KOTAK COMMITTEE REPORT on CORPORATE GOVERNANCE

Transcription

1 KOTAK OMMITTEE REPORT on ORPORATE GOVERNANE A pivotal move for Indian Market

2 Background The SEBI ommittee on orporate Governance led by Mr. Uday Kotak formed on June 2, 2017, recommended sweeping changes in current regulations on October 5, The recommendations aimed at improving standards of orporate Governance of listed entities in India, including splitting the posts of chairman and managing director besides amending rules on independent directors, disclosures, and accounting and auditing practices. The suggestions assume greater relevance in the background of high-profile boardroom battles that have rocked corporate India over the past years. The report is a sincere attempt to support and enable sustainable growth of enterprise, while safeguarding interests of various stakeholders. It is an endeavor to facilitate the true spirit of governance. the overall confidence in Indian markets and in India.

3 overage The Report of the Kotak ommitttee on orporate Governance sets out several recommendations which suggests certain amendments to the existing provisions as currently practices by ompanies and certain new provisions with regard to Listing Obligations and Disclosure Requirements (LODR). Further, the committee considering the role of stakeholders in orporate Governance provides for certain recommendations for Auditors, Directors. Apart from other recommendations, in order to bring about transparency to investors, the committee suggests changes in Stock Exchange submissions, website disclosures. Who? What? When? This precursor provides an insight on the Key Impacting Areas where the changes are recommended by the ommittee.

4 Key Impacting Areas (KIAs) Board 1 2 Director ommittees 3 4 General Meetings Auditors 5 6 Related Party Transactions Subsidiaries 7 Stock Exchange Submission Annual Report Website Disclosures Insider Trading Miscellaneous

5 Board Part omposition 2. Min. Directors w.e.f. April 1, 2019 / 2020 At least half of the Board shall comprise of Independent Directors w.e.f April 1, 2019, for the top 500 listed entities, and w.e.f. April 1, 2020, for all listed entities. w.e.f. October 1, 2018 Board shall comprise of not less than Six Directors Ref: hapter II, Page - 24 Ref: hapter I, Page hairperson w.e.f. April 1, 2020 / 2022 The hairperson of the Board shall be Non Executive Director (w.e.f. April 1, all listed entities with public shareholding of 40% or more. and w.e.f. April 1, 2022 all listed Entities)) Ref: hapter I, Page w.e.f. October 1, 2018 Woman Director Board shall have atleast one Woman as an Independent Director Ref: hapter I, Page - 14

6 Board Part Frequency 6. Quorum ompany to hold minimum 5 Board meetings in a financial year for conduct of business and additionally at least one meeting specifically to discuss strategic matters. w.e.f. October 1, 2018 Ref: hapter I, Page - 17 The quorum for Board meeting shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director. Ref: hapter I, Page ertificate from PS Senior Management A ertificate from a ompany Secretary in Practice that none of Directors on Board of the ompany have been debarred/disqualified from being appointed/continuing as directors of companies by the SEBI/MA or any such statutory authority. Ref: hapter VI, Page ompany Secretary and hief Financial Officer shall be considered as part of senior management. Ref: hapter III, Page - 38

7 Board Part Limits For the purpose of determination of hairpersonship and Membership Limit, hairpersonship and Membership of the Audit ommittee, Nomination and Remuneration ommittee and the Stakeholders' Relationship ommittee shall be considered. 10. Shareholder s Resolution 11. Evaluation Of IDs 12. Treasury Stock Ref: hapter III, Page - 43 The resolution placed before the shareholders should be recommended by the board of directors. Placing a resolution before the shareholders without a board recommendation should be used sparingly and on rare occasions. Ref: hapter VIII, Page - 94 The Evaluation of Independent Directors ( ID ) shall be done by the entire board, which should cover their performance and fulfilment of Independence riteria as specified in the regulations and their Independence from Management. Ref: hapter II, Page - 25 w.e.f. April 1, 2021 In case a listed entity holds its own shares in its name or in the name of any trust either on its behalf or on behalf of any of its subsidiaries or associates (i.e. treasury stock), no voting rights attached to such shares shall be exercisable. Ref: hapter VIII, Page - 94

