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Decisions of SEBI on recommendations of Kotak Committee Report

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Corporate Governance Framework

 

The Corporate Governance refers to the minimum governance standards which every corporate need to follow to protect the interests of all stakeholders.

 

Over the past decade, policymakers in India have been acutely conscious of the importance of corporate governance – several committees, including those under the chairmanship of Mr. Kumar Mangalam Birla, Mr. Narayana Murthy and Mr. Naresh Chandra, have made valuable recommendations which have been largely adopted. Yet, governance practices even in some of the most reputed publicly listed Indian companies have come under question on several dimensions.

 

Given recent trends of lapses of corporate governance norms on many counts which took place in varied forms, not surprisingly, there’s been a renewed focus on improved corporate governance: better structures, more rigorous checks and balances, and greater independence of all key gate-keepers including boards and auditors. Some of such improved corporate governance measures taken in past have started seeing the light of the day and seemingly benefiting the stakeholders. One such measure is mandatory rotation of statutory auditors in listed companies. Increasingly, in recent time, there have been many instances wherein statutory auditors, who were appointed for the first time by the auditee client under mandatory auditor rotation, have expressed concerns over the financial state of affairs of the listed auditee client and have tendered their resignation.

 

From regulatory perspective, the corporate governance norms are contained in various provisions of the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”).

 

Formation of Committee on Corporate Governance

 

On June 02, 2017, SEBI had set up a committee (“Kotak Committee”) under the Chairmanship of Shri Uday Kotak, Executive Vice Chairman and Managing Director of Kotak Mahindra Bank to advise on issues relating to corporate governance. The other members in the Kotak Committee included the representatives of government, industry, Corporate India, stock exchanges, professional bodies (including Mr. Nilesh Shivji Vikamsey, President of ICAI), Investor groups, chambers of commerce, law firms (including Ms. Zia Mody, Managing Partner of AZB & Partners and Mr. Cyril Shroff, Managing Partner of Cyril Amarchand Mangaldas), accounting firms (including Mr. N Venkatram, Managing Partner and CEO of Deloitte India and Mr. Arun M Kumar, Partner & CEO of KPMG India), academicians and research professionals and SEBI.

 

Terms of the reference of the Kotak Committee

 

With the aim of improving standards of Corporate Governance of listed companies in India, the Kotak Committee was requested to make recommendations to SEBI on the following issues:

 

  1. Ensuring independence in spirit of Independent Directors and their active participation in functioning of the company;
  2. Improving safeguards and disclosures pertaining to Related Party Transactions;
  3. Issues in accounting and auditing practices by listed companies;
  4. Improving effectiveness of Board Evaluation practices;
  5. Addressing issues faced by investors on voting and participation in general meetings;
  6. Disclosure and transparency related issues, if any;
  7. Any other matter, as the Committee deems fit pertaining to corporate governance in India.

 

Report of the Kotak Committee

As the Kotak Committee was requested to submit its report within four months, it submitted its report on October 5, 2017 containing the exhaustive recommendations on the burgeoning issues in the Corporate Governance in India, which is indicative of the enormous time and efforts devoted by the Kotak Committee members during the short span of four months. The report had set out the recommendations along with the rationale and the expected timeline for implementation of such recommendations. Kotak Committee Report contains a total of 78 broad recommendations concerning the corporate governance requirements for all listed companies grouped under 8 chapters apart from other specific recommendations contained in other 3 chapters.

 

 

In order to take into consideration the views of various stakeholders, the report of the Kotak Committee was placed on the SEBI website for public comments, which were required to be submitted by November 4, 2017. Comments were received from a variety of stakeholders including industry, government, global associations, institutional investors, lawyers, etc.

 

Finally, SEBI in its board meeting held on March 28, 2018, considered the Kotak Committee recommendations and the public comments received thereon. SEBI adopted threefold approach in dealing with the recommendations of the Kotak Committee viz.

  1. a) certain recommendations accepted without any modifications (“Complete Acceptance”);
  2. b) certain recommendations accepted with modifications (“Partial Acceptance”); and
  3. c) certain recommendations have been referred to various agencies (i.e. government, other regulators, professional bodies etc.) considering that the matters involved related to them. Such recommendations, inter-alia, include strengthening the role of ICAI, internal financial controls, adoption of Ind-AS, treasury stock, governance aspects of PSEs, etc.

 

SEBI Press Release dated March 28, 2018 announcing the decisions taken in the SEBI Board Meeting held on March 28, 2018 just mentioned few details regarding the decision of SEBI on recommendations of the Kotak Committee. Subsequently, SEBI notified SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 on May 9, 2018 to formally enforce the recommendations of Kotak Committee.

 

In this article, we have restricted coverage of 2 critical chapters namely i) Composition and Role of the Board of Directors; and ii) Accounting and Audit Related Issues, each chapter containing 13 broad recommendations. These are the two crucial components for the existence of good corporate governance practices. It is to be noted that all recommendations are in the context of a listed company. The recommendations made by the Kotak Committee vis-à-vis the existing regulatory requirements, the rationale for the recommendations and the corresponding amendment in SEBI LODR are summarised hereinafter.

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