Amendments to SEBI Listing Regulations pursuant to Kotak Committee recommendations

Transcription

1 to SEBI Listing Regulations pursuant to Kotak Committee recommendations An overview June 2018 KPMG.com/in

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3 Table of contents An introduction 01 Overview 02 Composition and role of the board 03 Institution of independent directors 09 Board committees 13 Monitoring group entities and related parties 17 Accounting and audit related matters 23 Disclosures and transparency 27 Investor participation 33 At a glance mapping of disclosures 35 Glossary 37

4 1 An introduction The Securities and Exchange Board of India (SEBI) recently issued certain amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) vide its circulars on 9 and 10 May These amendments have come as a follow up to the decisions taken at the last SEBI Board meeting, wherein it had accepted a number of recommendations of the Committee on Corporate Governance constituted by SEBI under the chairmanship of Uday Kotak (the Kotak Committee). The Kotak Committee was formed on 2 June 2017 with the aim of improving standards of corporate governance of listed companies in India. The Kotak Committee submitted its report to SEBI on 5 October 2017, wherein it provided 80 recommendations. The report was placed for public comments till 4 November The recommendations covered many areas of governance, including the composition, role and functioning of the board and its committees, oversight over group entities and related party transactions, promoter related arrangements, enhancing transparency and disclosures, strengthening the financial reporting and audit oversight functions, investor engagement and participation and governance in public sector enterprises. The SEBI received more than 120 comments letters from various stakeholders including Ministry of Finance, Ministry of Corporate Affairs, industry, government, global associations, institutional investors, lawyers, etc. SEBI has accepted most of the recommendations of the Kotak Committee without modification and a few others with modifications. Certain recommendations have been referred to various agencies (i.e. government, other regulators, professional bodies, etc.) since the matters pertain to them. There are also certain other recommendations that relate to best practices, where the implementation has been left to the discretion of the board of directors of listed entities. The recommendations that have been accepted are being implemented through amendments to the Listing Regulations and other related guidance being issued by SEBI through its circulars. The amendments to the Listing Regulations are being made applicable in a staggered manner to allow listed entities enough time to implement the changes and put in place the required resources and processes. Accordingly, in this publication we have categorised the amendments to the Listing Regulations in seven themes and within each theme we have highlighted them in the chronological order of their applicability. It is important to note that while most of the amendments are applicable from 1 April 2019, there are certain recommendations that are applicable immediately. We welcome the steps taken by SEBI based on recommendations of the Kotak Committee, which we are sure will go a long way in improving the corporate governance practices in the Indian listed entities. With most of the Kotak Committee recommendations getting codified into regulations, we have amongst the best corporate governance regulations in the world. However, the real test will come from implementation. The Kotak Committee recognised the need to move from compliance in letter to compliance with the spirit; this should be at the heart of any corporate governance reform that every company or board should seek to drive. Arun M. Kumar Chairman and CEO, KPMG in India and a Member of the SEBI Committee on Corporate Governance

5 SEBI amendments pursuant to Kotak Committee recommendations - An overview 2 Overview of the amendments to the Listing Regulations based on the recommendations of the Kotak Committee The amendments issued by SEBI to the Listing Regulations to operationalise the recommendations of the Kotak Committee have been grouped into seven themes (see diagram below). The key changes under each of these themes have been discussed in the following sections of this document. Board committees Monitoring group entities and related parties Accounting and audit related matters Institution of independent directors Disclosures and transparency 2 6 Composition and role of the board 1 7 Investor participation The Kotak Committee recommendations

6 3 Chapter i Composition and role of the board in relation to directors and Board of Directors (BoD) Minimum number of directors on a BoD (Effective from 1 April 2019 for top 1 1,000 listed entities and 1 April 2020 for top 2,000 listed entities) The Companies Act, 2013 (2013 Act) requires a minimum of three directors on the board of a public limited company. There is no similar requirement in the Listing Regulations. The BoD play an important role in a company s governance and performance. It is, therefore, essential that a company has a sufficient number of directors on its board to ensure that it is able to carry out its functions effectively. Amendment A minimum of six directors would be required on the BoD of top listed entities in a phased manner. Gender diversity on the BoD (Effective from 1 April 2019 for top 500 listed entities and 1 April 2020 for top 1,000 listed entities) The 2013 Act and the Rules require at least one woman director on the BoD of every listed entity. The Listing Regulations also currently require at least one woman director on the board of a listed entity. Diversity, including gender diversity, is often seen to have a positive impact on the decision-making processes of corporate boards. Amendment Top listed entities would be required to appoint at least one independent woman director on their BoD. Maximum number of directorships (Reduce to eight by 1 April 2019 and to seven by 1 April 2020) The 2013 Act provides that the maximum number of public companies in which a person can be appointed as a director should not exceed 10. The Listing Regulations state that a person should not serve as an independent director in more than seven listed entities and if the director is a whole-time director in one listed entity, then he/she cannot serve as an independent director in more than three listed entities. Multiple directorships beyond a reasonable limit may lead to a director not being able to allocate sufficient time to a particular company, thus may hinder their ability to play an effective role. The maximum number of directorships (including any alternate directorships) in listed entities would be reduced to seven (irrespective of whether the person is appointed as an independent director or not). This change will be achieved in a staggered manner. The maximum number of listed entity directorships held by a person would be brought down to eight by 1 April 2019 and to seven by 1 April A person would not serve as an independent director in more than seven listed entities. Additionally, any person who is serving as a whole-time director/managing Director(MD) in any listed entity would serve as an independent director in not more than three listed entities. For the purpose of calculation of maximum number of directorships, the count of listed entities on which a person is a director/independent director would be only those whose equity shares are listed on a stock exchange. 1. Relevant top entities to be determined on the basis of market capitalisation as at the end of immediate previous financial year.

