SEBI's mandate to shake up boardrooms across Indian enterprises

Acting on the Kotak panel’s proposals around corporate governance, the Securities and Exchange Board of India approved 40 new amendments that could completely revamp the Indian enterprise at the board level.

Mar 29th 2018

In a landmark decision, the Securities and Exchange Board of India (SEBI) gave the green signal to several governance-related amendments that could have far-reaching consequences at the board level of Indian organizations.

In October last year, a 21-member committee on corporate governance, headed by banker Uday Kotak, had submitted its report to SEBI. Out of the 80-odd recommendations made by the Kotak committee, 40 were accepted without modification, 15 with modifications made by SEBI, and eight were referred to government and other departments.

“Based on my experience, it appears that there are more than a few which genuinely want to comply with regulations – these companies already have independent woman directors. Others will need to move away from ‘tick the box’ approach and appoint one more woman director – this time an independent director.”

kalpana

                                                     Kalpana Unadkat, Partner, Khaitan & Co

 

 

 

 

 

 

 

 

SEBI missive spells major overhaul at board level

Among its most significant mandates, SEBI announced a reduction in the maximum number of directors in a listed entity from 10 to eight by April 1, 2019, and eventually to seven the year after. The board also mandated a minimum of six directors in the top 1000 listed entities by market capitalization by April 1, 2019.

1. Separate posts for chairman and MD; CEO & chairman posts to be segregated: SEBI, in its aim to improve corporate governance, has directed companies to split the post of chairman and managing director and proposed tighter rules for independent directors.

CIO India, in a bid to get a read on the significance and implication of this landmark decision, speaks to Kalpana Unadkat, Partner at Khaitan & Co – one of India’s oldest law firms.

“Kotak committee perhaps, recommended this knowing the ground reality on such matters and flow of information to promoters and shareholders. The committee tried to achieve this by permitting information sharing in a regulated environment by signing specific confidentiality or non-disclosure agreements.”

Kalpana Unadkat

Partner, Khaitan & Co

Unadkat opines that there is no downside in splitting the role of chairman and managing director. She points out that in developed countries such as UK and Australia, this is already the case and from a governance perspective, it is important to avoid concentration of power in one individual. This may also help promoters to think about succession planning in a time-bound manner.

2. At least one woman independent director at board level: In a major boost to women in the Indian enterprise, SEBI’s missive mandated companies to have at least one woman independent director on the board.

Lauding the move as a step in the right direction, Unadkat says: “Based on my experience, it appears that there are more than a few which genuinely want to comply with regulations – these companies already have independent woman directors. Others will need to move away from ‘tick the box’ approach and appoint one more woman director – this time an independent director.”

3. Enhanced disclosure of related-party transactions: SEBI’s intention with this move is to bring about transparency in transactions between companies and mandatory secretarial audits for listed entities and their material subsidiaries.

Unadkat believes this would no doubt mean increased work for compliance team. However, from a governance perspective, she says this is a welcome move. Effectively, this would mean that shareholders will have a complete picture on related-party transaction matters on the annual and half-yearly basis.

4. Disclosure of audit details: In a bold move, SEBI mandated organizations to disclose auditor credentials and audit fees. In the event of an auditor resigning, companies will also have to state the reason behind the auditor’s resignation.

5. SEBI restricts sharing information with promoters and shareholders: Commenting on SEBI’s decision to turn down information sharing with promoters and shareholders, Unadkat says that if we look at this from the insider trading regulations perspective, no information should be technically shared.

“Kotak committee perhaps, recommended this knowing the ground reality on such matters and flow of information to promoters and shareholders. The committee tried to achieve this by permitting information sharing in a regulated environment by signing specific confidentiality or non-disclosure agreements,” she explains.

Given the spate of numerous corporate frauds and banking scams, SEBI’s list of mandates to bring in transparency and accountability, in addition to fostering gender equality certainly looks like a step in the right direction.