Business & Strategy

Evolving corporate governance standards in India

Here's a comprehensive list of the latest changes in corporate governance brought about by Sebi

Updated: Aug 30, 2018 03:38:19 PM UTC

Rajdeep Banerjee is an advocate and legal consultant. He has additional PG Diplomas in Alternate Dispute Resolution, Media Laws, Cyber Laws, Intellectual Property Laws and Human Rights Law from NALSAR, Hyderabad and NLSIU, Bengaluru. He has been practicing law for the last ten years. He is also a visiting faculty at various premier institutions and has taught Corporate Taxation, Business Laws, Labour Laws, Intellectual Property Laws, Cyber Laws, Business Process Outsourcing, Drafting and Conveyancing, Constitutional Law, Sports Law, Public International Law and Human Rights to MBA and Law students. He delivers guest lectures on diverse topics to working professionals and students. He has been a resource person and has also presented research papers at various International and National Seminars and Conferences. He knows various languages including German, French, Spanish and Japanese. Joyeeta Banerjee is a legal consultant and practicing advocate for the last ten years. She is also a qualified Mechanical Engineer. She is also a visiting faculty at various premier institutions teaching Business and Economic Laws, Corporate Laws, Taxation Laws, Legal and Regulatory aspects of Banking, Intellectual Property Laws, Drafting and Conveyancing, Criminal law and Cyber Laws to MBA and Law students. She has delivered various guest lectures to working professionals and students. She has been resource person and has also presented research papers at various International and National Seminars and Conferences. She has PG Diplomas in Cyber Laws, Intellectual Property Laws, Media Laws, Alternate Dispute Resolution and Human Rights Law from NALSAR, Hyderabad and NLSIU, Bengaluru. She knows seven languages including Japanese, German, French and Spanish.

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Sebi by its Listing Obligations and Disclosure Requirements (Amendment) Regulations, 2018, has now bought in various provisions which will bring much desired changes in corporate governance standards like the independence of Independent Directors, disclosures pertaining to Related Party Transactions, improving effectiveness of Board Evaluation practices and improving auditing practices by listed companies.

In June 2017, the Securities and Exchange Board of India (Sebi) formed a committee on corporate governance under the chairmanship of banker Uday Kotak, with a view to enhancing the standards of corporate governance of listed entities in India. The committee submitted its report with a slew of recommendations. Sebi has now accepted most of the recommendations through the amendment in the listing regulations.

Six Directors on Board
The present Companies Act of India requires a minimum of three directors on the board of a public limited company. Now, with effect from April 1, 2019, the board of directors of the top 1,000 listed entities and with effect from April 1, 2020, the board of the top 2,000 listed entities has to comprise of a minimum of six directors.

One Independent Women Director on Board
It is expected that larger numbers of directors can bring more efficiency in the working of the company. The revised regulations mandate that the board of directors of the top 500 listed entities have to have at least one independent woman director by April 1, 2019. For the top 1,000 listed entities at least one independent woman director should be on the board by April 1, 2020.

Special Resolution for Non-Executive Director who is above 75 Years Old
Sebi now mandates that every listed entity which appoints a person or continues the directorship of any person above the age of 75 years as a non-executive director, has to get a special resolution passed to that effect. The special resolution should come with an explanatory statement annexed to the notice for such motion which should indicate the justification for appointing the person. The Companies Act, 2013, already has provisions related to appointment of executive directors who are above age of 70 years stipulating the requirement of special resolution.

Role Separation of Non-Executive Chairperson and MD/CEO
Sebi has now mandated separation of the roles of the non-executive chairperson and the managing director/CEO of the top 500 listed entities. With effect from April 1, 2020, such entities shall ensure that the Chairperson of the board of such listed entity shall be a non-executive director and not related to the managing director or the chief executive officer. This would be as per the definition of the term “relative” defined under the Companies Act, 2013. Such “relative” includes, under the Act, members of a Hindu Undivided Family, husband, wife, father (including step-father), mother (including step-mother), son (including step-son), son’s wife, daughter, daughter’s husband, brother (including step-brother), sister (including step-sister). But this sub-regulation will not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.

Minimum Attendance
Under the Companies Act, a quorum of one-third of the total strength of the board of directors or two directors, whichever is higher, is required for every board meeting. However, from April 1, 2019, now the quorum of board directors of the top 1,000 listed companies, will be one-third of its total strength or three directors, whichever is higher, including atleast one independent director. The same will be applicable to the top 2,000 listed entities with effect from April 1, 2020. The participation of the directors by video conferencing or by other audio-visual means will also be counted for the purposes of such quorum.

Maximum Directorships
The new amendments now restrict maximum directorships to eight listed entities with effect from April 1, 2019, and then seven listed entities with effect from April 1, 2020, respectively. A person cannot serve as an independent director in more than seven listed entities.

Committee Meetings
Regarding the committee meetings, the nomination and remuneration committee and the stakeholders’ relationship committee will now have to meet at least once in a year. This requirement is for all the listed entities. For the top 500 listed entities, the risk management committee will also have to meet at least once in a year.

"Related Party" payments
The present amendments have also modified the definition of “related party”. Transactions involving payments made to a related party with respect to brand usage or royalty will now be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed two percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

Secretarial Audit of Subsidiaries
Every listed entity and its material unlisted subsidiaries incorporated in India have to undertake secretarial audit and will annex with its annual report, a secretarial audit report, to be provided by a company secretary in practice.

Declaration of Independence
At board meetings, independent directors will now be required to submit a declaration announcing that, according to the criteria provided by regulations, they are not aware of any circumstance or situation that exists, or may be reasonably anticipated, that could impair or impact their ability to discharge duties with an objective independent judgment and without any external influence.

Directors' Insurance
The top 500 listed entities will be required to undertake directors and officers insurance for all their independent directors of suitable quantum and for risks to be determined by its board of directors.

Fund Raising Accounts
Also, if an entity has raised funds through preferential allotment or qualified institutions placement, the listed entity will have to disclose every year, the utilisation of the funds during that year in its annual report until the funds are fully utilised. The present amendments also introduce the requirement to make disclosures to stock exchanges in XBRL (Extensible Business Reporting Language) format in accordance with the guidelines specified by the stock exchanges from time to time.

AGM Timeline
The timeline for holding annual general meeting (AGM) has been now reduced to five months from the date of closing of the financial year. This requirement is applicable to top 100 listed entities. The top 100 listed entities will have to provide one-way live webcast of the proceedings of the annual general meetings.

These corporate governance amendments, though leading to higher compliance cost, will certainly increase the protection of shareholders’ interests and create long-term value in listed companies of India.

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