KOTAK Committee on Corporate Governance

Posted On - 1 April, 2019 • By - Kulin Dave

2018, The Securities and Exchange Board of India (SEBI) not only
approved a host of recommendations made by the Kotak Committee on Corporate
Governance (Kotak Committee), but also gave these recommendations the
required regulatory propulsion by notifying the Securities and Exchange Board
of India (Listing Obligations and Disclosure Requirements) (Amendment)
Regulations, 2018.

today, a slew of these amendments (Amendments) will come into effect and
all listed entities will be required to ensure their readiness in terms of
implementation and compliance.

The Board of Directors

majority of the Amendments are dedicated to boards and their schemes. To
achieve the twin objectives of stopping directors dividing their attention and
time amongst too many stakeholders, and increasing the diversity of each board,
the Amendments will now place restrictions on the maximum number of
directorships (independent and otherwise) that each director can hold in a
listed entity.

additional layer of scrutiny has been added for independent directors, which
requires such directors to make declarations to the board on an ongoing basis
regarding their independence, and the board to formulate a policy for
evaluating the performance of all independent directors. The compliance
requirements stretch even after the resignation by an independent director –
the board is now required to disclose to stock exchanges the why as well as the whenregarding the
resignation of the independent director.

Amendments also talks about managerial remuneration. As a result, for every
year in which the annual remuneration payable to a single non-executive
director exceeds 50% of the total remuneration payable to all non-executive
directors, shareholders’ approval will be required.

Amendments also acknowledge the significance of board-level committees as well
as senior management in the day-to-day operation and management of a company,
and seek to regulate them appropriately. The roles and responsibilities of
nomination and remuneration committees and stakeholder relationship committees
are now expanded and better defined. On the other hand, expanding the scope of
‘senior management’ will now ensure that tools of corporate governance such as
succession planning and code of conduct govern a wider array of employees.

Shareholder Information Rights

objective of SEBI remains simple – protection of investors’ interest. The same
objective remains the running theme of the Kotak Committee recommendations and
are reflected in the Amendments as well. A listed entity’s website – which will
need to include a copy of the annual report, details of board/committee
composition, code of conduct, policies, etc. under separate sections – will now
be a mini-repository of information for any discerning investor.

reports will also need to be e-mailed to shareholders’ registered IDs, and
shall mandatorily include, amongst other matters, disclosures in relation to
utilisation of funds, transactions with promoter/promoter groups, details of changes
in key financial ratios, details of other directorships, a competence matrix of
the board, credit ratings, and auditor fees. To sum up, post-Amendments, the
shareholders will be afforded a wider and deeper view into the workings of
their investee companies.

Corporate Governance

Kotak Committee introduced some Amendments that corporations need to think
through well, especially the large ones. For instance, what may at first appear
to be minor typical changes – mandatory submission of quarterly results,
limited review of consolidated entities, amended definition of material
subsidiary (for certain select aspects only) and half yearly statement of cash
flows – could potentially have wide-ranging implications on group structuring,
audit & reporting, and costs.

of costs, another industry practice that will now become the regulatory norm
applicable to all listed entities is the secretarial audit of the listed
entities and its material unlisted Indian subsidiaries. The Amendments also
specifically recognise the systemic impact that may result from any lapse of
governance at large corporates, and as a result there are several changes that
the top 100, 500 and 2,000 listed companies will have to adjust to.

Steps Towards Promoter Governance

placing persons belong to the promoter group and holding a minimum stake within
the definition of ‘related parties’, the Amendments have sought to subject
hitherto unsupervised dealings amongst promoters, companies and their related
entities and affiliates, to additional scrutiny at board and shareholder
levels. To strengthen this, the Amendments also mandate that no related party
shall vote on any related party transactions. Similarly, typical listed
entities-promoter arrangements such as brand usage or royalty exceeding
prescribed thresholds will now be deemed to be material related party
transactions. The board, on the other hand, is required to formulate a policy
for dealing with material related party transactions, and make bi-annual
disclosures of related party transactions to the stock exchanges.

Another key change to be introduced by the Amendments on this aspect is the limit on fees/remuneration payable to executive directors who are part of a promoter group, and the requirement to obtain shareholders’ approval in case such thresholds are breached.

Contributed by – Kulin Dave

King Stubb & Kasiva,
Advocates & Attorneys

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