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December 17, 2018

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Kotak Committee's Recommendations On Corporate Governance


- Ambuja Cement Corporate Legal Team, [ ]

corporate-legal-team

SEBI, by accepting most of the Kotak Committee recommendations, has displayed its willingness to undertake strong and bold measures to improve the corporate governance environment in India and align it with global best practices...

The Securities and Exchange Board of India (“SEBI”), in furtherance of its role of a regulator and in light of developments in corporate governance globally, constituted a committee under the chairmanship of Uday Kotak (hereinafter, the “Kotak Committee”) in June 2017. On October 5, 2017, post deliberation with various stakeholders, the Kotak Committee submitted its report (“Report”) proposing amendments to the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (LODR) with the objective of enhancing fairness and transparency in the corporate governance landscape in India.

SEBI, in its board meeting on March 28, 2018, considered the Report and accepted several reforms suggested by the Kotak Committee both with (15) and without modifications (40). Certain recommendations, which were criticized by market participants as being an example of ‘jurisdictional over-reach’, have been referred to various agencies (i.e., government, other regulators, professional bodies, etc.), considering that the matters involved related to them.

The following are some of the key recommendations of the Kotak Committee approved by SEBI:

A. Increasing Transparency


There may exist certain issues and glitches, such as the fact that various recommendations of the Kotak Committee which have been approved have been made applicable to top companies in terms of market capitalization

Corporate governance norms are aimed at monitoring and ensuring effective and cost-viable functioning of a corporation. Therefore, effective disclosures are fundamental to corporate governance. Some of the measures suggested by the Kotak Committee and approved by SEBI in this regard are as below:

i. Disclosure of utilization of funds from Qualified Institutional Placement (QIP)/Preferential Issues in the Annual Report of the listed company until such funds are completely utilized.

ii. Disclosures of Auditor credentials, audit fee, reasons for resignation of auditors to be recorded in the Annual Report. Further, the notice being sent to shareholders for an Annual General Meeting (AGM) where the statutory auditor(s) is/are proposed to be appointed/re-appointed will have to include disclosures as a part of the explanatory statement to the notice, including proposed fees, basis of recommendation for appointment, credentials, etc.

iii. Details of expertise/skills of directors to be published in the Annual Report.

iv. Enhanced disclosure of related party transactions (RPT) to be submitted to the stock exchanges and published on their website. Further, listed entities will now have to include disclosures of transactions of the listed entity with any person or entity belonging to the promoter/promoter group which hold(s) 10 percent or more shareholding in the listed entity, in the format prescribed in the relevant accounting standards for annual results in their Annual Report.

v. Mandatory disclosure of consolidated quarterly results with effect from Financial Year 2019-2020.

vi. All listed companies and their material subsidiaries incorporated in India will have to undertake secretarial audit and annex a secretarial audit report given by a practicing company secretary with their Annual Reports.

B. Reshaping the Management of the Company


The board of directors of a company, being entrusted to keep a check on the management, is its primary governance body and it owes a fiduciary duty to a company as a whole and to various stakeholders. The following measures have been recommended by the Kotak Committee to strengthen the institution of the board of directors:

i. The top 500 listed entities (by market capitalization) having a public shareholding of 40 percent or more have to separate the office of CEO/MD and Chairperson with effect from April 1, 2020.

ii. The top 1000 listed entities (by market capitalization) and the top 2000 listed entities should mandatorily have a minimum of six directors and a minimum of one woman director on their boards by April 1, 2019 and April 1, 2020, respectively.

iii. No person will be allowed to hold the office of director in more than eight listed entities at the same time (of which independent directorships are capped at seven) with effect from April 1, 2019. Further, with effect from April 1, 2020, such number will be capped at seven.

iv. No person who is a part of the promoter group can be appointed as an Independent Director. Further, to avoid the problem of ‘board interlocks’, a person who is a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director will not be eligible to be an independent director in the listed entity.

C. Enhanced Role of Committees


i. Audit Committee - The Audit Committee will have to review the utilization of loans and/or advances from/investment by the holding company in the subsidiary exceeding `100 crore or 10 percent of the asset size of the subsidiary, whichever is lower.

ii. Nomination and Remuneration Committee – The Nomination and Remuneration Committee, which is currently mandated by the LODR Regulations to recommend to the board of directors the appointment and removal of the senior management of a listed entity, shall now have to identify and recommend to the board the appointment and removal of persons for the positions/offices one level below the Chief Executive Officer/Managing Director/Whole Time Director/Manager (including Chief Executive Officer/ Manager, in case Chief Executive Officer/Manager is not a part of the board), specifically including the position of the company secretary and the chief financial officer: Such positions/offices will now be considered to be a part of the ‘senior management’. Further, it shall now be the duty of the Nomination and Remuneration Committee specifically to recommend to the board all remuneration, in whatever form, payable to members of the senior management.

iii. Risk Management Committee - The functions of the Risk Management Committee shall now specifically cover cybersecurity.

D. Board and Shareholder Meetings


i. Quorum of the board of directors will be one-third of the total strength of the board of directors or three directors, whichever is higher.

ii. Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19, i.e., by August 31, 2019.

iii. Webcast of AGMs will be compulsory for top 100 entities by market capitalization w.e.f. FY 2018-19.

iv. Shareholder approval (majority of minority) for royalty/brand payments to related party exceeding 2 percent of consolidated turnover (instead of the proposed 5 percent).

Comment:


SEBI, by accepting most of the Kotak Committee’s recommendations, has displayed its willingness to undertake strong and bold measures to improve the corporate governance environment in India and align it with global best practices. Most of the approved recommendations are firmly rooted in local business realities peculiar to India, where most listed entities are promoter-led as opposed to being professionally managed, thus increasing risks of promoter-raj at the cost of minority shareholders.

To conclude, while there may exist certain issues and glitches, such as the fact that various recommendations of the Kotak Committee which have been approved have been made applicable to top companies in terms of market capitalization, precluding smaller listed entities from such compliance requirements even though it is usually some of the smaller listed entities wherein corporate governance standards are found to be wanting, the approved recommendations are indeed welcome.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

 

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