How Sebi’s new governance framework will affect corporates
The Securities and Exchange Board of India (Sebi) has approved sweeping changes to the corporate governance framework for listed companies.
The new measures are based on recommendations made by a 25-member committee headed by Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank. Of the 81 key changes recommended, Sebi has decided to implement 40 without any modifications, 15 with modifications and has rejected or referred eight to other regulatory agencies. SAMIE MODAK does a detailed analysis of the measures that will be implemented by Sebi: Maximum number of directorships at listed firms to be reduced from 10 to 8 by April 2019 and to 7 by April 2020
IMPACT: Currently, only one individual holds 10 director positions; one holds 9 and one holds 8. These three individuals will have to give up their directorships in some companies.
Expanding the eligibility criteria for independent directors
IMPACT: More scrutiny over appointment of directors. Firms will not be able to appoint individuals related to the promoter group. Also, individuals who would not be able to discharge their duties independently due to certain prevailing circumstances cannot be appointed.
Enhanced role of various committees such as risk management and nomination and remuneration committee
IMPACT: Requirement of a risk management committee to be extended to the top 500 listed entities against the top 100. Also, at least two-third of the members on the nomination and remuneration committee will need to have independent directors. Disclosure of utilisation of QIP proceeds
IMPACT: Companies will have to ensure better transparency, appropriate disclosures pertaining to utilisation of proceeds of preferential issues and qualified institutional placements (QIPs). Disclosures of auditor credentials, audit fee, reasons for resignation of auditors
IMPACT: Firms will have to give disclosures in relation to the credentials and terms of appointment of the auditors. This will prevent firms from paying disproportionately high audit fees in relation to their assets. Disclosure of expertise/skills of directors
IMPACT: The board of directors of every listed entity should be required to list the competencies and expertise that it believes its directors should possess. Companies will have to name the directors who have such skills and expertise from financial year ended March 31, 2020.
Enhanced disclosure of relatedparty transactions (RPTs)
IMPACT: Companies will have to make half-yearly disclosure of RPTs on a consolidated basis. Strict penalties will be imposed on those failing to do so. Any entity belonging to the promoter group of the listed firm and holding 20 per cent or more of shareholding in the listed entity shall also be a related party. Mandatory disclosure of consolidated quarterly results with effect
IMPACT: Currently, the Companies Act and the Sebi Regulations mandate the submission of consolidated financial statements by a listed entity every financial year. Starting April 2019, companies will have to file consolidated results quarterly.
Enhanced obligations on listed entities with respect to subsidiaries
IMPACT: More oversight over unlisted ‘material’ subsidiaries both in India and overseas. Definition of the term ‘material subsidiary’ to be tightened to include those entities whose income or net worth exceeds 10 per cent (from 20 per cent) of consolidated income or net worth.
Secretarial audit to be mandatory for listed entities and their material unlisted subsidiaries
IMPACT: Secretarial audits for compliance of all regulations under various acts, including the Companies Act, the Foreign Exchange Management Act (Fema) and the Sebi Act. Such audits are to be extended to all material unlisted subsidiaries. Minimum six directors on board
IMPACT: Currently, there are 65 firms among the top 1,000 NSE listed-companies that have less than six board members. These will have to appoint more members before April 1, 2019.
At least one woman independent director
IMPACT: 155 of the top 500 and 336 of the 1,000 firms don’t have any women independent director. Top 500 companies will have to bring in at least one woman director before April 2019 and top 1,000 entities before April 2020.
Separation of CEO and chairperson post
IMPACT: Currently, 165 of the top 500 NSE-listed firms have same individual as CEO and chairperson. Quorum for board meetings
IMPACT: Under the Companies Act, a quorum of one-third of the total strength of the board of directors or two directors, whichever is higher, is required. Starting April 2019, top 1,000 firms will need at least onethird of its board or minimum three members, whichever is higher, to be present for board meetings.
AGMs within five months
IMPACT: Currently, listed companies are given six months from the end of a financial year to hold their annual general meetings (AGMs). Next fiscal year onwards, top 100 firms will have to conclude their AGMs within five months. Also, these will have to mandatorily provide webcast of AGMs.
Curbs on royalty or brand payments
IMPACT: Companies whose royalty or brand payments to related parties exceed 2 per cent of consolidated turnover will have to obtain minority shareholder nod. For FY17, there were about 32 firms where royalty and brand payments exceeded 2 per cent of their consolidated turnover. The Kotak panel had proposed a threshold of 5 per cent. In FY17, only 10 companies paid more than 5 per cent of their turnover as royalty payments. Experts said firms would have to justify high royalty payments to their minority shareholders. Proposals that got rejected to referred to other agencies
IMPACT: The proposal to strengthen the role of Institute of Chartered Accountants of India, the accounting body, was referred to the government. Sebi also rejected the proposal of removing voting rights on treasury stock. It refrained from taking any decision on the various proposals pertaining to governance aspects of PSUs such as independence from administrative ministries and consolidation of government stake under a separate holding structure. Experts said Sebi couldn’t implement some of these proposals as it were beyond its regulatory ambit.