8 Directors Part Attendance ontinuation of term of Director, shall be subject to approval of members, if Director fails to attend atleast half of the total number of board meetings held over a period of 2 consecutive FY on a rolling basis. Ref: hapter I, Page Appointment 3. Updation Programme 4. Interaction w.e.f. October 1, 2019 Special Resolution for Appointment/continuation for the relevant term of NEDs on attaining the age of 75 years. Undertake a formal updation programme atleast once in a year for Directors on changes in applicable laws, regulations and compliance requirements. Ref: hapter I, Page - 16 Ref: hapter I, Page - 18 Undertake a formal interaction between non-executive directors and senior management, at least once every year. Ref: hapter I, Page - 18

9 Directors Part Directorships 6. Eligibility 7. Declaration 8. Insurance w.e.f. April 1, 2019 / 2020 Director shall hold office in not more than 8 listed entities at same time (of which independent directorships shall not exceed 7) w.e.f. April 1, 2019 and not more than 7 listed entities w.e.f. April 1, 2020, provided person serving as WTD/MD in any listed entity shall serve as independent director in not more than 3 listed entities. Ref: hapter I, Page - 22 Independent Director shall not be member of the promoter group of listed entity and non-independent director of a company on board of which any non-independent director of listed entity is an independent director Independent Directors shall give a declaration on meeting the independence criteria at the first meeting of Board where he participates/ first meeting of Board for each FY/whenever there is a change and the Board shall note the same. Ref: hapter II, Page - 25 w.e.f. October 1, 2018 Ref: hapter II, Page - 25 Top 500 Listed Entities shall undertake Directors and Officers insurance for all the Independent Directors for such quantum and for such risks as Board may determine. Ref: hapter II, Page 30

10 Directors Part Training Each Independent Director to undergo formal training on their roles and responsibilities with particular emphasis on governance aspects once every five years and shall certify compliance with the same to the ompany every year. 10. No person shall be appointed as an alternate director for an Independent Director Alternate Director 11. asual Vacancy 12. Appointment Any casual vacancy arising in the office of Independent Director shall be filled by a new independent director not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later. Ref: hapter II, Page - 34 Ref: hapter II, Page - 31 Ref: hapter II, Page - 32 Appointment to fill casual vacancy in office of independent director shall be subject to approval by the shareholders at next general meeting, and such director shall cease to hold office if not so approved at the said meeting or on last date on which meeting ought to have been held; whichever is earlier. Ref: hapter II, Page - 34

11 Directors Part ompensation To ID Applicability Board Meeting Audit ommittee Top 100 listed entities Next 400 listed entities Other ommittees Rs. 50,000/- Rs. 40,000/- Rs. 20,000/- Rs. 25,000/- Rs. 20,000/- Rs. 10,000/- The top 500 listed entities, having adequate profits shall pay minimum total remuneration of Rs. 5 lakh p.a. to ID. Ref: hapter II, Page w.e.f. October 1, 2018 Lead Independent Director 15. asual Vacancy ompanies with Non - Independent hairperson shall designate an Independent Director as Lead Independent Director, who shall: Lead meetings of Independent Directors and provide feedback to hairperson / Board; Act as liaison between hairperson and Independent Directors; Preside over meetings of where hairperson is absent; Have authority to call meetings of Independent Directors; On request of significant Shareholders, ensure his presence for communication. Ref: hapter II, Page - 33

12 Directors Part Remuneration To Executive Promoter Director Applicability Remuneration shall be subject to Approval of Shareholders by Special Resolution, if ompany having 1 Executive Promoter Director ompany having more than 1 Executive Promoter Director Remuneration exceeds Rs. 5 rore or 2.5% of Net Profit, whichever is higher Aggregate Remuneration exceeds 5% of Net Profit. 16. Remuneration to Non Executive Directors 15. asual Vacancy Ref: hapter V, Page - 60 The approval of shareholders shall be obtained every year in which the annual remuneration payable to a single non-executive director exceeds 50% of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof. Ref: hapter V, Page - 61