7 SEBI amendments pursuant to Kotak Committee recommendations - An overview 4 Approval for non-executive directors on attaining a certain age (Effective from 1 April 2019) The 2013 Act provides that a person may be appointed/ continue as an MD, whole-time director or manager on attaining the age of 70 years by passing a special resolution. However, no such provision exists for nonexecutive directors. While age itself may not be a determinant of efficiency or capability of a person or the basis for disqualification of a director, a higher level of shareholder endorsement may be required for directors to continue in their position beyond a certain age. In order to appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years, a listed entity would require a special resolution to be passed to that effect. Additionally, an explanatory statement should be annexed to the notice for such motion that would provide the justification for appointing such a person. Separation of the roles of non-executive chairperson and MD/Chief Executive Officer (CEO) (Effective from 1 April 2020 for top 500 listed entities) The 2013 Act provides that the same individual should not be appointed/reappointed as the chairperson of a company as well as its MD/CEO, unless so required by the articles of the company or else the entity does not undertake multiple businesses. The Listing Regulations do not mandate such a separation of the posts of chairperson and CEO but instead leave it to the discretion of the listed entity. Chairperson of the board of top 500 listed entities would be a non-executive director and not be related to the MD or the CEO in accordance with the definition of relative as per the 2013 Act. The above requirement would not be applicable to listed entities that do not have any identifiable promoters as per the shareholding patterns filed with stock exchanges. Quorum for board meetings (Effective from 1 April 2019 for top 1,000 listed entities and 1 April 2020 for top 2,000 listed entities) The 2013 Act requires a quorum of one-third of the total strength of the BoD or two directors, whichever is higher, for every board meeting. The Listing Regulations do not prescribe any quorum for meetings of BoD. Due to enhanced obligations of the boards of listed entities, a higher quorum may be required vis-à-vis other entities. Also in the interest of all stakeholders, especially minority shareholders, the presence of at least one independent director would be required for every board meeting. The quorum for every meeting of the BoD of the top listed entity would be one-third of its total strength or three directors, whichever is higher, including at least one independent director. The participation of the directors by video conferencing or by other audio-visual means would also be counted for the purposes of such quorum.

8 5 Disclosures Disclosure of expertise/skills of directors (Effective from financial year ending 31 March 2019/ 31 March 2020) The 2013 Act and the Listing Regulations require the disclosure of a brief profile of a director on his/her appointment, including expertise in specific functional areas. However, there is no specific requirement under the 2013 Act or the Listing Regulations for listed entities to disclose the required and available expertise of the board on a regular basis. A group of individuals with varied skill-sets and experience is critical for providing comprehensive guidance and direction to a company. The corporate governance report would include a chart or a matrix setting out the skills/expertise/competence of the BoD in the following manner: a. List of core skills/expertise/competencies identified by the BoD as required in the context of its business(es) and sector(s) for it to function effectively and those actually available with the board. This requirement would be effective for financial year ending 31 March 2019 and b. Names of directors who have such skills/expertise/ competence. This requirement would be effective from financial year ended 31 March Disclosures on board evaluation (Effective from 10 May 2018/1 April 2019) Both the 2013 Act and the Listing Regulations contain broad provisions on board evaluation i.e. evaluation of the performance of the board as a whole, individual directors (including independent directors and chairperson) and various committees of the board. In addition, a guidance note on board evaluation has also been issued by SEBI vide circular dated 5 January Effective 10 May 2018, the equity listed entities may provide disclosures on board evaluation. Therefore, listed entities may consider the following points as a part of their disclosures on board evaluation: a. Observations of board evaluation carried out for the year b. Previous year s observations and actions taken c. Proposed actions based on current year observations. Additionally, with effect from 1 April 2019, the evaluation of independent directors is required to be done by the entire BoD and would include performance of the directors and fulfilment of the independence criteria as specified in the Listing Regulations and their independence from the management. The directors whose performance is being evaluated would not take part in such an evaluation.

