SEBI formed a committee on corporate governance in June 2017 under the Chairmanship of Mr. Uday Kotak with a view to enhancing the standards of corporate governance of listed entities in India. The committee consisted of officials from the government, industry, professional bodies, stock exchanges, academicians, lawyers, proxy advisors, etc. The committee submitted its report on October 5, 2017 with various recommendations. This article deals with some of the recommendations as well as the views of the writer on the same: however, anyone interested can send his views/recommendations/ observations directly to Mr. Pradeep Ramakrishnan, EMAIL: email@example.com or Ms. Nila Khamolkar, EMAIL: firstname.lastname@example.org no later than November 4, 2017.
Terms of reference
The terms of reference of the committee were as under:
> Ensuring independence in spirit of Independent Directors and their active participation in functioning of the company;
> Improving safeguards and disclosures pertaining to Related Party Transactions;
> Issues in accounting and auditing practices by listed companies;
> Improving effectiveness of Board Evaluation practices;
> Addressing issues faced by investors on voting and participation in general meetings;
> Disclosure and transparency related issues, if any;
> Any other matter, as the Committee deems fit pertaining to corporate governance in India.
Expectedly, the committee submitted the report along with its recommendations to the government on October 5, 2017.
Analysis of the recommendations
Its main report is contained in the following website:
It contains 177 pages and the number of items dealt, chapter wise, is as under:
Chapter 1: 13 items, Composition and Role of Directors
Chapter 2: 10 items, The institution of independent directors
Chapter 3: 9 items, Board Committees
Chapter 4: 3 items, Enhanced monitoring of group entities
Chapter 5: 8 items, Promotors/controlling shareholders and related party transactions
Chapter 6: 17 items, Disclosures/transparency
Chapter 7: 13 items, Accounting and Audit related issues
Chapter 8: 5 items, Investor participation in meetings of Listed entities.
Chapter 9 – 11 contain various recommendations and annexures 1,2,3,4,5, and 6: letters from Ministry of Corporate Affairs with their views, Ministry of Finance with their views, Detailed Regulatory Provisions, Illustrative parameters- Board Skill Evaluation, Strategy- Key Metrics and PSE Governance with international precedents are enclosed with annexures.
It is virtually impossible to touch all the matter discussed but the writer may give his own views or recommendations based on his experience. It is expected that every one of you would thoroughly read the report and send your views directly to SEBI as per the emails quoted in this article.
This article basically would love to kindle heated discussion on various suggestions of the august body of the committee with the widest group of professionals and enlist maximum recommendations from the readers of this article.
Since I am a CPA from USA with wide experience in audit, taxation, accounting, GAAP, IFRS or Ind AS(Banking), my discussion would be relevant to my areas of specialization. Intentionally, I shall not comment about other areas which are spread in 78 recommendations and various other chapters and precedents from international management/professional situations.
Now, the discussion starts in right earnest:
It was also noted that this was the only provision in which Indian auditing standards differed from their international counterpart. The committee, therefore, recommended that for listed entities in India, the auditor of the holding company should be made responsible for the audit opinion of all material unlisted subsidiaries.
(We have been playing soft with the auditor’s role in a holding company, believing totally the opinion of other auditors’ in subsidiary companies. This step recommended by the committee would further improve auditing standards. Though an auditor by profession, I feel that more responsibility needs to be fixed on auditors, in general).
The Committee recommends that IFC reporting requirements be made applicable to the entire operations of the group and not just to the Indian operations. However, the Committee recognizes that companies may require adequate transition time and in this regard, recommends that IFC reporting requirements for entire operations initially be only applicable to listed entities with net worth of Rs. 1000 crore and above. (Incorporation of international standards for internal financial controls is a welcome move, particularly, when big companies resist these moves.)
The Committee noted that many of the aforesaid indicators are already a part of ICAI’s peer review system.
The Committee believes that making such indicators public will enable transparency and comparison of the audit quality of different auditors. (The quality of auditors in India need constant monitoring and only recently, ICAI undertook CPE for Chartered Accountants and for its report on a regular basis. Unfortunately, we do not have good CA firms who could undertake Continuous Professional Education courses regularly developed by senior professors/ professionals and ICAI has monopolised even this work. I have attended many of the courses conducted by ICAI which are treated as picnic by the professionals.)
(a) Proposed fees payable to the statutory auditor(s) along with terms of appointment and in case of a new auditor, any material change in the fee payable to such auditor from that paid to the outgoing auditor along with the rationale for such change;
(b) Basis of recommendation for appointment including the details in relation to and credentials of the statutory auditor(s) proposed to be appointed. (This provides a better window to understand the appointment of auditors and other related matters. So far, the information provided by the companies looked like a monologue.)
The committee has recommended its implementation immediately (Strangely, all commercial banks would otherwise be reporting their comparative position for the periods ending March 31, 2018. It may not be difficult for them to adhere to Ind As provisions for financial statements based March 31, 2018.). Most of the banks have handed over their work to Big 4 accounting firms without stretching themselves to new accounting standards or challenges associated with them. Only time will testify whether Ind AS would succeed in Scheduled commercial banks with the severity attached to them.
One can easily see that there are 78 items on which the committee has given its recommendations and the object of this article is only show case some of the recommendations and their implications, in mind of the writer. It is now the turn of professionals like Chartered Accountants, Company Secretaries, Cost Accountants, Management professionals running the companies, engineers or IT people who are the backbone of the companies to give their views and send them to SEBI officials whose emails have been given at the beginning of this article. Yes, please spare some time to study the report and send your views.
To conclude, I can emphatically say that the recommendations made are realistic and intended to improve the working of companies. One can easily venture to read the report and find that even ICAI finds it difficult to counter argue with Mr Uday Kotek’s report recommendations since we have not progressed professionally up to the required international level. Board of Directors, particularly, the independent directors do not play the role intended for them.
I could easily recollect my casual meeting with one of the retired Chairman of the public-sector bank who happily recalled his association as an independent director with a private sector bank but rued the stringent requirement of adhering to higher standards of safeguarding the interests of poor investors like yourself, myself or other simpleton who do not have wherewithal to supervise the functioning of big companies with tentacles spread around the globe. He, however, appreciated the hefty fees paid to him as an independent director.
It is time to impose stringent international standards to save the companies from the inefficient employees, lazy auditors, sleepy management and corrupt related parties of the companies.
I am confident your reading of the report prepared by the respected committee headed by Mr. Uday Kotak along with their recommendations duly supported by your emails would save our companies and elevate them to world standard.
Can I say, why not the best for our companies?
titled “Report of the Committee on Corporate Governance” dated October 5, 2017.