13 ommittees Part Frequency Audit ommittee: Minimum 5 meetings in a year with maximum gap of 120 days between two meetings. Other committees: Minimum 1 meeting in a year. Ref: hapter III, Page omposition Of NR 3. Role of A 4. Role of NR w.e.f. April 1, 2019 At least two-third of the members of Nomination and Remuneration ommittee ( NR ) shall be Independent Directors. The Audit ommittee ( A ) shall review utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding Rs. 100 crore or 10% of the asset size of the subsidiary, whichever is lower. w.e.f. October 1, 2018 Ref: hapter III, Page - 38 Ref: hapter III, Page - 37 Nomination and Remuneration ommittee ( NR ) shall recommend to the board all remuneration, in whatever form, payable to senior management. Ref: hapter III, Page - 38

14 ommittees Part omposition of SR Stakeholder Relationship ommittee ( SR ) shall comprise of minimum 3 directors, with atleast 1 Independent Director. 6. The quorum for meeting of Stakeholders Relationship and Nomination and Remuneration ommittee shall be either two members or one third of the members of the committee, whichever is greater, with at least one Independent Director. Quorum of SR & NR Ref: hapter III, Page - 39 Ref: hapter III, Page RM Risk management committee ( RM ) shall be applicable on top 500 listed entities and function of such committee shall specifically cover cyber security. Ref: hapter III, Page - 42

15 General Meetings Part Frequency 2. Webcast 3. hairperson of SR 4. Appointment of Auditor Top 100 listed entities shall hold their Annual General Meeting within a period of 5 months from the date of closing of the Financial Year. Top 100 listed entities shall provide One - Way Live Webcast of the proceedings of all Shareholders Meetings. The hairperson of the Stakeholders Relationship ommittee ( SR ) shall be present at AGM to answer queries of the security holders.) Ref: hapter VIII, Page - 91 Ref: hapter VIII, Page - 92 Ref: hapter III, Page - 39 Explanatory Statement in relation to the item on appointment / re-appointment of auditor(s) in the relevant notice calling an annual general meeting, should include basis of recommendation for appointment including the details in relation to and credentials of the auditor(s) proposed to be appointed; and Proposed fees payable to the auditor(s) along with terms of appointment and in case of a new auditor, any material change in the fee payable to such auditor from that paid to the outgoing auditor and the rationale for such change. Ref: hapter VII, Page - 84

16 Auditor Part Audit Qualification 2. External opinion by Auditors Appointment Resignation of of Auditor Mandatory Quantification of Audit Qualifications in the Audit Report, with the exception being only for matters like going concern or sub-judice matters. In such an instance, the management will be required to provide reasons, which will be reviewed by the Auditors and reported accordingly. Ref: hapter VII, Page - 76 In case Statutory Auditors are not satisfied with the views or opinions of the management or of an expert whose services have been availed by the management, the Auditors have a right to obtain independent external opinions as deemed fit, at the cost of the listed entity. Ref: hapter VII, Page - 77 Detailed reason for Resignation of Auditor before the expiry of the term shall be disclosed to the Stock Exchange. Auditor Ref: hapter VII, Page - 83

17 Related Party Transactions Part Definition 2. Voting 3. Brand / Royalty payment Materiality Policy All promoters/promoter group entities that hold 20% or above in a listed ompany to be considered related parties for the purposes of the SEBI LODR Regulations. with immediate effect No related party shall vote to approve resolution for all material Related Party Transactions, whether the entity is a related party to the transaction or not. A transaction involving payments made to related party with respect to brand usage or royalty shall be considered material, if transaction(s) to be entered during a financial year exceeds 5% of the annual consolidated turnover of the listed entity. Ref: hapter V, Page Ref: hapter V, Page - 57 Ref: hapter V, Page - 58 lear threshold limits, as considered appropriate by the Board of Directors required to be disclosed in the materiality policy and such policy shall be reviewed by Board atleast one in every 3 yrs. Ref: hapter V, Page - 62