9 SEBI amendments pursuant to Kotak Committee recommendations - An overview 6 Timeline of the amendments to the Listing Regulations Applicability date Disclosures on board evaluation 10 May 2018 Disclosure of expertise/skills of directors on the BoD Financial year ending 31 March 2019 Minimum of six directors required on BoD Gender diversity on board with at least one woman independent director 1 April 2019 for top 1,000 listed entities 1 April 2020 for top 2,000 listed entities 1 April 2019 for top 500 listed entities 1 April 2020 for top 1,000 listed entities Maximum number of directorships Eight by 1 April 2019 Seven by 1 April 2020 Quorum for board meetings (one-third or three directors, whichever is higher) 1 April 2019 for top 1,000 listed entities 1 April 2020 for top 2,000 listed entities Evaluation of independent directors 1 April 2019 Approval for appointment of non-executive directors attaining 75 years of age by special resolution Disclosure of expertise/skills of directors identified by names of directors Separation of roles of non-executive chairperson and MD/(CEO) 1 April 2019 Financial year ending 31 March April 2020 for top 500 listed entities

10 7 The role of the BoD is important in order to provide effective governance and strategic direction to the business of an entity. The BoD are responsible to all stakeholders for meeting the requisite standards of corporate governance. Due to the enormous nature of the responsibilities of directors of a listed entity, the recent amendments to the Listing Regulations attempt to allow companies to benefit by getting the best out of their directors and at the same time put the onus/ responsibility on the directors and the company, with an enhanced level of public scrutiny. Our comments Maximum number of directorships To help directors discharge their role effectively with adequate time on hand, the Listing Regulations have limited the number of directorships to eight listed entities from 1 April 2019 and seven from 1 April Though the requirement to reduce the number of directorships is applicable from 1 April 2019, independent directors should now start evaluating which listed entities boards they are best suited to serve on and accordingly, make their decisions on continuance. The BoD of listed entities, on their part, should start the process of realignment of the composition of the board, and where necessary, start identifying independent directors with requisite skill sets that would either replace the outgoing independent directors or otherwise augment the current board members. Minimum number of directors on a BoD Additionally, the Listing Regulations increase the minimum number of directors on a BoD to six and have increased the size of the quorum of the BoD meetings. This is likely to help achieve sufficient number of directors are available to carry out functions of an entity constructively and a smaller number of directors are not burdened for providing oversight to the affairs of an entity. This requirement is applicable from 1 April 2019 but listed entities should start the process of identification of new directors with the requisite skill sets relevant for the business of the entity. Diverse skill sets As diverse skill sets are needed for providing comprehensive guidance and direction to an entity, the requirements relating to disclosure of expertise/skills of directors would drive BoDs to make a formal gap assessment of the available skills on the board vis-à-vis the required skills, and this in turn will require them to reassess the board composition. The Listing Regulations also looked at the gender diversity of the BoD and its

