Kotak-Led Corporate Governance Panel Proposes Bigger Board, At Least 50% Independent Members

The Uday Kotak-led panel on corporate governance today submitted its report to the market regulator Securities and Exchange Board of India, suggesting a host of changes including the composition and role of the board of directors, transparency in the appointment of independent directors and their role in company management.

SEBI has put the report up on its website inviting public feedback.

The Committee proposed changes in the following areas:

• Composition and role of board of directors
• Institution of independent directors
• Board committees
• Enhanced monitoring of group entities
• Promoters/controlling shareholders and related party transactions
• Disclosures and transparency
• Accounting and audit related issues
• Investor participation in meetings of listed entities

The Committee’s recommendations on the composition and role of board of directors:

• A minimum of six directors should be required on the board of any listed company
• The board shall have a combination of executive and non-executive directors with at least one woman as an independent director
• At least 50 percent of the board of directors shall comprise of non-executive directors
• Shareholder ratification of directors should be mandatory if the attendance criteria is not met
• Board should make disclosures on competencies and expertise directors possess or should possess
• Special resolution requirement for the appointment/continuation of non-executive directors on attaining the age of 75 years
• Separation of the roles of the chairperson and the CEO/MD for listed entities with more than 40 percent public shareholding, effective April 1, 2020
• Maximum number of directorships in listed entities should be reduced to seven (irrespective of whether the person is appointed as an independent director or not)

Committee’s recommendations on independent directors:

• For every listed company, at least half its total number of directors should be independent
• Timelines: Top 500 listed companies by market capitalisation by April 1, 2019 and remaining by April 1, 2020
• Bar on appointment of family associates as independent directors
• Revision of eligibility criteria for a director to be an “independent director”
• Listed entities should be required to disclose detailed reasons for resignation of independent directors
• Appointment of an alternate director for independent directors should not be permitted

Committee’s recommendations on board committees:

• Audit committee should review the utilisation of funds of the listed entity infused into unlisted subsidiaries including foreign subsidiaries
• Widen the role of Stakeholders Relationship Committee

Committee’s recommendations on enhanced monitoring of group entities:

• At least one independent director with the listed entity shall be a director on board of unlisted foreign material subsidiaries
• Revision in the definition of material subsidiary to mean subsidiary whose income or net worth exceeds 10 percent (from the current 20 percent) of consolidated income/networth of listed entity and its subsidiaries

Committee’s recommendations on promoters/controlling shareholders and related party transactions:

• Regulate the information rights of certain promoters and significant shareholders to reduce subjectivity
• Amendments to insider trading regulations
• Where there is no identifiable promoter/promoter group, the 1 percent threshold to be able to classify the entity as professionally managed is too low and merits an increase to 10 percent
• Half yearly disclosure of RPTs on a consolidated basis
• Al promoters/promoter group entities that hold 20 percent or above in a listed company to be considered “related parties”
• Allow related parties to cast a negative vote
• Where royalty payout exceeds 5 percent of consolidated revenues, the terms of conditions of such royalty must require shareholder approval