18 Subsidiaries Part Definition 2. Independent Director 3. Secretarial Audit Material Subsidiary shall mean a subsidiary, whose income or net worth exceeds 10% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. Ref: hapter IV, Page - 45 At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted subsidiary, whether incorporated in India or not, whose income or net worth exceeds 20% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. Material Unlisted Subsidiaries Incorporated in India shall undertake Secretarial Audit Ref: hapter IV, Page A statement of all individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or 4. total liabilities of the unlisted subsidiary shall be brought into notice of the Board of Listed Entity. Ref: hapter IV, Page - 45 Statement of Transaction Ref: hapter IV, Page - 45

19 Annual Report Part Matrix Reporting Structure 2. onfirmation of Independence 3. Resignation Of ID w.e.f. March 31, 2019 onfirmation by the Directors on the business affairs and reporting structure of ompany and that reporting structures are consistent with the above, shall be disclosed in the orporate Governance Section in the Annual Report. onfirmation that Independent Directors fulfill the conditions specified in these regulations and are Independent of the Management, shall be disclosed in the orporate Governance Section in the Annual Report. Detailed reasons for resignation of independent directors who resigns before the expiry of his tenure, shall be disclosed in the orporate Governance Section in the Annual Report. 4. w.e.f. March 31, 2019/ 2020 Skills of Directors Ref: hapter I, Page - 21 Ref: hapter II, Page - 25 Ref: hapter II, Page - 29 A matrix setting out the skills of the Directors as required in context of its business/sector, shall be disclosed in the orporate Governance Section in the Annual Report. Ref: hapter I, Page - 15

20 Annual Report Part Details of Directorships 6. Utilization of PI & QIPs 7. Financial Indicators Details of directorships of a Director should include details of directorships (e.g. Independent/executive) in other listed entities, to be disclosed in the orporate Governance Section in the Annual Report. Ref: hapter VI, Page - 70 Utilisation of proceeds of Preferential Issues ( PI) and Qualified Institutional Placements ( QIPs) till the time such proceeds are utilised, shall be disclosed in the orporate Governance Section in the Annual Report. Ref: hapter VI, Page - 69 Key Financial Ratios viz. Debtor Turnover, Inventory Turnover, Interest overage Ratio, urrent Ratio etc., wherever there is a change of 25% or more in a particular financial year, along with detailed explanations thereof shall be disclosed in the Management Discussion & Analysis Section in the Annual Report. Ref: hapter VI, Page Strategy w.e.f. March 31, The ompany may disclose, within the limits set by its competitive position, its medium-term and long-term strategy based on a time frame as determined by its board of directors, in the Management Discussion & Analysis Section in the Annual Report. Ref: hapter VI, Page - 72

21 Annual Report Part Views of ommittees 10. Audit Fees 11. Transactions 12. ertificate from PS Where the board had not accepted any recommendation of any committee of the board which is mandatorily required, in the relevant financial year, the same to be disclosed in the orporate Governance Section of the Annual Report along with reasons thereof. Ref: hapter VI, Page - 74 Total Fees for all services paid by the listed entity and its subsidiaries (i.e. on a consolidated basis) to the statutory auditor and all entities in the network firm/ network entity of which the auditor is a part, shall be disclosed in the orporate Governance Section of the Annual Report. Ref: hapter VII, Page - 83 Disclosure of transactions with any person or entity belonging to the promoter / promoter group which hold(s) 10% or more shareholding in the listed entity. Ref: hapter V, Page - 57 Disclosure that a ertificate from a ompany Secretary in Practice that none of Directors on Board of the ompany have been debarred/disqualified from being appointed/continuing as directors of companies by the SEBI/MA or any such statutory authority, in the orporate Governance Section of the Annual Report.. Ref: hapter VI, Page - 71

