Kotak Committee's Recommendations On Corporate Governance

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

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.