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Sep 13, 2017 07:30 AM IST | Source:

SEBI-appointed committee may put a cap on number of subsidiaries of listed companies

The committee has expressed concern on the large number of subsidiaries that many listed companies have.

The Securities and Exchange Board of India’s (SEBI) corporate governance committee is looking to plug loop-holes being exploited by companies while appearing to be in compliance with regulations.

The committee will put more responsibility on the board of the company and its auditors. The committee may cap the number of subsidiaries that a listed company can have, and lay rules for attendance by independent directors, information sharing outside of the board, minority shareholders’ approval for royalty payment, and increase participation of investors in annual general meetings. The committee will submit a report on October 3.

The committee has expressed concern on the large number of subsidiaries that many listed companies have.

SEBI and the exchanges don’t regulate the subsidiaries because most of them are unlisted.

“The top 100 listed companies have nearly 10,000 unlisted subsidiaries between them,” a source familiar with the development told Moneycontrol.

“With the government cracking down on shell companies, there is a need for SEBI and exchanges, too, to plug loopholes. There is a proposal to put greater responsibility on the parent company and its auditors for the subsidiaries. Most of the time, companies do not make adequate disclosures about the activities of the subsidiary companies if they happen to be unlisted.”

Some members of the committee are of the view that the boards of companies can share business details with the promoters. This point will be discussed at the meeting.

It may be recalled that during the public battle between Ratan Tata and Cyrus Mistry, the latter had charged Ratan Tata with Mistry with having influenced key operational decisions despite not having any managerial role and with having sought price-sensitive information from the group’s companies.

The committee will also debate an increase in the remuneration of independent directors of the board. Along with that, the committee is planning to make it binding on independent directors to attend at least 50 percent of the board meetings.

The committee will also discuss whether to make it mandatory for companies to seek the approval of minority shareholders while making a royalty payment to foreign partners.

This committee plans to increase the liability on the audit committees, as it feels that most adverse events can be avoided if the audit committee were to raise red flags in time.  The committee is considering barring directors who don't object even if there is a clear case of violation. “As we have seen in the case of Raymond, audit committee members were mum for years on the issue of the sale of company flats to promoters,” the source said.
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