Uday Kotak Committee Recommendations

Uday Kotak Committee on Corporate Governance was set up in June, 2017 by SEBI to suggest measures on enhancing the standards of governance of listed companies in India. This committee also had members from government, industry, professional bodies, stock exchanges, academics, lawyers etc. Some of the important areas on which the committee was asked to make recommendations were as follows:

• How to ensure the active participation of independent directors in the functioning of companies?
• How to improve the safeguards and disclosures pertaining to related-party transactions?
• How to handle the issues in accounting and auditing practices by listed firms?
• How to improve effectiveness of board evaluation practices?
• How to address issues faced by investors on voting and participation in general meetings
• Recommendations on disclosure- and transparency-related issues.

This committee had submitted report in first week of October. They key recommendations are as follows:

Independent directors

What is an ID?

An independent director (ID) is a person on company’s board other than managing director, whole time director or nominee director. Provisions regarding ID are found in SEBI’s Clause 49 of the Listing Agreement, 2000. This clause deals with corporate governance norms in listed companies.

What are objectives and functions of ID?

The objective of having an independent director on company’s board is to allow someone to take an autonomous view on what is happening in the company. Since autonomy is important for ID, the law has placed several restrictions on who can be appointed the independent director. Some of these include:

• An independent director must not be related to the promoter of a company or its subsidiaries or even its associates.
• ID must not be an employee of the company or any other entity from whom it has earned some fee (such as CA firm or consulting firm) in last three years.
• The ID should not have any kind of pecuniary relationship with the company in current or two preceding financial years.

What are functions of ID?

The above description makes it clear that ID is basically a watchdog to ensure good governance. They serve as a connecting link between management and its diverse stakeholders including creditors and investors. They also play the role of moderators during conflicts of interests in the company.

What are Kotak Committee Recommendations on IDs

SEBI has always tried to plug the loopholes and kept amending the provisions regarding appointment of IDs and give more credence to this role. It was seen that IDs were not able to play substantial role in these issues.

Now the Kotak committee has some recommendations as follows:

• The number of independent directors in the company’s board should be increased from 33% to 50%.
• Strict eligibility criteria for independent directors will be prescribed to ensure that the company promoter does not name a kin to the board.

The committee not only intends to give more voice to independent directors, but also put the responsibility on them in case of any lapse in corporate governance.

Changes with regard to independent directors for top 500 companies based on their market-cap have been recommended from April 2019. For the remaining, they can be implemented from April 2020.

Minimum number of directors

The Committee has proposed that board of directors shall comprise not less than six directors. This is double the previous requirement of having at least three directors on the board of a public company.

Also board of directors shall have an optimum combination of executive and non-executive directors with at least one woman as an independent director and not less than 50% of the board of directors shall comprise of non-executive directors.

No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years unless a special resolution is passed to that effect.

Attendance of directors

The proposed changes will include making it mandatory for companies to hold at least five meetings a year (from four at present). The reason for asking companies to hold five board meetings is to ensure that at least one is held to discuss corporate governance issues and not quarterly financial results.

A minimum level of attendance at meetings is prescribed for each board member. Currently, many board members are known to skip all four board meetings during the year.

Gender diversity on the board

The recommendations may also usher in ‘gender diversity’, by mandating the appointment of at least one woman as an independent director.

This rule is in addition to the existing requirement of having at least one woman director on the board. If this recommendation will implemented then the companies would have at least one woman director and one woman as independent director.

Separation of powers

To provide a better and more balanced governance structure by enabling better and more effective supervision of the management the committee recommended to separate the role of Chairperson and MD/CEO at listed entities with more than 40 percent public shareholding with effect from April 1, 2020.

Other recommendations

• The committee recommended for transparent frame work to regulate the information rights of certain promoters and significant shareholders. The Committee observed that information sharing with promoters and significant shareholders occurs in the “shadows” in the absence of a channel legitimizing such information flow.
• The report has capped the remuneration of executive promoter director at Rs5 crore a year or 2.5 percent of net profit, whichever is higher. Overall, the salary of all executive promoter-directors at 5 percent of net profit. In both the cases, company needs to take shareholder approval through a special resolution.
• 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.

Conclusion

The report has called for overhauling the existing rules to strengthen the role of independent directors and bring more transparency to the functioning of boards. This assumes significance in the light of recent boardroom battles at Infosys. We note that a significant number of recommendations by the Uday Kotak panel on corporate governance are in conflict with provisions of the Companies Act 2013 and also face dissent from the ministry of corporate affairs (MCA) and other regulatory bodies such as the Institute of Chartered Accountants of India (ICAI).

Exam Topic Suggestions

Prelims: What is class 49 of SEBI listing agreement?

Mains: Corporate Governance is a broad topic and this committee should be seen in conjunction with other committees such as Narayana Murthy Committee and Kumarmangalam Birla Committee. Importance of Corporate Governance and recent issues in this context are important for paper-2. Further, Independent Directors – appointment, functions and mandate should be analyzed in the context that they could not play any significant role during recent Tata-Mistry episode and issues in Infosys.