11 SEBI amendments pursuant to Kotak Committee recommendations - An overview 8 impact on board functioning; with a view to increase diversity on corporate boards, top 500 listed entities would need to appoint one independent woman director from 1 April 2019 and top 1,000 listed entities from 1 April These amendments to the Listing Regulations are aimed at bringing right balance in the boards. Disclosure on board evaluation The disclosure of board evaluation should not be a boiler plate and move the needle to substance rather than form. These disclosures are likely to bring transparency to stakeholders as they would be able to understand all the aspects of evaluation i.e. observations of board evaluation carried out for the year, previous year s observations and actions taken and proposed actions based on current year observations. This requirement is applicable from 10 May 2018 and therefore, listed entities that have not yet issued annual reports may consider providing disclosures regarding board evaluation. It is important to note that BoD have discretion in the manner of presentation of disclosures with regard to board evaluation. The circular is effective from 10 May 2018 while the compliance by companies is voluntary. Separation of roles of non-executive chairperson and MD/CEO While all of the above amendments are towards empowering the BoD, separation of non-executive chairperson and MD/CEO is expected to provide a better and more balanced governance structure to a listed entity. The separation is likely to ensure that the BoD would be able to concentrate on the governance role while the management led by MD/CEO would focus on management. Generally, the separation of roles is considered as a best practice and few jurisdictions like the U.K. and Australia require it. The Kotak Committee had recommended that listed entities with more than 40 per cent of public shareholding should separate the roles of the chairperson and CEO/MD with effect from 1 April 2020, with the chairperson being a nonexecutive director. However, SEBI has accepted this recommendation with a modification; as per the amendments, this is applicable to all top 500 listed entities irrespective of the level of public shareholding. However, this requirement would not be applicable to listed entities that do not have any identifiable promoters as per the shareholding patterns filed with stock exchanges. It is important to note that the definition of promoter in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) covers ultimate parent entities too, and would therefore, impact both multinational companies as well as Indian businesses. Indian subsidiaries (though professionally run) of global multinational companies, should carefully evaluate the definition of promoter. If their holding companies are covered in the promoter definition then they would need to separate the roles of non-executive chairperson and CEO/MD. In the context of Indian business companies that are promoter managed, a decision on separation of roles of chairperson and CEO/MD would also require careful evaluation and would need to take into account succession planning. Additionally, with a view to drive compliance in substance rather than form, SEBI has prohibited the appointment of relatives of chairperson as CEO/MD or vice versa, as the Listing Regulations specifically mention that chairperson, MD or CEO should not be relatives of each other. Board inter-locks The Listing Regulations also prohibit board inter-locks. This requirement is applicable from 1 October Therefore, the listed entities should start evaluating the composition of their BoD to identify if there is a situation of board inter-lock. Additionally, they would need to ensure that processes are in place for prior consultation with directors while they accept new positions in other listed entities in the future. Recommendation not accepted by SEBI One recommendation of the Kotak Committee that has not been accepted by the SEBI relates to matrix reporting structure. The Kotak Committee had proposed that the corporate governance report should carry a confirmation that the BoD are responsible for the business and overall affairs of the listed entity in the relevant financial year and that the reporting structures of the listed entity, formal or informal, are consistent with the BoD s responsibility. The SEBI felt that BoD are already responsible for the overall affairs of a listed entity as per the law irrespective of a listed entity s internal structures. Therefore, this recommendation was not accepted.

12 9 Chapter ii Institution of independent directors Eligibility criteria for independent directors (Effective from 1 October 2018) Alternate directors for independent directors (Effective from 1 October 2018) The 2013 Act and the Listing Regulations set out certain objective criteria for determination of independence of a director. Evaluation of independence of an independent director should entail both objective and subjective assessments and such assessments should be both continuing and genuine. The Kotak Committee noted some instances of persons who are relatives of promoters being appointed as independent directors. Therefore, it was recommended that the net of exclusions be appropriately expanded to avoid the appointment of family associates as independent directors. Additionally, a self-assessment of independence be required of every independent director, the veracity of which would need to be confirmed by the board. The trend of board inter-locks may run a structural vulnerability of quid-pro-quo and is undesirable from a good governance standpoint. Eligibility criteria for a director to be an independent director would be as follows: a. Specifically exclude persons who constitute the promoter group of a listed entity b. Exclude board inter-locks arising due to common non-independent directors on boards of listed entities (i.e. a non-independent director of a company on the board of which any non-independent director of the listed entity is an independent director, cannot be an independent director on the board of the listed entity). For example, if Mr. A is an executive director on the board of company A (being a listed entity) and is also an independent director on the board of company B, then no non-independent director of company B can be an independent director on the board of company A. The 2013 Act permits appointment of alternate directors for all directors including independent directors (for a director during his absence for a period of not less than three months from India). It also states that a person holding any alternate directorship for any other director in the company (or holding directorship in the same company) would not be appointed as an alternate director. Additionally, it provides that no person shall be appointed as an alternate director for an independent director unless he/she is qualified to be appointed as an independent director under the provisions of the 2013 Act. There is no specific provision pertaining to alternate directors in the Listing Regulations. Independent directors are elected to the board for their skills, experience, acumen, network and objectivity. These qualities are distinct to the relevant appointee and are not replaceable with an alternate. Amendment Appointment of an alternate director for an independent director would not be permitted. Directors and Officers (D&O) insurance for independent directors (Effective from 1 October 2018 for top 500 listed entities) The 2013 Act specifies that the letter of appointment of independent directors should include a provision for D&O, if any. However, for a company to undertake such D&O insurance is not mandatory under the 2013 Act. The Listing Regulations do not have a specific provision on this matter. Top 500 listed companies are required to undertake D&O insurance for their independent directors. The quantum and the risks to be covered under D&O insurance would be determined by BoD.

