Corporate governance overhaul: What did the Uday Kotak-led SEBI panel recommend?

Pranay Lakshminarasimhan

Moneycontrol News

The Uday Kotak-led SEBI committee on corporate governance submitted its report to the regulator on Thursday, recommending a slew of changes in corporate governance norms.

One of the biggest recommendations made by the panel was splitting up the roles of Chairman and Managing Director or Chief Executive Officer in a company. Some of the other recommendations include making a parent company’s audit committee responsible for checking the books of its group companies as well.

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The panel also suggested that independent directors should make up at least half of every company’s board and should attend at least half of the board meets. A minimum of 6 independent directors, including at least one woman director, should be appointed on the board of a listed company.

Listed below are some of the major recommendations made by the committee and what they mean for listed companies:

1) Chairman of the board cannot be the MD or CEO of a company

The chairman of the board cannot hold the post of either MD or CEO in the company. This will impact a lot of companies, including major ones like Adani Ports & SEZ, Hindustan Petroleum Corporation, NTPC, ONGC, and Power Grid Corporation of India, among others, who have the same person holding the posts of both Chairman and MD.

The companies having a CMD or Chairman and CEO will now have to chose between retaining the person in either role and finding another to fill the vacancy. Industry experts have suggested that companies might opt to appoint a non-executive chairman and retain the incumbent chairman as the MD or CEO.

To be sure, a person cannot be Chairman and MD or CEO at the same time. He/she could, however, be MD and CEO at the same time without being Chairman.

2) Board of directors to have at least one woman independent director

Just to clarify, this rule is in addition to the existing requirement of having at least one woman director on the board. If this recommendation was to be implemented, companies would have at least one woman director and one woman as independent director.

3) Board of directors to have a minimum of six directors

The board of directors of a company must have at least six directors. This is double the previous requirement of having at least three directors on the board of a public company.

4) Independent directors to make up 50 percent of the board

At least half the directors on the board will have to be independent directors to ensure better governance. The panel has recommended a minimum remuneration of Rs 5 lakh a year for independent directors and a sitting fee of Rs 20,000 to Rs 50,000 for each board meeting. It has also recommended that for the top 500 companies by market capitalisation, it should be compulsory to undertake Directors and Officers Insurance for their independent directors.

5) Audit committee to review use of loans or investment of more than Rs 100 crore by a holding company in a subsidiary

The audit committee of any parent or holding company that has invested or lent Rs 100 crore or more to a subsidiary will be responsible to review the use of those funds by the subsidiary. This is to ensure more transparency on the use of funds and to keep an eye on any round-tripping of funds.

6) SEBI to penalise auditors if any lapses are found

SEBI will have the right to pull up auditors for any lapses in corporate governance norms and penalise them for the same. This will ensure diligent auditing of company processes and funds.

7) Directorship in listed entities to be limited to 8 per person

A director in a listed company can be a director on the board of only 7 other companies.

In addition to these, the committee also recommended that a formal induction be made compulsory for every new independent director on the board, that no person be appointed an alternate director for an independent director of a listed company, and that the number of board meetings a year be increased from one every quarter to five a year, among others.

Apart from making these recommendations to SEBI, the Uday Kotak-led panel also said that the regulator is severely understaffed and recommended increasing employee capacity at the regulator to ensure better governance and enforcement of norms.

The committee also recommended imposing more checks and balances on royalty and brand payments, related-party transactions and sharing on information between the company management and entities that are not a part of the board, and creation of an independent shareholding structure for listed public sector undertakings so as to reduce their dependency on administrative ministries.

The creation of a formal channel to facilitate sharing of information between promoters and the company, disclosure of all rating actions by companies, and mandating a minimum qualification for independent directors were some of the other recommendations made by the corporate governance committee.