RECOMMENDATIONS OF KOTAK COMMITTEE ON CORPORATE GOVERNANCE

SEBI formed a committee on corporate governance in June 2017 under the Chairmanship of Mr. Uday Kotak with a view to enhancing the standards of corporate governance of listed entities in India. The committee consisted of officials from the government, industry, professional bodies, stock exchanges, academicians, lawyers, proxy advisors, etc. The committee was requested to submit its report within four months.

The terms of reference of the committee were to make recommendations to SEBI on the following issues:

• Ensuring independence in spirit of Independent Directors and their active participation in functioning of the company;
• Improving safeguards and disclosures pertaining to Related Party Transactions;
• Issues in accounting and auditing practices by listed companies;
• Improving effectiveness of Board Evaluation practices;
• Addressing issues faced by investors on voting and participation in general meetings;
• Disclosure and transparency related issues, if any;
• Any other matter, as the Committee deems fit pertaining to corporate governance in India.

The Committee was requested to provide its recommendations in the context of equity listed companies.

The committee has submitted its report on October 5, 2017 to SEBI. The said report was put in the public domain by the Board seeking public comments on the recommendations on or before 04.11.2017.  Comments were received from a variety of stakeholders including industry, government, global associations, industrial investors, lawyers etc.,

Corporate governance deals with the ways in which suppliers of capital to corporations, especially faceless, powerless small investors, can assure themselves of getting fair treatment as stakeholders. A promoter, or a professional manager, raises funds from equity investors either to put them to productive use or to cash out his/her holdings in the firm. 

Companies that exhibit sound corporate governance generate significantly greater returns when compared to companies that exhibit poor corporate governance.    The governance mechanisms that ensure such value creation highlight the role of:

• composition of boards, especially their independence in law and in spirit from the company’s management;
• expertise of the directors on the boards;
• the composition and independence of key board committees such as the audit committee and the nomination and remuneration committee;
• independence of the companies’ auditors and the quality of audit of its financial statements;
• the quality of disclosures by the company; and
• careful balancing of the interests of controlling shareholders vis-à-vis minority shareholders.

SEBI Board in its meeting held on 28.03.2018 at Mumbai considered the recommendations of the Committee and also considered the public comments on the report of the Committee on corporate governance.

The Board accepted the following recommendations of the Committee without any modifications-

• Reduction in the maximum number of listed entity directorships from 10 to 8 by 01.04.2019 and 7 by 01.04.2020;
• Expanding the eligibility criteria for independent directors;
• Enhanced role of the audit committee, nomination and remunerationcommittee and risk management committee;
• Disclosure of utilization of funds from QIP/preferential issue;
• Disclosures of auditor credentials, audit fee, reasons for resignation of auditors etc.,;
• Disclosure of expertise/skills of directors;
• Enhanced disclosure of related party transactions and related parties to be permitted to vote against related party transactions;
• Mandatory disclosure of consolidated quarterly results with effect from the Financial year 2019-2020;
• Enhanced obligations on the listed entities with respect to subsidiaries;
• Secretarial audit to be mandatory for listed entities and their material unlisted subsidiaries under SEBI (LODR) Regulations;

The Board decided to accept several recommendations with modifications which included the following-

• Minimum six directors in the top 1000 listed entities by market capitalization by 01.04.2019 and in the top 2000 listed entities by 01.04.2020;
• At least one women independent director in the top 500 listed entities by market capitalization by 01.04.2019 and in the top 1000 listed entities by 01.04.2020;
• Separation of CEO/MD and Chairperson (to be initially made applicable to the top 500 listed entities by market capitalization with effect from 01.04.2020);
• Quorum for Board meetings (1/3^rd size of the Board or 3 members whichever is higher) in the top 1000 listed entities by market capitalization by 01.04.2019 and in the top 2000 listed entities by 01.04.2020;
• Top 100 entities to hold Annual General Meetings within five months after the end of Financial year 2018 – 19;
• Webcast of Annual General Meetings will be compulsory for top 100 entities by market capitalization with effect from 2018-19;
• Shareholder approval (majority or minority) for Royalty/brand payments to related party exceeding 2% of the consolidated turnover, instead of the proposed 5%.

The Board decided to refer certain recommendations to various agencies, such as government, other regulators, professional bodies considering that the matters involved relate to them.  Such recommendations, inter alia, include strengthening the role of ICAI, internal financial controls, adoption of Accounting Standards, treasury stock, governance aspects of PSEs etc.,