22 Stock Exchange Submissions Part Financial Results Submission of quarterly/year-to-date consolidated financial results of all their Subsidiary ompanies. Ref: hapter VII, Page ash Flow Statements Submission, by way of a note, of the statement of cash flows for the half-year as part of its standalone and consolidated financial results. Ref: hapter VII, Page Annual Report 4. Revised Annual Report Submission of opy of the Annual Report sent to the shareholders along with the notice of the annual general meeting not later than the day of commencement of dispatch to its shareholders. Ref: hapter VI, Page - 63 In the event shareholders approve any amendments to any portion of the annual report, then the revised copy (with details of and explanation for the changes so approved) to be sent to the Stock Exchange not later than 48 hours after the Annual General Meeting. Ref: hapter VI, Page - 63

23 Stock Exchange Submissions Part Shareholding Pattern 6. Format of Disclosure Shareholding Pattern shall also specify details of names of holders of global depository receipts issued, if any, holding more than 1% of the total shareholding of the entity. All the disclosures made in Soft opy shall be in XBRL Format. Ref: hapter VI, Page - 64 Ref: hapter VI, Page Prior Intimation 8. onsolidated RPTs With immediate effect Prior Intimation of Board Meeting for consideration of Bonus Issue by the Board of Directors. Ref: hapter VI, Page - 73 Half yearly disclosure of Related Party Transactions ( RPTs ) on a consolidated basis to be submitted to the stock exchange(s) within 30 days of publication of the half yearly financial results. Ref: hapter V, Page - 57

24 Website Disclosures Part onsolidated RPTs 2. Annual Report 3. Revised Annual Report 4. redit Rating Half yearly disclosure of Related Party Transactions ( RPTs ) on a consolidated basis within 30 days of publication of the half yearly financial results. opy of the Annual Report sent to the shareholders along with the notice of the annual general meeting not later than the day of commencement of dispatch to its shareholders In the event shareholders approve any amendments to any portion of the annual report, then the revised copy (with details of and explanation for the changes so approved) to be published on Website not later than 48 hours after the Annual General Meeting. Ref: hapter V, Page - 57 Ref: hapter VI, Page - 63 Ref: hapter VI, Page - 63 All credit ratings obtained by the entity for all its outstanding instruments and should be updated immediately as and when there is any revision in any of the ratings. Ref: hapter VI, Page - 65

25 Website Disclosures Part Separate Section 6. Subsidiary Financials Provide all the information mandated under Regulation 46 of SEBI LODR Regulations in a separate section, to ensure ease of availability and access of pertinent information in one place to investors and regulators alike. Ref: hapter VI, Page - 71 Audited Financial Statements for the relevant financial year of each of its subsidiaries at least 21 days before the date of the Annual General Meeting. Ref: hapter VI, Page Format of Disclosure All the disclosures on the website should be in a searchable format that allows users to find relevant information easily. Ref: hapter VI, Page - 66

26 Insider Trading Part Information Agreement 2. Authority in AoA 3. Disclosure 4. Definition A listed entity may enter into the agreement in relation to providing access to material information (including unpublished price sensitive information) to the counterparty as per new hapter IV-A. A listed entity may enter into the agreement as per new hapter IV-A only after amending its Articles of Association ( AoA ) by including an enabling provision authorizing the listed entity to enter into such agreements in accordance with new hapter IV-A. Ref: hapter V, Page - 49 Ref: hapter V,Page - 49 The fact of entering into or termination of the agreement under new hapter IV-A along with the name of the counterparty shall be disclosed to Stock Exchange(s) as per Regulation 30. Ref: hapter V, Page - 49 ounterparty means any person who qualifies as promoter of the listed entity and holds more than 25% OR is in direct or indirect control of such promoter OR has nominated a director on the board. Ref: hapter V, Page - 49

