Sebi tests new governance concepts on a non-mandatory basis

The Securities and Exchange Board of India (Sebi) is testing new governance concepts like board evaluation, group governance units and disclosure of strategies in the Indian markets.

To begin with, the markets regulator has implemented these measures on a non-mandatory basis. Experts feel these could be made compulsory if proved effective. Some of these concepts are operational in the developed world and are considered a key tool in empowering of minority investors.
 

Sebi, in a circular on Thursday, said companies may consider disclosures on board evaluation. Further, companies with unlisted subsidiaries need to consider establishing a group governance policy. More important, the regulator has said companies may spell out medium- and long-term strategies, though it’s optional.

The measures are based on recommendations by the Uday Kotak panel on corporate governance. 

“The entire Kotak committee focus was evolutionary, not revolutionary. The bigger issues with large implications were decided to be done in a phased manner, as these kinds of disclosure would take time to implement,” said J N Gupta, managing partner, SES, a proxy advisory.

Sebi has said companies under the ‘management discussion and analysis’ section of annual report, “within the limits set by its competitive position”, disclose their medium-term and long-term strategy, based on a time frame as determined by its board of directors.

Gupta said disclosure on strategy should enumerate the steps necessary to realise the vision, typically over a three to five-year period. “This would also stimulate the functioning of board towards the goal,” he said.

Sebi has also asked companies to undertake board evaluation, a kind of performance appraisal for directors. “Such evaluation enables boards to identify barriers in the way of a company’s growth. Through this, a company can identify its areas of strength and weaknesses, leading to positive impact on performance and shareholder value. Hence, there should be some mechanism to periodically monitor the board evaluation,” said the chief executive of a Nifty company.