13 SEBI amendments pursuant to Kotak Committee recommendations - An overview 10 Declaration by independent directors (Effective from 1 April 2019/annual report for the year ended 31 March 2019) The 2013 Act provides that every independent director is required to provide a declaration that he/she meets the legal criteria of independence, at the first meeting of the relevant board in which he or she participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his/her status as an independent director. Further, at the time of appointment of an independent director, the board needs to certify that in the opinion of the board, the independent director proposed to be appointed fulfils the conditions specified in the 2013 Act and the rules made thereunder and that the proposed director is independent of the management. Each independent director would submit a declaration on the following occasions: At the first meeting of the board in which he/she participates as a director At the first meeting of the board in every financial year Whenever there is any change in the circumstances which may affect his/her status as an independent director. The declaration should state that he/she meets the criteria of independence and he/she is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his/ Timeline of the amendments to the Listing Regulations her ability to discharge his/her duties with an objective independent judgement and without any external influence. The board of the listed entity would take on record the declaration and confirmation submitted by the independent director after due assessment of the veracity of such declaration. (Effective from 1 April 2019) Additionally, the BoD would be required to provide a confirmation in the corporate governance section of the annual report, that in its opinion, the independent directors fulfil the conditions specified in the Listing Regulations and are independent of the management. (Effective for annual report for the year ended 31 March 2019) Disclosures on resignation of independent directors (Effective from 1 April 2019 /annual report for the year ended 31 March 2019) The 2013 Act provides that a director who resigns before the expiry of his/her term is required to give detailed reasons to the registrar of companies. There is no specific provision on this aspect in the Listing Regulations. Within seven days of the date of resignation, listed entities would be required to disclose to the stock exchanges, detailed reasons for resignation of independent directors along with the confirmation by such director that there are no other material reasons other than those provided. (Effective from 1 April 2019) Detailed reasons for the resignation of an independent director before the expiry of his/her tenure is also required to be given in the corporate governance section of the annual report. (Effective for annual report for the year ended 31 March 2019) Applicability date Eligibility criteria for independent directors 1 October 2018 Alternate directors for independent directors 1 October 2018 D&O insurance for independent directors Confirmation by the BoD regarding fulfilment of specified conditions by the independent directors Disclosures on resignation of independent directors - In the annual report - To the stock exchanges 1 October 2018 for top 500 listed entities Annual report for the year ended 31 March 2019 For the year ended 31 March April 2019 Declaration by independent directors 1 April 2019

14 11 A set of good and truly independent directors is a prerequisite for good corporate governance of any company. Independent directors are expected to bring objectivity into the functioning of the BoD and improve its effectiveness. The Listing Regulations strengthen and support the institution of independent directors and the amendments seek to bring focus on the spirit of independence of independent directors. Our comments Eligibility criteria for independent directors The eligibility criteria specifically now excludes relatives of the promoter/promoter group to be appointed as independent directors and also prohibits any board interlocks. The timeline for applicability of this requirement is from 1 October Given that a limited time frame is left for the implementation date, listed entities should start the process of carefully evaluating the eligibility criteria of their independent directors and in case they need to appoint new independent directors then they should consider initiating the process. Declaration by independent directors Additionally, independent directors have to provide a subjective declaration of their independence, including the absence of any current or anticipated situations that may impact their ability to discharge their duties objectively and also conduct a continuous assessment of the independence criteria. D&O insurance for independent directors The Listing Regulations also mandate a D&O insurance for independent directors as they have significant responsibilities and liabilities. In practice, many large listed entities provide D&O insurance for their independent directors. This requirement is more relevant for mid-size listed entities and is expected to provide some relief to independent directors.

15 SEBI amendments pursuant to Kotak Committee recommendations - An overview 12 Alternate directors for independent directors Alternate directors in place of independent directors may not be able to bring same kind of skills, experience, acumen, network and objectivity. Therefore, appointment of an alternate director for an independent director is not permitted. Recommendations not accepted by SEBI Some of the recommendations made by the Kotak Committee but have not been included in the amendments to the Listing Regulations are as follows: 1. At least once every year, an interaction to be required between non-executive directors and senior management 2. Minimum number of board meetings to be increased from four to five and specific agenda items like strategy, Environment, Sustainability and Governance (ESG), board evaluation, etc. 3. Minimum compensation to independent directors 4. Formal updation programme for the board on changes in laws every year 5. Formal induction programme for independent directors 6. Appointment of lead independent director 7. More exclusive meetings of independent directors 8. Setting up of an IT committee. The SEBI has indicated that the adoption of these practices may be left to the discretion of the listed entities. Considering that these are good practices, companies should consider to voluntarily adopt these above mentioned recommendations as these are aimed at further strengthening the effectiveness of independent directors and executive management. Additionally, these practices are expected to help the former gain better insights into the business of the company and its functioning. Further, the appointment of a lead independent director will also help amplify the collective voice of independent directors in the board room, and make their role effective. Two recommendations of the Kotak Committee that have not been accepted by the SEBI relate to the requirement for minimum number of independent directors and requirement of shareholders approval on appointment in case of casual vacancy of directors. Regarding the recommendation for minimum number of independent directors, SEBI felt this requirement is likely to burden the listed entities as there is a concern on availability of independent directors with requisite skills/expertise. In case of casual vacancy of directors, SEBI pointed out that the Companies (Amendment) Act, 2017 requires shareholders approval for the said appointment. Hence, there is no need to introduce this provision under the Listing Regulations.

