Recently, the boards of some well governed listed companies faced the heat of a battle between their founder-promoters and directors. Reacting to these issues at Tata Sons and Infosys, SEBI decided to set up a committee under the chairmanship of Mr. Uday Kotak for revamping the corporate governance norms in the securities market. The Kotak Committee presented its comprehensive report on October 05, 2017, suggesting changes in corporate governance norms for listed companies.

Some of the major recommendations given by the Committee and our views on it are discussed below:

EXISTING PROVISION

COMMITTEE’S RECOMMENDATION

OUR VIEWS

 

COMPOSITION AND FUNCTIONING OF THE BOARD

 

Minimum No. of Directors on the Board – Three. Should be increased to six. Considering that the Listing Regulations are also applicable on small and medium size companies which may be listed on institutional platform or on SME, this is nothing but an additional onerous requirement and will only increase the costs of the company.
Gender Diversity on the Board – Minimum one woman director is required. For listed companies, minimum one woman ‘independent director’ should be appointed on the Board. In companies comprising of small group of directors, the number of independent director may be 1 or 2. Out of these, mandating one of the independent directors to be “woman” will reduce options for selection of an independent director. In such a scenario, the Board will give priority to the person’s gender and compliance with law, rather than the qualifications, expertise and experience of the director.
Minimum number of Board meetings – At least four meetings in a year. Should be increased to five wherein at least one meeting is dedicated towards discussing strategy, budgets, Board evaluation, etc. Instead of imposing a mandate to hold a fifth meeting, it may be required that the Board must spend time on strategizing, budgeting, evaluation, etc. and the same should be reflected in the minutes of the meetings.
Different Non-Executive Chairperson and MD/CEO – Chairperson of a company cannot become its MD / CEO. Listed companies with public shareholding of 40% or more should have a non-executive director as its Chairperson; the provision will be applicable even if the public shareholding reduces below 40% eventually. Separation of the two positions would create two power centres which may hinder the progress of the company. Management should act like a collegium comprising of variety of people with one chief.
 

INDEPENDENT DIRECTORS

 

Minimum number of IDs – If the Chairperson is an executive director or related to promoter: then ½ of the Board should comprise of IDs; otherwise 1/3rd of the Board should comprise of IDs. At least ½ of the Board should comprise of IDs. The primary purpose of appointment of IDs is to keep a check on the functioning of the Board and the Company. The management of the Company lies primarily in the hands of other executive and non-executive director. IDs may not be equally concerned about the company, its profitability, etc. as compared to the founders, promoters or other directors. Therefore, the mandatory number of IDs in the composition of Board should not be increased further.
Compensation to IDs – No provision for minimum compensation. Top 500 companies by market capitalization should pay at least Rs. 5 lakhs per year to IDs; Minimum sitting fees is also prescribed. Mandating specific minimum amounts would only add to the costs of the company. Such laws on minimum wage are not appropriate.
Alternate directors for IDs – Person who is eligible to become an ID can be appointed as an alternate director to ID. No alternate director can be appointed for IDs. Circumstances where IDs are unable to participate in the functioning of the Company due to unforeseen reasons have not been taken into account. The existing perquisite that the alternate director should be independent will serve the intent.
Appointment of Lead ID – No such provision. Listed companies with non-independent Chairperson to appoint a Lead ID. Creation of special role of “Lead ID” and calling of separate meetings of IDs will divide the Board into two and will lead to running of parallel boards. The power centre of Board should only rest with one person and all members of the Board should work in furtherance of company’s interest.
 

PROVISIONS RELATED TO PROMOTERS

 

Sharing of information with certain parties – No such provision. Allow sharing of information, including unpublished price sensitive information (as defined under the Insider Trading Regulations) with certain persons with whom an agreement to this effect has been signed with.

The price sensitive information in a company should not be allowed to be moved outside it unless it is on a ‘need-to-know’ basis, which is already permitted in law.

The significant shareholders / promoters, being just another shareholder of the company cannot be treated different from all other shareholders. Thus, they cannot be given special privilege to have access to sensitive information about the company. Current law already allows appointment of promoters and their representatives as directors of a company which enables them to have an access to company’s information.

Compensation to Executive Promoter Directors – No specific provision. Compensation payable beyond a prescribed threshold to the executive directors who are also the members of the promoter/promoter group should be approved by passing a special resolution. This is a much needed recommendation as it ensures that the promoters who are also independent directors of the company do not misuse their powers.
 

DISCLOSURE NORMS

 

Disclosure of Credit Ratings – Any revision in the credit ratings has to be disclosed. Revisions should be updated immediately. This is a much needed disclosure, as we have recently seen a number of cases wherein investors were affected due to non-disclosure of revised credit ratings in due time.
Key changes in financial indicators – No such provision. Certain ratios, such as, debtors turnover, interest coverage ratio, debt-equity ratio, net profit margin, etc. should be separately disclosed in MD&A. This is an unnecessary addition, increasing the volume of MD&A report, since all the parameters and numbers on the basis of which these ratios are calculated are already a part of the financial statements.
Medium and long-term strategy – No such provision. Under the MD&A, the companies may be required to provide their medium and long-term strategies. A Company’s medium term and long term strategy is subject to change, given the dynamic environment in which it operates. Mandatorily providing every detail of it will create additional responsibility. Such a disclosure is not necessary in the practical scenario.

 

The Committee has tried to regulate every aspect of a business on a rule-based approach. The companies have to be given certain leeway to be able to decide and conduct their businesses. We believe that providing guidance notes and best practices is a better way to implement the above recommendations than prescribing them.