENTITIES
The Committee believed that better investor participation would improve good governance. It was in favour of doing away with the restrictions imposed by in-person gatherings and embracing technology.
A new sub-regulation (5) was added to Regulation 44, mandating that the top 100 listed entities by market capitalization (as of March 31 of each financial year) hold their annual general meetings (“AGMs”) within five months of the financial year’s end, or by August 31 of each year.
A new sub-regulation (6) was added to Regulation 44, which mandates that the top 100 listed firms provide a one-way live webcast of the AGM proceedings in addition to the aforementioned requirements. The top 100 listed companies will be chosen based on their market capitalisation at the end of the most recent financial year.
RECOMMENDATIONS TO OTHER AGENCY
As some of the Committee’s suggestions would have violated the authority of other authorities, they were either rejected or forwarded to other agencies. A suggestion to strengthen the function of the Institute of Chartered Accountants of India (ICAI), a body that oversees auditors, was referred to the Central Government, for example. In order to improve the governance of listed corporations, the Kotak Committee had proposed that the ICAI be given more authority, including the ability to fine members up to INR 10 million and audit firms up to INR 50 million, among other things.
The proposal to take away voting rights from Treasury Stock was also rejected by SEBI. Additionally, the market regulator held off on making any decisions regarding the governance of public sector entities (PSEs). Important suggestions in this approach included consolidating government holdings and separating PSEs from administrative ministries.
CONCLUSION
The Kotak Committee’s recommendations addressed a few crucial corporate governance issues. The SEBI LODR Regulations have been amended in a way that is consistent with these recommendations and advances the goal of overall company openness and credibility.
[1] Page 105 of Kotak Committee Report
[2] Page 111 of Kotak Committee Report
[3] Proviso to Regulation 17(1)(a), as amended by the LODR amendments of May 09, 2018.
[4] Page 24 of the Kotak Committee Report
[5] Section 149(6) of the Companies Act, 2013 and Regulation 16(1)(b) of SEBI LODR Regulations
[6] Page 25 of the Kotak Committee Report
[7] Section 1.2 of SEBI Board Meeting dated March 28, 2018, PR No. 09/2018 followed by the May 09, 2018 amendments to the SEBI LODR Regulations, specifically in Regulation 16(1)(b)(ii), insertion of new sub-clause (viii) to Regulation 16(1)(b) and insertions of sub-regulations (8) and (9) to Regulation 25.
[8] Regulation 18 of the SEBI LODR Regulations
[9] Amendment to Regulation 21(4) of the SEBI LODR Regulations on May 09, 2018.
[10] Regulation 24 of the SEBI (LODR) Regulations, 2015
[11] Regulation 2(1)(Zb) of the SEBI LODR Regulations
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