16 13 Chapter iii Board committees Role of an audit committee (Effective from 1 April 2019) Role of Nomination and Remuneration Committee (NRC) (Effective from 1 April 2019) The 2013 Act and the Listing Regulations specify the role for the audit committee members. However, there is no specific requirement in the 2013 Act or the Listing Regulations for audit committee members to review the utilisation of funds given to unlisted subsidiaries by a listed holding company. Therefore, the audit committee should review the utilisation of funds of the listed entity infused into unlisted subsidiaries including foreign subsidiaries. In order to ensure such an obligation is not onerous on the audit committee, the report provides a limit for scrutinisation of the loans/advances/investment from the holding company to the subsidiary. The audit committee members would need to review the utilisation of loans and/or advances from/investment by the holding company in the subsidiary exceeding INR100 crore or 10 per cent of the asset size of the subsidiary, whichever is lower. The thresholds would include existing loans/advances/investments existing as on 1 April 2019 (the date when this provision comes into force). The 2013 Act and the Listing Regulations cast responsibility on NRC members to identify and recommend persons who can be appointed in senior management based on the criteria specified. The Listing Regulations have amended the definition of senior management. As per the amendment, the persons in senior management would include all members of management one level below the CEO/MD/ whole-time director/manager (including CEO/manager, in case CEO/manager is not part of the board) and should specifically include the company secretary and the Chief Financial Officer (CFO). Further, it has been clarified that administrative staff would not be included. Also the NRC members would need to recommend the remuneration payable to the senior management. Quorum for NRC meetings (Effective from 1 April 2019) The 2013 Act does not prescribe quorum requirement for committee meetings. The Listing Regulations currently prescribe quorum requirement only for meetings of the audit committee, which is either two members or onethird of the members of the audit committee, whichever is greater, with at least two independent directors. The quorum for a meeting of the NRC would be either two members or one-third of the members of the committee, whichever is greater, with at least one independent director.

17 SEBI amendments pursuant to Kotak Committee recommendations - An overview 14 Composition and role of Stakeholders Relationship Committee (SRC) (Effective from 1 April 2019) The 2013 Act and the Listing Regulations provide detailed provisions on composition and role of the SRC and specify that the role of the SRC should be, inter alia, to consider and resolve the grievances of the security holders of a listed entity including complaints related to the transfer of shares, non-receipt of annual report and non-receipt of declared dividends. In order to increase the role of SRC, the scope and responsibilities of SRC have been significantly increased. The recommendation on composition of members is made to reshape the SRC by inducting new skills (including adding an independent director). The SRC of every listed entity would specifically look into various aspects of interest of shareholders, debenture holders and other security holders. Also the SRC should consist of at least three directors as members, with at least one being an independent director. Additionally, the chairperson of the SRC should be present in the Annual General Meeting (AGM) to answer queries of the security holders. Thus, the role of the SRC has been widened to include the following: a. Resolve security holders grievances including complaints relating to transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue of new/duplicate certificates, general meetings, etc. b. Review measures taken for effective exercise of voting rights by shareholders. c. Review of adherence to the service standards adopted by the listed entity in respect of various services being rendered by the registrar and share transfer agent. d. Review various measures and initiatives taken by the listed entity for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the security shareholders of the entity. Applicability and role of Risk Management Committee (RMC) (Effective from 1 April 2019 to top 500 listed entities) The Listing Regulations require the constitution of a RMC by the top 100 listed entities determined on the basis of market capitalisation, as at the end of the immediate previous financial year. The 2013 Act does not prescribe any such requirement. Further, the Listing Regulations does not specify the role of the RMC. The constitution of RMC would be applicable to top 500 listed entities and the role of RMC would specifically include cybersecurity. Minimum number of committee meetings (Effective from 1 April 2019) The 2013 Act does not provide a requirement for minimum number of meetings. The Listing Regulations require at least four meetings of the audit committee every year with a maximum gap of 120 days between any two meetings. However, there is no requirement of minimum number of meetings for other committees under the Listing Regulations. This recommendation is made to ensure that mandatory committees function effectively. NRC, SRC and RMC would be required to necessarily meet at least once in a year.

