COMMENTS ON RECOMMENDATIONS BY COMMITTEE ON CORPORATE GOVERNANCE UNDER THE CHAIRMANSHIP OF MR. UDAY KOTAK On October 5 th 2017, the Uday Kotak Committee on Corporate Governance submitted its report to SEBI on recommendations in corporate governance regulations. Following is our overall view on the recommendations by the Committee: Many recommendations are prescriptive in nature which presents a risk that companies may not adopt the spirit but undertake a tickbox approach for compliance. To avoid this, the recommendations should be categorised into 2 codes: Code of Acceptable Governance and Code of Desirable Governance This puts the responsibility on the companies themselves as to what Code they desire to adopt. The companies choice will also send a clear message to the investors based on which they can make informed investment decisions. Following are InGovern s detailed feedback on the recommendations by the Committee in the required format. We have mailed this feedback to SEBI while also uploading on our website www.ingovern.com for public view. COMMENTS ON RECOMMENDATIONS PAGE 1
1 Minimum Number of As per InGovern s report India 2016 Board Analysis published Directors on a Board in October 2016, the average size of the Board of top 100 Indian listed companies was 11 with the smallest Board size of 6. We agree with the recommendation of having a minimum of 6 members on the Board of listed companies. A Board with lesser than 6 members will not have sufficient diversity of views. 2 Gender Diversity on the Disagree As per InGovern s report India 2016 Board Analysis published Board in October 2016, there were 133 women directors on the Board of top 100 Indian listed companies. The proportion of women independent directors is very low. If the committee s aim is to enhance gender diversity, then more women directors should be mandated. There is no compelling logic that the women directors should be independent directors. Hence, we disagree with this recommendation. It should be left to the companies to decide how they want to benefit from diversity, and hence a mandated number of woman directors is not desirable. 3. Attendance of Directors We agree with the committee s intention to enhance directors Directors must attend at least COMMENTS ON RECOMMENDATIONS PAGE 2
with revision attendance in Board meetings. However, we believe that 50% is too low a figure and also that attendance in mandatory subcommittees and AGM should also be taken into consideration to calculate aggregate attendance. 75% of the Board meetings and all mandatory subcommittees (if they are a member) put together, as well as the last AGM. If this is not the case, the continuation should be put up for ratification by shareholders. 4. Disclosure of Expertise/Skills of Directors 5. Approval for n We agree with the recommendation as we are of the opinion that The age in the executive Directors on with approval of (re)appointment and continuation of directorship of recommendation should be Attaining a Certain Age revision nonexecutive directors that are more than 70 years old should 70 and not 75. be taken through a special resolution. There is no logic of having different ages for executive and nonexecutive directors. 6. Minimum Number of Disagree The Committee s intention behind this recommendation is that This recommendation may be COMMENTS ON RECOMMENDATIONS PAGE 3
Board Meetings Boards should devote more time towards discussing issues like strategy, succession planning, budgets, risk management, ESG, board evaluation, etc. However, we are of the opinion that Boards can meet any number of times on their own and/or these issues can be delegated by the Board to various subcommittees such as risk management committee, ESG committee, finance committee, etc. The topics for discussion should be left to the Board to decide. withdrawn. 7. Updation of Knowledge of the Board Members 8. NED Engagement with the Management 9. Quorum for Board Meetings 10. Separation of the Roles This should be adopted as a mandatory code rather than a of nexecutive discretionary code. It is essential to prevent concentration of Chairperson and executive powers and responsibilities in the hands of one COMMENTS ON RECOMMENDATIONS PAGE 4
Managing Director/CEO individual. 11. Matrix Reporting Structure 12. Maximum Number of Private and foreign (private and listed) company directorships Directorships also require time and efforts of an individual. SEBI should also look at this aspect and introduce caps/ limits if it feels necessary. 13. Disclosures on Board Evaluation 14. Minimum Number of Independent Directors InGovern, in its Board Evaluation Practices in India 2015 report published in May 2016 had called for similar disclosures as recommended by the Committee. Hence, we agree to this recommendation. The Boards of listed companies must have atleast 50% representation by Independent Directors. This ensures that the independent directors are not in a minority and their voice is not subdued in a majority of nonindependent directors which is the case of many foreign listed subsidiaries in India. COMMENTS ON RECOMMENDATIONS PAGE 5
15. Eligibility Criteria for This will prevent many cases where though being a relative of Independent Directors promoter, the individual is classified as an independent director as he/she is not a relative as per Companies Act. The recommendation also introduces the risk of boardinterlocking which needs to be put on a check. 16. Minimum Disagree There is no need to fix any lower limit on compensation to This recommendation may be Compensation to independent directors. It should be up to the discretion of the withdrawn. Independent Directors company. 17. Disclosures on Resignation of Independent Directors 18. Directors and Officers Disagree There is no need to provide D&O insurance to independent This recommendation may be Insurance for directors. We can take the example of Berkshire Hathaway withdrawn. Independent Directors which doesn t provide any such insurance to its directors stating that they should be held accountable and face consequences for their actions. 19. Induction and Training COMMENTS ON RECOMMENDATIONS PAGE 6
