Background:
The Committee on Corporate Governance was constituted by SEBI in June 2017, under the Chairmanship of Mr. Uday Kotak, to make recommendations to SEBI for improving standards of corporate governance of listed entities in India.
The Committee submitted its report detailing several recommendations on October 5, 2017; was placed on the SEBI website for public comments.
Few recommendations of the same were accepted by SEBI on March 28, 2018.
Brief snapshot of the recommendations accepted by the SEBI are:
Particulars |
Existing Provision of SEBI(LODR) Regulations |
Amendment |
Impact/ Rationale |
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| LISTED ENTITY DISCLOSURES | |||||
| Maximum number of Directorships | Section 165:
Companies Act provides limit of 10 for directorship in public companies.
Regulation 25: Obligation with respect to independent directors provides for Independent directorship in upto 7 listed entities. Additionally, Whole –time director of any listed entity cannot be ID in more than 3 listed entities. |
Insertion of a new regulation (17A) Maximum number of directorships:
No person shall hold office as a director, including any alternate directorship, in more than eight listed entities at the same time (of which independent directorships shall not exceed seven), with effect from April 1, 2019 and not more than seven listed entities with effect from April 1, 2020:
Provided that any person who is serving as a whole time director/managing director in any listed entity shall serve as an independent director in not more than three listed entities.
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In order to improve the efficiency of directors in terms of time allocation to a particular company, cap on directorships has been reduced from 10 to 8 effectively by April, 01, 2019 and to 7 by April 01, 2020.
Further, Regulation 25(1) has been repealed completely . Effective date:April 1, 2019(8) April 1, 2020 (7) |
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| ENHANCED ELIGIBILITY CRITERIA FOR INDEPENDENT DIRECTORS | |||||
| Eligibility criteria for Independent Directors “ID” | Regulation (1) (b) :Definitions
Definition of Independent Director is given providing eligibility conditions for the same |
Additions made in the Regulation 16 (1) (b)(ii):
ID shall not be member of the promoter group*1 of listed entity.
Insertion of point (viii): ID of listed entity shall not be non-independent director of another company, if any non- independent director of the same listed entity is an independent director in that another company.
For instance, Mr. X is an ID of ABC Company and Mr. Y is non- independent director of the same company and at the same time, Mr. Y is ID at XYZ Company.
Therefore, Mr. X shall not be non- independent director of XYZ Company because Mr. Y is the ID of XYZ Company.
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In order to avoid the instances of persons who are relatives of
promoters being appointed as IDs, the eligibility conditions have become more stringent by excluding persons constituting “promoter group”’ of a listed entity and “board inter-locks” arising due to common non-independent directors on boards of listed entities.
Effective date:April 1, 2018. |
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| ROLE OF BOARD COMMITTEES | |||||
| Enhanced role of the Audit Committee | Part C of Schedule II of SEBI LODR, provides the role of Audit Committee | A new sub-clause has been inserted in the Part C of Schedule II i.e.
To review the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower. |
Enhanced role of the Audit Committee to scrutinize the end utilization of funds.
Effective date:April 1, 2018.
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| Role of the Nomination and Remuneration Committee “NRC” | Part D of Schedule II of SEBI LODR Regulations provides for the role of NRC.
Regulation 16(1)(d): Definition of Senior Management |
A new sub-clause is inserted in the Part D of Schedule II i.e.
To recommend to the board all remuneration payable to senior management.
Definition of Senior Management expanded to include : · Persons one level below the chief executive officer/managing director/whole time director/manager (including chief executive officer/manager, in case chief executive officer /manager not part of the board) · specifically include company secretary and chief financial officer (Excludes administrative staff )
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In the absence of specific provisions in SEBI LODR
Regulations, compensation paid to certain KMPs were not being recommended by NRC in some companies. Therefore, the role of the NRC has now been enhanced to review the remuneration of the enhanced senior management
Effective date:April 1, 2018. |
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| Role of Risk Management Committee “RMC” | Regulation 21(4):
The top 100 listed entities determined on the basis of market capitalization shall constitute Risk Management Committee with the roles and responsibilities as may be defined by the board.
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Role of RMC as provided by the board shall specifically cover cyber security.
Also, applicability has now been extended from top 100 listed entities to top 500 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year. |
An active risk management committee is imperative for
identification, mitigation and resolution of risks Therefore, considering the relevance of cyber associated risks, role of RMC is specifically provided. Effective date:April 1, 2018. |
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| Enhanced obligations on the listed entities with respect to subsidiaries | |||||
| Appointment of Independent Director in subsidiaries | Reg 24 provides for the appointment of independent director on the board of subsidiary of listed entity, if incorporated in India.
Reg. 16 (1)(c) : Definition of Material Subsidiary |
Modification in the Reg 24:
At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, whetherincorporated in India or not.
Definition of material subsidiary revised as“material subsidiary” shall mean a subsidiary, whose income or net worth exceeds tenpercent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
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Scope of the term of Material Subsidiary has been widened to include all material unlisted subsidiaries of listed entity.
Effective date:April 1, 2018.
Definition has been modified (Reduced from twenty to ten) for purposes other than requirement of having Independent director on the board. |
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| Secretarial Audit | Section 204:
Companies Act requires a secretarial audit for listed companies and unlisted companies above a certain threshold. However, no specific provision exists under SEBI LODR Regulations. |
Insertion of a new Regulation 24A- Secretarial Audit:
Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a Company Secretary in practice.
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Material Unlisted Subsidiaries of listed entities incorporated in India are now required to undertake Secretarial Audit.
