Published on 13/10/2017 12:56:50 PM | Source: Motilal Oswal Securities Ltd

Embarking on a new era of corporate governance - Motilal Oswal

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SEBI Committee proposes a host of changes

 

The 23-member committee formed under the chairmanship of Mr Uday Kotak submitted its 170-page recommendations report on ‘Corporate Governance in India’ to the Securities and Exchange Board of India (SEBI) on 5 October 2017. The committee was formed with the objective of bridging the gap between the global and Indian corporate governance standards. The report broadly tries to address five key areas: (i) improving board effectiveness, (ii) bringing transparency in disclosure of related-party transactions, (iii) elevating accounting and audit practices, (iv) improving disclosure standards and (v) Judicious method in exercising the voting rights. Further, the committee has proposed a transition window, between 2018- 2020, which would give the board’s adequate time to effect phased implementation of the recommendations.

 

Key takeaways

The committee recommendations contained comprehensive detailing on each aspect of governance; however, there were 5 broad themes that were highlighted. Few points, that stood out for us, within these themes have been listed below:

1. Board effectiveness

*  Listed companies are required to have at least six directors on the board, with a minimum of 50% representation of independent directors — including one woman director. According to the Companies Act 2013, currently, a minimum of three directors are required on the board of a public limited company.

* The committee has proposed (i) disclosure of the expertise of the directors being appointed, (ii) increasing the number of board meetings from four to five every year and (iii) capping the maximum number of directorships to seven by April 2020.

* Starting April 2020, companies with a public shareholding of 40% or more will need to separate the roles of chairperson and CEO, and appoint a non-executive chairperson in order to prevent excessive concentration of power in one individual.

* Boards must meet more often, and disclose if they refuse to accept any of the recommendations of audit or remuneration committees.

 

2. Related-party transactions

* Disclosure of related-party transactions (RPT) to be made on half yearly basis. ARs to disclose RPTs with entities holding 10% or more in the company.

*  Definition of ‘related party’ will be made stricter to prevent darling deals from going undetected.

 

3. Accounting and audit practices

* Audit committees to monitor the flow of funds to unlisted subsidiaries, including those established overseas, while listed entities should put in place proper regulatory framework.

*  Auditors to have the right to seek independent opinion in case of conflicting views about the company.

*  Total fees for all services paid by the group to the auditor and its network firms to be disclosed.

 

4. Disclosure and transparency

* Enhanced disclosure requirements related to abrupt resignation of independent directors and auditors should be put in place.

* Transparent framework to regulate the information rights of certain promoters and significant shareholders to prevent any abuse and unlawful exchange of unpublished price sensitive information (UPSI). The committee proposed a formal signing of the ‘Access to Information Agreement,’ which will cover terms of information sharing.

*  Listed entities to disclose details of such holders of global depository receipts who hold more than 1% shareholding of an entity to the stock exchange as part of the disclosure on shareholding pattern on a quarterly basis.

*  Disclosures made by the listed entity on its website and submitted to the stock exchanges should be in a searchable format that allows users to find relevant information easily. Specifically, all disclosures made to the stock exchanges by listed entities should be in XBRL format.

* Listed entity may be required to disclose all credit ratings obtained by the entity for all its outstanding instruments annually to stock exchanges and also on its website which shall be updated on a regular basis as and when there is any change. In addition, the SEBI may consider requiring the credit rating agencies and the stock exchanges to set up a mechanism by which the ratings may be sent directly from the credit rating agencies to the stock exchanges.

 

5. Judicious method in exercising voting rights

*  Live one-way webcasts of all shareholder meetings to be mandatory for top 100 companies (based on market capitalization).

* No voting rights attached to treasury stock shall be exercisable after three years.

*The committee recommends that a common stewardship code be created for the financial sector on the lines of global best practices.

 

 

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