18 15 Timeline of the amendments to the Listing Regulations Applicability date Role of an audit committee 1 April 2019 Role of NRC 1 April 2019 Quorum for NRC meetings 1 April 2019 Composition and role of SRC 1 April 2019 Applicability and role of RMC 1 April 2019 for top 500 listed entities Minimum number of committee meetings 1 April 2019

19 SEBI amendments pursuant to Kotak Committee recommendations - An overview 16 Role of an audit committee The intent of an audit committee is fairly well understood in terms of its role and responsibilities. The Listing Regulations strengthen the role of NRC, SRC and RMC. This in turn is also expected to help an audit committee to strengthen its role as it is likely to reduce the burden on them and allow them to concentrate on matters relevant from the perspective of oversight of governance. Role of NRC As per the amendments, NRC would be required to recommend all payments (in whatever form) to be made to the senior management. Our comments Role of SRC and RMC The role of SRC has also been enhanced to increase its scope and responsibilities and require it to actively engage and communicate with major shareholders of the listed entity or group. As SRC has to play an important role, the Listing Regulations specify the quorum of the SRC meeting. Additionally, an active RMC has been envisaged in the Listing Regulations and applicable to top 500 listed entities (earlier to top 100 listed entities) and the RMC is specifically required to monitor the cybersecurity risk. Therefore, the current practice of combining audit committee and RMC may not fulfil the roles and responsibilities identified in the Listing Regulations. It is noteworthy to see that the Listing Regulations are now providing a sound framework for NRC, SRC and RMC to help these committees discharge their roles effectively. Recommendations not accepted by SEBI Two recommendations of the Kotak Committee that have not been accepted by SEBI relate to the requirement for at least two-third of the NRC to be independent and to add NRC in calculation of membership and chairpersonship limit. With regard increasing the number of independent directors in NRC, SEBI felt that sufficient norms are currently in place in the Listing Regulations i.e. NRC currently comprises nonexecutive directors and half of the directors are independent with an independent chairperson. Therefore, there is no need to increase the number of independent directors in the NRC. The SEBI received comments to not include NRC to calculate maximum number of memberships/chairpersonship as it may create shortage of right individuals to be part of the committees.

20 17 Chapter iv Monitoring group entities and related parties Governance Group governance unit (Effective from 10 May 2018) There is no provision under the 2013 Act or the Listing Regulations with respect to group governance unit/ governance committee or a group governance policy. Where a listed entity has a large number of unlisted subsidiaries: a. The listed entity may monitor their governance through a dedicated group governance unit or governance committee comprising the members of the board of the listed entity. b. A strong and effective group governance policy may be established by the entity. c. The decision of setting up of such a unit/committee or having such a group governance policy would rest with the board of the listed entity. Secretarial Audit (Effective from year ended 31 March 2019) The 2013 Act requires a secretarial audit for listed companies and unlisted companies above a certain threshold. However, there is no specific provision for secretarial audit under the Listing Regulations. Secretarial functions are critical to efficient board functioning and extending this requirement to material unlisted subsidiaries incorporated in India would be in accordance with the theme of strengthening group oversight and improving compliance at a group level. Secretarial audit would be mandatory for listed entities and their material unlisted subsidiaries incorporated in India and the report would be annexed with the annual report. Related Party Transactions (RPTs) Royalty and brand payments to related parties (Effective from 1 April 2019) The Listing Regulations do not contain any specific provision pertaining to payments made for brand and royalty to related parties. A listed entity would be encouraged to provide better disclosures on the value it derives from a brand or technology for which it has agreed to pay royalty, brand, or technical fees to the parent entity/promoters. Additionally, the disclosures are expected to provide shareholders an opportunity to comprehend the terms and conditions of such payouts. Payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than two per cent of consolidated turnover of the listed entity would be considered material. As currently required by the Listing Regulations such related party payments for royalty and brand would require approval from the shareholders on a majority of minority basis. This sub-limit of two per cent would be considered within the overall 10 per cent limit to determine material RPTs.