Effective date:April 1, 2018.
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| DISCLOSURE OF RELATED PARTY TRANSACTIONS | |||||
| Half-yearly disclosure of Related Party Transactions “RPTs” | No specific provision on half yearly disclosure of RPTs | Insertion of a new clause (g) in Reg 33 of Financial results :
Listed entity shall submit consolidated disclosures of RPTs to the stock exchanges within 30 days of publication of half yearly financial results, in the format prescribed in the relevant accounting standards for annual results and publish the same on its website. |
In order to strengthen transparency on RPTs, enhanced disclosure of RPTs is required.
Effective date:April 1, 2018.
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| Disclosure in the Annual Report of RPTs | Reg. 34 (3). Provides for the disclosures to be made in the Annual Report
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Addition in Reg 34 (3):
Insertion for the requirement of making disclosure of transactions of the listed entity with any person or entity belonging to the promoter/promoter group which hold(s) 10% or more shareholding in the listed entity, in the format prescribed in the relevant accounting standards for annual results; |
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| Approval of Related Party Transactions | Reg. 23
Shareholders’ approval is required for the related party transactions with the condition that all related parties are abstained from voting whether the entity is a related party to the particular transaction or not. |
Amendment
Shareholders’ approval is required for the related party transactions with the condition that all related parties shall not vote to approve such resolution whether the entity is a related party to the particular transaction or not. |
The Companies Act
allowed non-interested related parties to vote on a related party transaction while the SEBI LODR Regulations require such parties to abstain from voting. Therefore, amendment proposes to allow related parties to cast a negative vote, in case of conflict of interest. |
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| MISCELLANEOUS DISCLOSURES | |||||
| Disclosure of utilization of funds from Qualified Institutional Placement (QIP)/
preferential issue
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SEBI ICDR Regulations require periodic disclosures on utilization of issue proceeds in case of public issues. However, these disclosures are not required for funds raised by way of preferential allotments and QIPs. | Schedule V: Annual Report
C. Corporate Governance Report (10) Other Disclosures Insertion of a new clause (h):
(h) Utilization of funds raised through preferential allotment or QIPs undertaken in the relevant financial year, until such funds are fully utilized |
Utilisation of proceeds of Preferential Issues (‘PI)’ and Qualified Institutional Placements (‘QIPs) till the time such proceeds are utilised, shall be disclosed in the Corporate Governance Section in the Annual Report. | ||
| Disclosure of expertise/skills of directors in the Annual Report | No specific provision | A new clause (h) has been inserted in Part C of Schedule V (Annual Report), providing that a chart specifying the list of core skills and the names of the directors who have such skills to be disclosed in the Annual Report. | Shareholders are unable to adequately analyze whether a board has a sufficient mix of diverse expertise. Therefore, such disclosure is required with effect from FY ending March 31, 2019.
(Names of directors is not required for the annual filing of the FY ended 2018-19, names are required from F.Y 2019-20) |
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| Mandatory disclosure of consolidated quarterly results | Reg. 33
Disclosure of consolidated financial results on quarterly basis was optional. |
Disclosure of consolidated financial results on quarterly basis is now mandatory. | Effective Date: F.Y 2019-20 | ||
| Disclosure of auditor’s credentials/ fee in the Annual Report | No specific provision | Insertion of Regulation 34A:
Notice of AGM to be sent to shareholders providing appointment/ re-appointment of auditor must include following mandatory disclosures as explanatory statement:
· Fees payable/Change in fess (applicable, if any) · Terms of appointment · Rationale for change of the fee payable · Credentials of the proposed statutory auditor |
In the interest of improving transparency and informed decision making by shareholders, details of auditors
Is to be disclosed.
Effective date:April 1, 2018 |
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Other important recommendations:
ANNUAL GENERAL MEETINGS:
- Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19 i.e. by August 31, 2019
- Webcast of AGMs will be compulsory for top 100 entities by market capitalization w.e.f. FY 2018-19
Revised Framework for non-compliance of the Listing Regulations:
- Non-compliance will lead to imposition of fines by stock exchanges.
- Empowers stock exchanges to freeze the shareholding of the promoter and promoter group in such non-compliant entity as well as their shareholding in other securities.
- Suspension if non-compliance persists.
*1. Regulation 2 (1) (zb) of SEBI (ICDR) Regulations, 2009, defines promoter group as:
“promoter group” includes:
(i) the promoter;
(ii) an immediate relative of the promoter; and
(iii) in case promoter is a body corporate:
- a subsidiary or holding company of such body corporate;
- any body corporate in which the promoter holds 10% or more of the equity share capital or which holds 10% or more of the equity share capital of the promoter;
- any body corporate in which a group of individuals or companies or combinations thereof which hold 20% or more of the equity share capital in that body corporate also holds 20% or more of the equity share capital of the issuer; and
(iv) in case the promoter is an individual:
(A) any body corporate in which 10% or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member;
(B) any body corporate in which a body corporate as provided in (A) above holds 10% or more, of the equity share capital;
(C) any HUF or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than 10% of the total; and
(v) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading “shareholding of the promoter group”:
Provided that a financial institution, scheduled bank, [foreign portfolio investor other than Category III foreign portfolio investor] and mutual fund shall not be deemed to be promoter group merely by virtue of the fact that 10% or more of the equity share capital of the issuer is held by such person:
Provided further that such financial institution, scheduled bank and [foreign portfolio investor other than Category III foreign portfolio investor] shall be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.
