Governance Reforms suggested by The Uday Kotak Committee

Swachh Corporate Abhiyaan- Moving towards better corporate governance (Uday kotak Committee Recommendations)

  • The Uday Kotak-led Sebi panel’s recommendations on corporate governance will enhance transparency and effectiveness in the way boards of listed companies function
  • The 21-member corporate governance comittee was formed by the Sebi in June 2017, under the chairmanship of Uday Kotak, MD, Kotak Mahindra Bank, with a view to enhance the standards of this regime of listed entities in India. The committee recently submitted its report. to recommend a number of changes for companies with regard to listing obligations and disclosure requirements (LODR).
  • In an attempt to support and enable sustainable growth of enterprise, while safeguarding interests of various stakeholders, The Uday kotak Committee has come out with various recommendations.
  • The committee has recommended splitting of roles of Chairman and MD-CEO for listed companies.

Important recommendations made by the committee:

  • The Uday kotak Committee has proposed that now board of directors shall comprise not less than six directors.
  • At present, of 1,670 firms considered by Prime Database for the survey, 154 companies have five directors, 82 have four, 19 have only three and one company just has two, says the data shared with Mint. These 1,670 firms account for 99% of market cap of NSE listed companies.
  • Board of directors shall have an optimum combination of executive and non-executive directors with at least one woman as an independent director and increasing the number of independent directors from 33 per cent to 50 per cent of a company’s board
  • The committee not only intends to give more voice to independent directors, but also put the onus on them in case of any lapse in corporate governance
  • Strict eligibility criteria for independent directors will be prescribed to ensure that the company promoter does not name a kin to the board.
  • These board shall meet at least 4-5 times a year, with a maximum time gap of one hundred and twenty days between any two meetings and at least once a year.
  • 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
  • Under this meeting, the board shall specifically discuss strategy, budgets, board evaluation, risk management, ESG (environment, sustainability and governance) and succession planning. Listed entity shall, at least once every year, undertake a formal interaction between the non-executive directors and the senior management.
  • Changes have been specified to the ‘matrix reporting structure’ of a company board to diversify power and responsibility.
  • A minimum level of attendance at meetings is likely to be prescribed for each board member. Currently, many board members are known to skip all four board meetings during the year.
  • The panel also suggested a minimum remuneration of Rs 5 lakh for independent directors per annum and a sitting fee of Rs 20,000-50,000 for each board meet.
  • Currently, there is no Sebi rule on remuneration of independent directors in listed firms and companies adhere to norms laid down in Companies Act.
  • The Uday kotak Committee suggested that independent directors should be paid at least Rs 5 lakh a year for top 500 firms and the minimum sitting fees per board meeting for these directors should be Rs 50,000 for the top 100 firms.
  • It also sought to make it mandatory to seek public shareholders’ approval for annual remuneration of executive directors from promoter family if the amount exceeds Rs 5 crore or 2.5 per cent of the company’s net profit.

Going forward

  • If these proposals are implemented, at least 256 companies on NSE will need to increase their board size and 637 will have to appoint a woman director. a survey by Prime Database showed.
  • Overall, the recommendations of the The Uday kotak Committee will enhance transparency and effectiveness in the way boards of listed companies function.
  • Since some of the proposed changes are structural in nature, it has provided timelines for implementation. However, effective implementation and regulation remains an issue.
  • The securities market regulator will need to develop capabilities to be able to regulate listed companies more effectively and protect the interests of small shareholders.

Opposition

  • Corporate governance reforms: SEBI may find it tough to act on Kotak panel recommendations
  • The corporate affairs ministry has opposed half of the corporate and said the changes are not feasible and in many instances will cause a regulatory overlap and unnecessarily make the functioning of boards tougher.
  • The panel recommended raising the minimum number of directors in listed firms from three to six. The corporate affairs ministry opposed this proposal, saying this will increase costs for companies.
  • The ministry said this proposal will unduly impinge upon the freedom of the management of the company to decide its non-executive directors.
  • The corporate affairs ministry also disagreed with the panel’s view on women board members.
  • The ministry opposed these norms entirely, stating there is no need to fix the lower limit of compensation.
  • Even on the changes on composition of nomination and remuneration committee in listed companies, The ministry said the proposals, if implemented, will have the effect of making the provision in the Companies Act, completely non-effective, which is not desirable.

♦Pradeep Gautam

Sources:

The Hindu
Livemint
Moneycontrol
PTI

 

 

 

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