of Independent Directors 20. Alternate Directors for An independent director s contribution to the company is Independent Directors limited to his/ her attendance in the Board and subcommittee meetings. Attending meetings has been made easier by allowing video conferencing facilities. Considering this, we think that alternate directors for independent directors are not necessary. 21. Lead Independent The requirement of a Lead Independent Director must be made Director in Companies mandatory in India. with nindependent Chairperson 22. Exclusive Meeting of This is not an amendment but a suggestion. The company has Independent Directors the discretion to hold any number of IDonly meetings as it feels necessary, during the year. 23. Casual Vacancy of Office of Independent Director 24. Minimum Number of Disagree It should be left at the discretion of the company to hold as many This recommendation may be COMMENTS ON RECOMMENDATIONS PAGE 7
Committee Meetings committee meetings as they require. withdrawn. 25. Role of Audit Committee 26. Composition of To ensure N & R committee's independence, it is imperative that The N & R committee should mination and with all the members of the committee should be independent have only independent Remuneration revision directors. directors as members. Committee 27. Role of mination and Remuneration Committee 28. Composition and Role of Stakeholders Relationship Committee 29. Quorum for Committee Meetings 30. Applicability and Role of We agree with the recommendation to make risk management Risk Management committee mandatory for top500 companies from the current COMMENTS ON RECOMMENDATIONS PAGE 8
Committee top100 companies and also to include cyber security and related risks as area under this committee. 31. Membership and Chairpersonship Limit 32. Information Technology Committee 33. Obligation on the Board of the Listed Entity with Respect to Subsidiaries 34. Group Governance Unit/Committee and Policy 35. Secretarial Audit 36. Sharing of Information with Controlling Promoters/Shareholders COMMENTS ON RECOMMENDATIONS PAGE 9
with minee Directors 37. Reclassification of Promoters/Classification of Entities as Professionally Managed 38. Disclosure of Related The company should also be mandated to disclose rationale for Party Transactions related party transactions, i.e., why was it necessary to enter into a transaction with the concerned related party. 39. Approval of Related Party Transactions 40. Royalty and Brand We agree with the comment made by Ministry of Corporate Reduce royalty/ brand Payments to Related with Affairs to reduce the royalty/ brand payment threshold from 5% payment threshold from 5% Parties revision to 2%. to 2%. 41. Remuneration to We agree with the recommendation of seeking shareholders Executive Promoter approval through a special resolution. COMMENTS ON RECOMMENDATIONS PAGE 10
Directors 42. Remuneration of nexecutive Directors 43. Materiality Policy 44. Submission of Annual Reports 45. Disclosures Pertaining to Holders of Depository Receipts 46. Disclosures Pertaining to Credit Rating 47. Searchable Formats of Disclosures 48. Harmonization of Disclosures 49. Disclosures Pertaining to COMMENTS ON RECOMMENDATIONS PAGE 11
Analyst/Institutional Investor Meets 50. Disclosures of Key Changes in Financial Indicators 51. Utilisation of Proceeds of Preferential Issue and Qualified Institutional Placement 52. Disclosures in Valuation Reports in Schemes of Arrangement 53. Disclosures Pertaining to Directors 54. Disclosures Pertaining to Disqualification of COMMENTS ON RECOMMENDATIONS PAGE 12
Directors 55. Disclosures on Website 56. Disclosures of Subsidiary Accounts 57. Disclosures on Longterm and Mediumterm Strategy 58. Prior Intimation of Board Meeting to Discuss Bonus Issue 59. Views of Committees t Accepted by the Board of Directors 60. Commodity Risk Disclosures 61. Audit Qualifications COMMENTS ON RECOMMENDATIONS PAGE 13
62. Independent External We agree with the recommendations by the MCA that the Opinion by Auditors external expert, if appointed, should be independent of the management as well as the auditors. 63. Group Audits 64. Quarterly Financial While we agree with disclosure of consolidated financial results The cashflow statements Disclosures with on a quarterly basis, we do not understand the logic behind should be disclosed on a revision disclosure of cashflow statements on a halfyearly basis. They quarterlybasis. too, should be disclosed in quarterly basis to the shareholders. 65. Internal Financial Controls 66. Disclosure of Reasons of Resignation of Auditors 67. Disclosures on Audit and naudit Services Rendered by the Auditor 68. Audit Quality Indicators COMMENTS ON RECOMMENDATIONS PAGE 14
69. Disclosures of Credentials and Audit Fee of Auditors 70. INDAS Adoption 71. Powers of SEBI with Respect to Auditors and Other Statutory Third Party Fiduciaries for Listed Entities 72. Strengthening the Role of ICAI We have no comments to make since this recommendation is outside the scope of SEBI. 73. Timeline for Annual Disagree As per our analysis of the companies constituting the Nifty50 General Meetings of index, more than 3/4 th of the 50 companies held their AGMs Listed Entities before September. Since a large majority is already holding its AGM well before the last month, there is no point in making it a mandatory practice and force all top100 listed companies to follow the same. COMMENTS ON RECOMMENDATIONS PAGE 15
Secondly, if all top100 companies are required to hold AGMs by August 31, 2018, there is a high probability that they will hold the AGMs in August, which will again lead to bunching up of AGMs in August. It should be left to investors to judge the quality of companies based on when they conduct AGMs. 74. Stewardship Code There is a need to adopt a common stewardship code for all domestic institutional investors. 75. Treasury Stock 76. Resolutions sent to Shareholders without Board s Recommendation 77. Governance of PSEs PSEs should be treated equally with other companies in terms of compliance with principles of corporate governance. 78. SEBI Leniency COMMENTS ON RECOMMENDATIONS PAGE 16
Mechanism 79. Capacity building in SEBI We have no comments. COMMENTS ON RECOMMENDATIONS PAGE 17
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