Sebi may give nod to partial implementation of Kotak panel recommendations

Sebi in favour of splitting CMD position

The Securities and Exchange Board of India (Sebi) is in favour of partial implementation of the recommendations made by the Kotak committee on corporate governance. 

The regulator is keen on implementing key proposals of the report such as changes to the board structure of listed companies, sharing price-sensitive information and MNC royalty payouts.  At the same time, some of the other recommendations like oversight of unlisted subsidiaries, bringing auditors under its purview and capacity building could be put on the back burner as some of them result in regulatory overlap, said people with the direct knowledge of the development. 

“Sebi is keen to improve corporate governance standards at India Inc. However, given the sensitivity of the issue and its wide-scale impact on listed companies, the regulator is taking a cautious approach. It is trying to maintain a balance between increasing regulatory obligations and maintain ease of doing business,” said a regulatory source.

In October, the 25-member panel headed by Uday Kotak, managing director, Kotak Mahindra Bank, had proposed a slew of measures to enhance governance standards at India Inc. 

Sources said Sebi had shortlisted some of the key proposals that could be implemented first. These include as separation of the role of chairman and managing director in the listed company, sharing information with promoters not part of the board, and greater scrutiny of the royalty payments by Indian arms of multi-national companies (MNCs) to their foreign parents.

Also, some of the proposals related to the role of audit committee and board evaluation could also be implemented with some modifications, sources add.

Sources say that Sebi board is likely to take up the issue at its upcoming customary board meeting expected to be on February 10 post Union Budget 2019. Some of the panel’s suggestion has faced dissent from the Ministry of Corporate Affairs (MCA) and Institute of Chartered Accountant of India (ICAI) may also be put on hold. Revising the definition of “material subsidiary” is said to have not gone down well with the MCA. 

“While both Sebi, MCA are committed to implement these proposals, they will need to bring in greater alignment of the existing regulations. Sebi needs to ensure that governance mechanism in listed firms are effective in oversight over their unlisted arms,” said Sai Venkatesh, Partner, KPMG India.  Other proposed provisions like insurance coverage for independent directors, number of board meetings are among those may not get green signal from the Sebi. The regulator had received hundreds of comments from various stakeholders including exchanges and other intermediaries registered on the report.  On the split of roles, Sebi expert panel recommended that listed entities with more than 40 per cent public shareholding should separate the roles of chairman and managing director/chief executive officer with effect from April 2020.  Several companies, including state-owned enterprises, have executives holding the position of CMD. Some of them are Reliance Industries, Oil and Natural Gas Corporation, Coal India, Wipro, NTPC, Bharat Petroleum, Nestlé India and JSW Steel. Globally, too, both the positions are distinct and held by different people.  “This would prevent a potential conflict of interest arising out of the same person playing the two roles,” said J N Gupta, co-founder, Stakeholder Empowerment Services. He was also the part of the panel. He adds this curtail the excessive concentration of authority in a single individual and give structural advantage to the board to act independently.

On sharing the information with controlling promoters, the panel has recommended creation of special agreements enabling the management to share any sensitive information with “designated persons”. Under the current framework, such information can be shared with members only if they are part of the decision-making process. “This would bring clarity on who are party to the information shared. Also, this will formalise the current informal information sharing with promoters and other interested people,” said Shriram Subramanian, MD, Ingovern, a proxy firm. 

Sebi is said to be also looking at the implication of high royalty payments by domestically listed multinational companies to their parents. The committee recommended payments amounting to over five per cent of the revenues would require approval of the public shareholders.

Under Review

Key proposals 

• Separation for the role of chairperson and CEO/MD for listed entities
• Special resolution if royalty/brand payments exceed 5% of the turnover
• Formal framework for sharing price-sensitive information with non-board member
• Enhancing role of audit committee; board evaluation with some modifications

May go in slow lane

• Proposals that have direct conflict of interest/ overlapping of regulations
• Oversight on the listed firms followed by revising definition of material subsidiary
• Stringent action against auditors in case of irregularities
• Insurance coverage to independent director 
• Capacity building within Sebi at par with global regulator

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