Point-by-point analysis of Sebi's new corporate governance framework

Out of the 81 recommendations by Kotak panel, market regulator has accepted 40 proposals without any modifications; 15 with modifications; 18 were rejected and 8 have been referred to other agencies

Capital market regulator Securities and Exchange Board of India (Sebi) has approved sweeping changes to the corporate governance framework for listed companies. The new measures are based on recommendations made by a 25-member committee headed by Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank. The panel had suggested 81 key changes and new measures to improve the governance standards at India Inc. 

Some of the proposals faced oppositions from industry and other regulators after the committee made its report public in October 2017. Sebi had to take all stakeholders on board to ensure implementation of the measures suggested the Kotak panel. As a result, the market regulator couldn't implement all the 80 recommendations in toto.  

Ajay Tyagi, chairman, Sebi said out of the 80 odd recommendations, the market regulator has accepted 40 proposals without any modifications; 15 with modifications; 18 were rejected and eight have been referred to other agencies. 

Following is a point-by-point analysis:

A. Proposals accepted without modifications 

So far, Sebi has made public only 10 out of 40 proposals accepted without modifications. The 10 proposals are as follows:

Reduction in the maximum number of listed entity directorships from 10 to 8 by April 01, 2019 and to 7 by April 1, 2020

Impact: Currently, only one individual holds 10 director positions; one holds nine and one holds eight. These three individuals will have to give up their directorships in some companies.

Expanding the eligibility criteria for independent directors

Impact: Companies will not be able to appoint individuals related to the promoter group as independent directors. Also, such individuals who would not be able to discharge their duties independently due to certain prevailing circumstances or situations.

Enhanced role of the audit committee, nomination and remuneration committee and risk management committee

Impact: The requirement of a risk management committee to be extended to the top 500 listed entities by market capitalization as against current applicability to top 100 listed entities. Also, nomination and remuneration committee will need to have at least two-thirds of its members' independent directors.

Disclosure of utilization of funds from QIP/preferential issue

Impact: Companies will have to ensure better transparency, appropriate disclosures pertaining to utilisation of proceeds of preferential issues and QIPs till the time such proceeds are utilised.

Disclosures of auditor credentials, audit fee, reasons for the resignation of auditors

Impact: Going ahead, companies will have to give disclosures in relation to the credentials and terms of appointment of the auditors. Disclosures on fees paid will prevent companies from paying disproportionately high audit fees in relation to their assets. The move will ensure more transparency and help investors make informed decisions.

Disclosure of expertise/skills of directors

Impact: The board of directors of every listed entity should be required to list the competencies and expertise that it believes its directors should possess. Companies will have to name the directors who have such skills, expertise, and competence from financial year ended March 31, 2020.

Enhanced disclosure of related party transactions (RPTs) 

Impact: Companies will have to make half-yearly disclosure of RPTs on a consolidated basis. Strict penalties on those failing to do so. Any entity belonging to the promoter group of the listed entity and holding 20 per cent or more of shareholding in the listed entity shall also be a related party.

Mandatory disclosure of consolidated quarterly results with effect from FY20

Impact: Currently, the Companies Act and Sebi Regulations mandate the submission of consolidated financial statements by a listed entity every financial year. Soon companies will require to state the same on a quarterly basis.

Enhanced obligations on the listed entities with respect to subsidiaries

Impact: More oversight over unlisted ‘material’ subsidiaries both in India and overseas. The definition of the term “material subsidiary” could be tightened to include those subsidiaries whose income or net worth exceeds 10 per cent (from the current 20%) of consolidated income or net worth.

Secretarial Audit to be mandatory for listed entities and their material unlisted subsidiaries

Impact: Secretarial audit checks for compliance with all the regulations under various acts including Companies Act, Foreign Exchange Management Act (Fema) and Sebi Act.

B. Proposals accepted with modifications

Sebi has made public seven out of 15 proposals it has accepted with modifications. These include:

Minimum six directors in the top 1,000 listed entities by market capitalization by April1, 2019 and in the top 2000 listed entities, by April 1, 2020

Impact: Currently, there are 65 companies among the top 1,000 NSE listed-companies that have less than six board members. These companies will have to appoint more board members.

At least one  woman  independent  director  in the  top  500  listed entities  by  market capitalization by April 1, 2019 and in the top 1000 listed entities, by April 1, 2020

Impact: 155 out of top 500 and 336 out of 1,000 companies don’t have any women independent director

Separation of CEO/MD and Chairperson (to be initially made applicable to the top 500 listed entities by market capitalization w.e.f. April 1, 2020)

Impact: Currently 165 out of top 500 NSE-listed companies have same individual as CEO and chairperson. Some of these companies include Reliance Industries (Mukesh Ambani), Wipro (Azim Premji), Adani Ports and SEZ (Gautam Adani). Some PSUs including ONGC and Coal India too have CMD positions.

The quorum for Board meetings (1/3rdof the size of the Board or 3 members, whichever is higher) in the top 1,000 listed entities by market capitalization by April 1, 2019 and in the top 2000 listed entities, by April 1, 2020 

Impact: Currently, the Companies Act requires a quorum of one-third of the total strength of the board of directors or two directors, whichever is higher. Going ahead, companies will need at least 1/3rd of its board or minimum three members (whichever is higher) to be present for board meetings.

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

Impact: Currently, listed companies are given six months from the end of a financial year to hold their AGMs. Top 100 companies will have to conclude their AGMs within five months.

Webcast of AGMs will be compulsory for top 100 entities by market capitalization a w.e.f. FY19

Impact: Currently, webcast of AGMs is not mandatory. Starting this fiscal, top 100 companies will have to provide this facility.

Shareholder approval for Royalty/brand payments to related party exceeding 2% of consolidated turnover (instead of the proposed 5%)

Impact: While the Kotak panel had proposed a five per cent threshold, the Sebi board has decided to take more stringent action. For the financial year 2016-17, there were about 32 companies where royalty and brand payments exceeded two per cent of their consolidated turnover. Interestingly, there were only 10 companies where royalty payments were in excess of five per cent. Typically, MNCs are known to pay high royalties to their overseas parents. Such payments will now require the blessings of at least half (50% plus one vote) of the minority shareholders. Some of the companies that will be impacted include Maruti Suzuki, Page Industries and Colgate-Palmolive.

C. Proposals rejected to referred to other agencies

The proposals that were rejected or referred to other agencies were mostly those which infringed on other regulatory territories. For instance, the proposal strengthening the role of Institute of Chartered Accountants of India (ICAI), a body that regulators auditors, was referred to the government. The Kotak panel had suggested greater powers be given to ICAI to enhance the governance of listed entities. Power to penalize members by up to Rs 10 million and audit firms by up to Rs 50 million were among the measures suggested. Also, setting up of a separate team for enforcement action was recommended by the panel.

Sebi also rejected the proposal of removing voting rights on treasury stock. The market regulator also refrained from taking any decision on the various proposals pertaining to governance aspects of public sector undertaking (PSUs). Among the key proposals in this regard were ensuring the independence of PSUs from administrative ministries, consolidation of government stake in all listed PSUs under a separate holding structure. Experts said Sebi couldn't implement some of these proposals as it was beyond its regulatory ambit.