21 SEBI amendments pursuant to Kotak Committee recommendations - An overview 18 Approval of RPTs (Effective from 1 April 2019) The 2013 Act provides that a shareholder cannot vote to approve a contract or transaction which may be entered into by a company if such a shareholder is a related party to that transaction. The Listing Regulations have a blanket restriction on related parties voting on any resolution pertaining to a material RPT. There is a gap in the legal framework wherein the 2013 Act allowed related parties to vote on (albeit not in favour of) a RPT while the Listing Regulations require such parties to abstain from voting. All material RPTs would require an approval of the shareholders through a resolution and a related party would not vote to approve such resolutions whether the entity is a related party to the particular transaction or not. Additionally, all entities falling in the definition of related parties would not vote to approve the relevant transaction irrespective of whether the entity is a related party to the particular transaction or not. Therefore, the related parties would be allowed to cast a negative vote, as such voting would not be considered to be in conflict of interest. Materiality policy (Effective from 1 April 2019) The Listing Regulations require listed entities to formulate a policy on materiality of RPTs and on dealing with RPTs. Certain companies have formulated their materiality policy. However, they have not spelt out any threshold limits for determining materiality and therefore, enforcement becomes difficult. Disclosure of RPTs (Effective from half-year ending 31 March 2019/annual report for the year ended 31 March 2019) The 2013 Act contains provisions on disclosure of RPTs in the board s report and approval of the shareholders in certain cases, etc. Similar approval and disclosure requirements are also required in the Listing Regulations. Certain promoters/promoter group entities were not getting categorised as related parties under the Listing Regulations as they did not strictly fall under the definition of related parties as per the relevant accounting standards. Therefore, transactions with such persons were not getting categorised as RPTs under the Listing Regulations. The Listing Regulations amend the definition of related party by including all promoters/promoter group entities that hold 20 per cent or above in a listed entity. Additionally, in order to strengthen transparency on RPTs, the following would be disclosed: a. Half-yearly disclosure of RPTs on a consolidated basis, in the disclosure format required for RPT in the annual accounts as per the accounting standards, on the website of the listed entity within 30 days of publication of the half-yearly financial results. Copy of the same also to be submitted to the stock exchanges (Effective from half-year ending 31 March 2019) b. Disclosures of transactions with promoters/ promoter group entities holding 10 per cent or more shareholding would need to be made annually (even if not classified as related parties in the annual report). (Effective for annual reports filed for the year ended 31 March 2019) Strict penalties may be imposed by SEBI for failing to make requisite disclosures of RPTs. Clear threshold limits, as considered appropriate by the BoD would be required to be disclosed in the materiality policy. Such materiality policy should be reviewed by the BoD at least once every three years and updated accordingly.

22 19 Obligations in relation to subsidiaries Obligations on the board of a listed entity with respect to subsidiaries (Effective from 1 April 2019) Remuneration to directors Remuneration to executive promoter directors (Effective from 1 April 2019) The 2013 Act does not have any specific provision for the board of the listed entity to oversee the affairs of the subsidiary. The Listing Regulations impose the following specific obligations on the board of the listed entity with respect to its subsidiaries such as: a. At least one independent director must be a director in unlisted material Indian subsidiaries 2 b. Audit committee to review financial statements of unlisted subsidiaries c. Minutes of the meeting of the BoD of an unlisted subsidiary to be placed before a meeting of the BoD of the listed entity. The Listing Regulations provide the following amendments: a. Definition of material subsidiary: The definition of a material subsidiary would be revised to mean a subsidiary whose income or net worth exceeds 10 per cent (from the current 20 per cent) of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. b. Appointment of an independent director: At least one independent director on the BoD of the listed entity would be a director on the BoD of an unlisted material subsidiary, whether incorporated in India or not. In this case, material subsidiary would mean a subsidiary whose income or net worth exceeds 20 per cent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. c. Significant transaction or arrangement: The management of the unlisted subsidiary should periodically bring to the notice of the BoD of the listed entity, a statement of all significant transactions and arrangements entered into by all unlisted subsidiaries (currently the disclosure is required for material subsidiaries). The 2013 Act prescribes a ceiling on the compensation that can be paid to directors. There are no specific provisions in the Listing Regulations on maximum remuneration payable to executive promoter directors.the Kotak Committee noted cases of disproportionate payments made to executive promoter directors as compared to other executive directors. Shareholders approval by special resolution in a general meeting would be required if the total remuneration paid to the following: a. A single executive promoter director exceeds INR5 crore or 2.5 per cent of the net profit, whichever is higher or b. All executive promoter directors exceeds five per cent of the net profits. Such an approval would be valid only till the expiry of the term of such director. Net profits would be calculated under Section 198 of the 2013 Act. Remuneration to non-executive directors (Effective from 1 April 2019) In case of non-executive directors, the 2013 Act requires the approval of shareholders for any remuneration payable to such directors exceeding one per cent of the net profits in case there is a MD or whole time director or manager and three per cent in other cases. The Listing Regulations require the board to recommend all fees and compensation to be paid to non-executive directors. The Kotak Committee observed that certain non-executive directors (generally promoter directors) were receiving disproportionate remuneration from the total pool available vis-à-vis all other non-executive directors. 2. The Listing Regulations provide the threshold for determining material subsidiary as a subsidiary whose income or net worth exceeds 20 per cent of the consolidated income or net worth of the listed entity.