27 Miscellaneous Part Board Evaluation 2. Group Governance 3. IT 4. E- Voting Voluntary Disclosure on Board Evaluation may include previous years Observations and action taken, Observations of the Board Evaluation carried out for the year and proposed action on current year observations. Voluntary Ref: hapter I, Page - 23 Where ompany has multiple unlisted subsidiaries, it may on the decision of the Board set up a dedicated Governance ommittee and have a strong and effective group governance policy to monitor governance of all Subsidiaries Voluntary Ref: hapter IV, Page - 47 The ompany may constitute an Information Technology ommittee ( IT ) which will focus on digital and technological aspects. E-Voting should be kept open till midnight (11.59 PM) on the day of the General Meeting (SEBI to take up recommendation with MA for amendment in ompanies (Management and Administrations) Rules, 2014) Ref: hapter III, Page - 44 Ref: hapter VIII, Page - 92

28 Miscellaneous Part Re lassification of Promoters With immediate effect A- Where there are multiple promoters and a specific promoter wishes to undergo re-classification, on request being received by the ompany, reclassification can be done provided following conditions are met: (i) promoters and PAs cumulatively hold 10% or more of the aggregate shareholding; (ii) a specific person and PAs cumulatively hold less than 5% of the aggregate shareholding; (iii) the specific promoter or PA are neither on the board nor in the management and are not acting in concert with other persons forming part of the promoter group; and (iv) Ordinary Resolution is passed at the General Meeting B- Where there is only one specific promoter and who wishes to undergo re-classification, on request being received by the ompany, re-classification can be done provided following conditions are met: (i) such promoter or PA for that promoter is/are neither on the Listed Entity Board nor in management of the company nor has a nominee director; (ii) cumulative shareholding and voting rights of such promoter and its promoter group and PAs goes below 10%; (iii) there are no other persons qualifying as promoters of the company; and (iv) Ordinary Resolution is passed at the General Meeting Ref: hapter V, Page - 54

29 Miscellaneous Part Further Actions to be taken by SEBI Harmonization of Disclosures made to Stock Exchange and MA ircular on Specific disclosures on assets, liabilities and turnover of the entities involved should be disclosed in the valuation reports on schemes of arrangement. ircular on disclosure of risk management activities by the ompanies, including their commodity hedging positions in a more transparent, detailed and uniform manner for easy understanding and appreciation by the shareholders. ircular stating that the auditor of the holding company should be made responsible for the audit opinion of all material unlisted subsidiaries. IF reporting requirements be made applicable to the entire operations of the group (Indian and Foreign operations) for listed entities with Net Worth of Rs. 1,000 crore and above. Making public Audit Quality Indicators available with IAI, which will enable transparency and comparison of the audit quality of different auditors. Strengthening the role of IAI and Independent functioning of Quality Review Board. Introduction of Stewardship code Introduction of Leniency Program

30 Our Insight The Report of the ommittee represents an important milestone in Indian orporate Governance by presenting The Next Phase Of orporate Governance Reforms. Unlike corporate governance reviews of the past that sought to look elsewhere and adopt Governance mechanisms prevalent in other jurisdictions such as the united kingdom and The United States, the Kotak ommittee has conducted an introspective exercise and attempted to devise customized solutions for local problems. The ommittee s process - oriented approach is grounded on the logic that orporate Governance is an integral part of the broader governance of the country, and that corporate India plays a significant role in nation-building. The recommendations focus on the composition of the board, its independence and functioning, the role of auditors, shareholder participation and the enhancement of corporate disclosures. This is indeed a welcome step!!!!!... Although the committee has demonstrated care in facilitating the true spirit of governance, the tenor of the recommendations may have the effect of form prevailing over substance. Moreover, the penetration of unyielding corporate regulation into the boardroom may have unintended adverse consequences. In all, while the committee s efforts are laudable, it remains to be seen whether, and the extent to which, they are implemented by the regulators and accepted by corporate India.

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