Kotak Committee on Corporate Governance

Kotak Committee on Corporate Governance

In News:

Uday Kotak committee established by SEBI has recently released its recommendations addressing rising concerns in corporate governance.

Formation of Committee

• SEBI has set up a committee under the Chairmanship ofUdayKotak, of Kotak Mahindra Bank to advise on issues relating to corporate governance.
• The other members of the committee are the representatives of various stockholding groups, academicians and research professionals. 

Terms of Reference of the Committee:The Committee shall make recommendations to SEBI on the following issues with the aim of improving standards of corporate governance of listed companies in India:

• Ensuring independence in spirit of Independent Directors and their active participation in functioning of the company;
• Improving safeguards and disclosures pertaining to Related Party Transactions;
• Issues in accounting and auditing practices by listed companies
• Improving effectiveness of Board Evaluation practices;
• Addressing issues faced by investors on voting and participation in general meetings;
• Disclosure and transparency related issues;
• Any other matter, as the Committee deems fit pertaining to corporate governance in India.

Present scenario

• The existing definition of ‘senior management’ means and includes officers or personnel of the listed entity who are members of its core management team, excluding board of directors.
• Normally this comprises of all the members of the management one level below the executive directors, including all functional heads.
• In India, most companies are run by the dominant shareholder, also known as “promoter” who is either an industrialist or the government.
• Independent directors, who are supposed to represent ordinary shareholders, are chosen not by shareholders but largely by the management, i.e. the promoter.
• At present, the Companies Act, 2013, says that one-third of the directors on board of every public-listed company must be independent directors.
• There’s no way that any independent director would be chosen without the approval of the promoter.
• In public sector enterprises, the appointment of independent directors is at least independent of the CEO because it’s the ministry concerned that appoints independent directors.

Recommendations on corporate governance

• The Committee, while redefining senior management, recommended that the term ‘senior management’ shall specifically include ‘company secretary’.
• The Committee recommended that secretarial audit must be made compulsory for all listed entities.
• It also clarified that the same may be extended to all material unlisted Indian subsidiaries.
• This is in line with the theme of strengthening group oversight and improving compliance at a group level.
• Committee also recommended certificate from a company secretary, providing that none of the directors have been debarred or disqualified from being appointed or continuing as directors by any such statutory authority.

On Independent Directors

• Board – It recommended a minimum of 6 directors and a maximum of 8 to be on the board of listed entities.
• And at least 50% (currently one-third) of the board should have independent directors and compulsorily one woman among them.
• It also called for more transparency on appointment of independent directors and a more enhanced role for them.
• It proposed a mandatory formal induction for every new Independent Director appointed to the board.
• It said that stakeholders should approve the application to fill a casual vacancy of office of any Independent Director.
• It held that no person be appointed as alternate director for an independent director of a listed company.

Other Recommendations

• The panel suggested making a distinction between the roles of chairman and MD/CEO of listed companies.
• It emphasized on regular interaction between NEDs (non-executive director) and the senior management.
• It also suggested an Audit Committee review for the use of loans or investment by holding company for over Rs 100 crore.
• It suggested increasing the number of Audit Committee meetings to five every year.
• It also proposed making D&O (Directors and Officers) insurance mandatory for independent directors, for top 500 companies by market capitalization.

Unaddressed Areas

• In India, there are independent directors who are beholden to the promoter for their place on the board.
• Theydon ‘have considerable freedom to express them, as vast majority of private companies treat promoter and CEO in a same rank.
• So it would be quite a challenge for an independent director to question decisions of a board.

Way Forward

• The recent instances of rift between the founders and the management of companies drew serious attention to the shortfalls in corporate governance.
• These have considerably weakened the confidence in the quality of board supervision and auditing.
• The panel has thus suggested a host of changes for bringing in transparency at companies’ boards.

It is now up to the market regulator, SEBI to move forward on implementing the panel’s recommendations.

Independent Directors

• An Independent director is a non-executive director who does not have any kind of relationship, material or financial, with the company.
• Independent directors are to ensure the independence of decisions taken in matters related with the board.

D&O Insurance

• Directors and officers Insurance is a liability insurance payable to the directors and officers of a company, or to the organization itself.
• It is provided as reimbursement for losses or advancement of defense costs in the event of loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers.

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Corporate Governance