Will Corporate Governance in India change from April 2019?

Robin Banerjee, Managing Director, Caprihans I Ltd, takes a look at corporate governance in the light of the Kotak Committee recommendations accepted by Sebi, and writes since most of the requirements are due for implementation on 1 April 2019, the CFO and the Company Secretarial teams need to review what needs to change in their organization, as any slippage in following the new regulations may entail some onerous punishments.

Independent directors are emerging as the fulcrum for good governance. Their increased presence in the boardroom is to prevent frauds and mismanagement. Attempts are being made to make them more independent.

The business news in the recent times has been hogged by corporate hubris! IL&FS tripping with allegations of top-management fraud; Fortis Healthcare complaining that their promoters – now the infamous Ranbaxy-Singh brothers – have fraudulently sucked-out multiple crores; allegations of DHFL creating shell companies to divert funds - the stories of corporate deceits are unending. 

Corporate governance in India seems to be under a severe strain. Will things change?

Let us look at what is corporate governance at the broadest level. Business governance is all about an organization providing consistently good quality goods and services at reasonable prices. And this is feasible, when an enterprise is run properly, without cutting corners with the shareholders, suppliers, customers and employees. Good governance is all about maximizing ‘stakeholder’ returns, as opposed to the popular narrow view of optimizing ‘shareholder’ value. 

With this in mind, in June 2017, the Government formed a committee under the Chairmanship of Uday Kotak (Kotak Committee) to suggest steps to improve the governance in Indian corporates. Of its 81 recommendations, SEBI accepted about half of them, and issued in May 2018, the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018.  

The Government showed its keenness to put into force the governance recommendations quickly. Accordingly, it provided for a phased timeline of implementation from 1 October 2018 to 1 April 2020, with most of the requirements falling due for implementation on 1 April 2019.   

Listed companies need to behave differently

The CFO and the Company Secretarial teams, need to review what needs to change in their organization, as any slippage in following the new regulations may entail some onerous punishments.

Given below are the important changes which are coming into effect from 1 April 2019 for listed entities:

1. Board composition, wider: Approval to be taken by special resolution for non-executive directors on attaining the age of 75; no person can be a director in more than 8 listed entities. 

For Top 500 listed companies: the Board should have at least one ‘independent’ woman director; for top 1,000 listed entities: minimum 6 directors on the board. Quorum will be 1/3rd of total board strength or three directors, whichever is higher. 

Implication: For larger companies, gender diversity is being driven with minimum board size requirements. Board members cannot be too old and should not have too many companies to manage.

2. Independent directors, to show independence: Board to evaluate all independent directors. Company corporate governance reports to disclosure the independence of independent directors. If independent directors resign before expiry of term, disclosure of reasons to be made to the stock exchange.   

Implication: Independent directors are emerging as the fulcrum for good governance. Their increased presence in the boardroom is to prevent frauds and mismanagement. Attempts are being made to make them more independent. 

3. Board committees, to get more effective:  Audit committee to review utilization of loans, advances and investments; definition of senior management has been widened; Nomination and Remuneration Committee (NRC) to recommend board on remuneration of senior management; minimum 3 directors of which at least one independent director on the Stakeholders Relationship Committee (SRC); SRC chairperson to be present in AGM; NRC quorum higher of 1/3rd of total strength or 2 directors; SRC and NRC to meet at least once a year.

For top 500 listed entities: Mandatory requirement to set-up of Risk Management Committee and to specifically cover cyber security. The Committee to meet at least once a year.

Implication: Scrutinizing the purpose of lending funds and credit evaluation by the audit committee should help to mitigate risks. Widening the responsibilities of the SRC is clearly to work in the interest of the non-controlling shareholders and debenture-holders. For large companies, the risk committee should be able to evaluate existence of appropriate internal control systems and if there are controllable-risks remaining unattended. 

4. Enhanced management of Group entities: The definition of material subsidiary have been made wider (‘material-subsidiary’ now means those whose income or net worth exceeds 10% from current limit of 20%); need to appoint at least one ID on the board of unlisted material subsidiary including foreign subsidiaries.

Implication: Companies with a large number of subsidiaries will need to put in place a proper governance mechanism all across the group including its unlisted subsidiaries.   

5. Related-party, net wider: Definition of related-party is widened and disclosure required in annual report (‘related party’ definition modified to include any person or entity belonging to the promoter group holding 20% or more shareholding in the listed entity).  

Implication: The net on related-parties have been rightly enhanced to ensure proper disclosures and better governance on transactions with parties holding over 20% stake in the listed entity. 

6. Transparency, for subsidiaries: Release of subsidiary accounts separately on company website.

ImplicationPlacing each subsidiary’s audited accounts on the company website is in the direction for enhanced transparency of providing the holistic picture of the group. 

7. Tougher accounting and auditing: Mandatory submission of quarterly and year-to-date consolidated financial statements; limited review of last quarter financial results with disclosure of material adjustments pertaining to earlier period; submission of standalone and consolidated cash flow statements for the half year; limited review of subsidiary entities by statutory auditor of the listed-parent; disclosure to stock exchange of detailed reasons for auditor resignation. 

Implication: The amendments seek to provide good quality financial statements having a balanced disclosure of material items that may potentially influence decision-making. Mid-term auditors’ resignations will now be taken more seriously.  

8. Investor participation in meetings: For top 100 listed entities as on 31 March every financial year: AGM to be held within 5 months from date of closing the financial year; if the company is Top 100 based on market capitalization, then one-way live webcast to be provided of the AGM proceedings.

Implication: AGM timelines have been reduced for large companies, in line with global practice. Making AGM proceedings accessible through internet platform is a huge measure towards enhanced transparency. 

The last words

The changes for the listed companies which are coming into existence soon is a good move to tackle the issue of lack of governance in many listed entities. Time will only tell whether enhanced ticking of the boxes of governance will help in improving good corporate behavior. 

It must be remembered that good governance is a matter of top management mindset. If this motley group decides that things need not be as kosher as it is supposed to be, no amount of regulations will help to make the listed entities behave well. The rule of ‘caveat emptor’ continues!

(Views expressed in this article are personal)

   

 About the author:

Robin Banerjee is the Managing Director of Caprihans I Ltd, a listed and one of the largest Polyvinyl Chloride (PVC) film manufacturers. Prior to the present role, he served as the Group Chief Financial Officer of Suzlon Energy, Executive Director at Essar Steel and Thomas Cook, Managing Director at Arcelor Mittal Germany and General Manager in Hindustan Unilever. He has authored several books including a business non-fiction best-selling book titled: ‘Who Cheats and How’.

Author can be contacted at: robinbanerjee2000@yahoo.co.uk


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