India – SEBI Revises Corporate Governance Standards Based On Recommendations Of The Kotak Committee.

The Securities and Exchange Board of India (“SEBI”) by way of a press release dated March 28, 2018 (“Press Release”) has announced actions taken at the SEBI board meeting including adoption of certain recommendations of the Uday Kotak Committee constituted in June 2017.

 

The Kotak Committee was constituted to make recommendations for improving standards of corporate governance of listed entities in India and the report (“Committee Report”) was released in October 2017. After having reviewed the Committee Report, on March 28, 2018, SEBI at its board meeting approved certain recommendations in toto and accepting some with modifications. This Press Release does not detail all recommendations of this committee which have been adopted by SEBI and is also silent on those which have been rejected.

 

These recommendations which have been highlighted in the Press Release will be applicable only after necessary amendments are made in the relevant regulations. Further, the points mentioned below are not exhaustive and indicate only the key highlights of the Press Release:

 

Composition and Role of the Board of Directors – Recommendations accepted

CEO/MD: Separation of CEO/MD and Chairperson positions (modified recommendation in the Committee Report): Applicable to the top 500 listed entities in terms of market capitalization, effective from April 1, 2020. Note, the Committee Report had recommended that (a) listed entities with more than 40% public shareholding should separate the roles of Chairperson and MD/CEO with effect from April 1, 2020, and (b) after 2020, SEBI may examine extending the requirement to all listed entities with effect from April 1, 2022.

 

Gender Diversity (modified recommendation in the Committee Report): At least one ‘woman independent director’ to be on the Board of Directors of the top 500 listed entities by April 1, 2019 and in the top 1000 listed entities by 

 

• April 1, 2020.  The Committee Report had recommended that every listed entity have at least one independent woman director on its board of directors.

 

• Minimum Directors (modified recommendation in the Committee Report): At least six directors to constitute the Board in the top 1,000 listed entities by April 1, 2019 and in the top 2,000 listed entities, by April 1, 2020. Currently, the minimum number of directors for such companies is 3. The Committee Report had recommended that this provision be adopted by all listed entities.    

 

• Maximum Directors: A director can be appointed on the Board of only up to 8 listed companies by April 1, 2019 and it will be reduced to 7 by April 1, 2020. Currently, the Companies Act, 2013 stipulates this as 10 directorships. This recommendation of the Committee Report has been adopted without any modification.

 

• Quorum (modified recommendation in the Committee Report): Quorum for board meetings to be one third of the size of the board or three members, whichever is higher, for top 1,000 listed companies by April 1, 2019 and for top 2,000 listed companies by April 1, 2020. Currently, the Companies Act, 2013 requires a quorum of one-third of the total strength of the board of directors or two directors, whichever is higher. However, it is important to note that the Committee Report had also recommended that at least 1 independent director be required to constitute quorum.

 

Disclosures and transparency- Recommendations accepted (without any modification)

 

• QIPs: Disclosure on utilization of funds raised from Qualified Institutional Placement and preferential issues.
• Quarterly: Mandatory disclosure of consolidated quarterly results with effect from FY 2019-20.
• Auditor: Disclosures of auditor credentials, audit fee, reasons for resignation of auditors, etc. to be disclosed in the notice to the shareholders to allow shareholders to take an informed decision on the appointment of auditors of listed companies.

 

Investor participation in meetings of Listed entities – Recommendation accepted (with modification)

 

• Timeline for holding AGM: Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19 i.e. by August 31, 2019. Currently, under the Companies Act 2013, listed entities in India are required to hold Annual General Meetings within six months from the end of the financial year. There is no specific provision in SEBI LODR Regulations on this matter. The Committee Report had recommended that the time period be reduced to 4 months over time.

 

• Royalty payments: Mandatory approval of the majority of minority shareholders for any payments on account of brand or royalty to a related party exceeding 2% of the consolidated turnover. The Committee Report had recommended a 5% threshold in this regard. 

 

​Enhanced disclosure of related party transactions – Recommendations accepted (without any modification)

 

• Disclosure: SEBI has adopted the enhanced disclosure requirements for related party transactions as prescribed in the Committee Report. The Committee Report had inter alia recommended that listed companies submit within 30 days of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format prescribed in the relevant accounting standards for annual results, to the stock exchanges

and publish the same on its website.

 

Monitoring of group entities – Recommendations accepted (without any modification)

 

• Secretarial Audit: Secretarial Audit is mandatory for listed entities and their material unlisted subsidiaries under SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.

 

Enhanced obligations on the listed entities with respect to subsidiaries- Recommendations accepted (without any modification)

 

• Subsidiaries: The recommendations in the Committee Report on the enhanced obligations with respect to subsidiaries were accepted by SEBI. Therefore, amongst other amendments, the monetary threshold in the definition of ‘material subsidiary’ will now be reduced to 10% (as against 20% currently). These recommendations aim for better transparency on the governance levels of downstream investee entities of the listed entity and also to improve the monitoring of the listed entity at a consolidated level.

 

Independent Directors – Recommendations accepted (without any modification)

 

Eligibility criteria: The recommendations for expanding the eligibility criteria for independent directors was adopted by SEBI. The Committee Report inter alia sought to specifically exclude persons who constitute the ‘promoter group’ of a listed entity from the definition of an ‘independent director’. Further, it also excluded “board interlocks” arising due to common non-independent directors on boards of listed entities. 

 

JMP Observation: While it would be important to review the final report of SEBI and the amendments which are made to the applicable regulations, the Press Release does reinforce SEBI’s commitment to investor protection through higher levels of corporate governance. As the Press Release indicates, a number of recommendations appear to be have been accepted in toto by SEBI, however, SEBI has also been prudent in considering stakeholder comments and not immediately enforcing certain recommendations to all listed companies. For example, the recommendations relating to separation of the roles of the CEO and MD will now be based on market capitalization of the listed company as against the public shareholding percentage recommended earlier. 

 

It is important to note that SEBI has been mindful of the expertise and jurisdiction of other regulators and governing bodies such as the ICAI on issues such as accounting and financial controls and has referred certain recommendations to these agencies and governing bodies. In our view, it is imperative that SEBI engages with other regulatory bodies such as the MCA in ensuring that the regulations are amended in a manner consistent with other corporate laws to ensure limited judicial challenge

 

 

For more information, please contact:

 

Sameer Sibal, Partner, Jerome Merchant + Partners

sameer.sibal@jmp.law