Sebi panel for more curbs on royalty payouts, information sharing

This, after the corporate battle between Tata and Mistry, where the latter had alleged that boards of Tata cos were sharing info with Tata

The corporate governance panel of the Securities and Exchange Board of India (Sebi) has recommended more checks and balances on royalty and brand payments, related-party transactions and sharing of information between management and entities not part of the board.

Among the key recommendations by the committee is one on the aspect of exchange of price-sensitive information between companies and a promoter no longer a part of the board or management.

The committee said a company could exchange unpublished price sensitive information (UPSI) with its promoters or persons only after the entity enters in an agreement of information-sharing with the designated person. These agreements would last at least one year and the company would reserve the right to terminate them.

According to the current norms, such information can be shared only between the board members. The information can be shared with any other person only on a “need-to-know” basis. But, several promoters are often not a part of the company’s boards but their opinion could be valuable for the company. 

The move comes after the corporate battle between Ratan Tata and Cyrus Mistry, where the latter had alleged that the boards of Tata companies were sharing UPSI with Ratan Tata, who was no longer a part of the board of these companies.

“While it is recognized that the status of a promoter is akin to a perpetual insider requiring access to information on a regular basis and the role of the nominee director is to protect the interests of the nominating shareholder (subject to the former’s fiduciary duty), the information flow to such promoters and significant shareholders occurs in the ‘shadows’ in the absence of a green channel legitimising such information flow,” the panel said.

“The committee members proposed that the regulatory framework should be amended to provide an enabling transparent framework regulating the information rights of certain promoters and significant shareholders to reduce subjectivity and provide clarity for ease of business,” the 25-member panel, headed by Kotak Mahindra Bank Vice-Chairman and Managing Director Uday Kotak, said in its report.

The panel also recommended that if a company wants to pay any promoter-director a remuneration of more than Rs 5 crore, or more than 2.5% of the net profit, the move will need an approval from shareholders through a special resolution. Although there is a ceiling on the remuneration payable to directors under the Companies Act, there are no provisions for executive promoter-directors.

Among other prominent changes suggested by the committee are relaxed norms for promoter reclassification. Although Sebi brought in a framework for reclassification of promoters a few years ago, there are hardly any takers, given the stringent rules. Until now, a promoter who is not involved in the day-to-day activities of the company, could reclassify himself as a shareholder if he doesn’t own more than one% stake in the company. The committee has recommended increasing the threshold to 10%. Such a move will now require a nod from the company’s board as well as shareholders.

The committee also recommended that payments made by listed entities with respect to brand usage/royalty amounting to more than 5% of the consolidated turnover of the listed entity may require prior approval from public shareholders. 

The committee has also recommended tightening of related-party transaction (RPT) disclosures. It has suggested that the companies should disclose their RPTs once every six months and violations be heavily fined. 

Uday Kotak panel recommendations in a nutshell
 
On board composition

• Minimum number of directors increased from three to six
• Minimum number of independent directors increased from a third to a half
• At least one independent woman director
• Ratification by shareholders if a director fails to attend at least half of the board meetings
• Disclosure of competencies/expertise of directors
• Special resolution for appointment of non-executive directors with age over 75 years
• Minimum number of board meetings in a year increased from four to five
• Presence of at least one independent director at every board meeting
• Separation of roles of chairperson and the CEO/MD for listed entities

On independent directors

• Checks and balances to ensure independence of independent directors
• Prescription of minimum compensation and sitting fee
• Detailed reason for resignation
• Insurance to protect from significant responsibilities and liabilities
• Induction and training programmes
• Alternate director not permitted
• Appointment of a lead independent director
• Exclusive meeting of independent directors

Improvement in accounting and audit standards

• Quantification of audit qualifications to be mandatory
• Auditors should have a right to obtain independent external opinions
• More quarterly disclosures on consolidated basis
• Reason for resignation of auditors
• Audit quality indicators to be made public, to increase transparency
• Disclose credentials and fees for appointment of auditors
• IndAS implementation for all entities including banks, NBFCs and insurance companies
• Power to Sebi to act against auditors
• More power to ICAI, regulator of auditors

On board committees

• Minimum number of audit committee meetings be increased to five every year
• Meeting of all other board committees at least once a year 
• Audit committee to scrutinise the end-utilisation of funds
• Committee recommends the requirement of having at least two-thirds of its independent directors on nomination and remuneration committee (NRC)
• Greater role of NRC, including setting compensation for KMPs
• Presence of one independent director compulsory for quorum
• Requirement of risk management committee extended to top 500, companies amid growing cyber threat
• Cap on number of committees for each member

On RPT, info-sharing with promoters

• Formal framework for sharing of sensitive information with non-board members
• Creation of ‘designated person’ for sharing of such info
• Cap on remuneration of promoter-directors
• RPTs to be disclosed once in every six months
• Special resolution if royalty/brand payments exceed 5% of turnover

On PSUs

• Independence of PSUs from administrative ministry
• Consolidation of government stake in listed PSUs under holding entity structure
• Setting up of independent board with diversified skill set 

Greater investor participation

• Remove the boundaries of physical meetings by use of technology
• AGM to be conducted within five months from end of a financial year
• Live web-cast for all shareholder meetings; e-voting deadline to be extended from 5pm to midnight
• Sebi to introduce common stewardship code for all institutional investors
• Stewardship code to cover aspects such as better monitoring of investee companies
• Voting rights on treasury stock to be withdrawn 

On disclosure and transparency

• Soft copy of annual reports
• Mobile numbers and email addresses compulsory for all demat accounts
• Linking of all demat accounts with Aadhaar
• Details of ADR, GDR holders with 1% shareholding
• Updated list of all credit ratings to be made available at one place for each company
• All disclosures in searchable formats
• Common filing platform to be devised by exchanges
• Disclosures of significant changes in key financial indicators
• Disclosure of basis of valuation for any scheme for arrangement
• Disclosures of hedging strategy

Capacity building at Sebi

• Increase staff strength at Sebi to improve monitoring and enforcement
• Revolving-door policy between Sebi and private sector
• Greater coordination between Sebi and MCA 

Protection of whistle-blower

• Grant of leniency and protection against victimisation to whistle-blowers

(Kotak Mahindra and associates are predominant shareholders in Business Standard Pvt Ltd)