An independent survey found that implementing the corporate governance reforms suggested by Uday Kotak-led Sebi panel will require many companies to overhaul their boards. Photo: Aniruddha Chowdhury/Mint (Aniruddha Chowdhury/Mint)
An independent survey found that implementing the corporate governance reforms suggested by Uday Kotak-led Sebi panel will require many companies to overhaul their boards. Photo: Aniruddha Chowdhury/Mint (Aniruddha Chowdhury/Mint)

Corporate governance reforms: Sebi may find it tough to act on Kotak panel recommendations

The corporate affairs ministry has opposed half of the corporate governance reforms suggested by the Uday Kotak-led Sebi panel

Mumbai: The latest proposals by the stock market regulator’s corporate governance panel could turn out to be a tough sell.

The corporate affairs ministry has opposed half of them, and an independent survey found implementing them will require many companies to overhaul their boards.

In a report released on Thursday, a 25-member Securities and Exchange board of India (Sebi) panel led by banker Uday Kotak suggested greater powers for independent directors, chairmanship solely for non-executive directors, and more steps for transparency and disclosures at publicly listed companies.

If these proposals are implemented, at least 256 companies on NSE will need to increase their board size and 637 will have to appoint a woman director, a survey by Prime Database showed.

In its dissent note to the proposals, the ministry of corporate affairs (MCA) opposed 12 out of the 24 key proposals and said the changes are not feasible and in many instances will cause a regulatory overlap and unnecessarily make the functioning of boards tougher.

The panel recommended raising the minimum number of directors in listed firms from three to six. The MCA opposed this proposal, saying this will increase costs for companies.

The MCA also disagreed with the panel’s view on women board members.

While the panel suggested every listed firm should have at least one woman independent director, the MCA said there is no need to have a woman independent director, but a woman director not related to the promoters will bring in gender diversity.

At present, of 1,670 firms considered by Prime Database for the survey, 154 companies have five directors, 82 have four, 19 have only three and one company just has two, says the data shared with Mint. These 1,670 firms account for 99% of market cap of NSE listed companies.

In order to ensure the boards are fair to all shareholders in their approach and function more transparently, the Kotak committee suggested that at least 50% of the board members be independent directors as compared to the current requirement of 33%.

Even though MCA has not commented on this proposal, there are at least 326 companies (of the 1,670 companies listed on NSE) which will have to change the composition of their boards to ensure that at least half of them are independent.

“We have kept the report forward-looking; minimum number of directors and a women director are all to ensure that going forward, firms have robust boards," said J.N. Gupta, co-founder and managing director of Stakeholder Empowerment Services, and member of the Sebi committee.

Amit Tandon, managing director of Institutional Investors Advisory Services and also a committee member, says there are a handful of companies that will not be able to meet the requirement of six directors. “However, the BSE 500 companies are on a comfortable ground as many of them already have more than six directors. The idea is to have diversity of views on board, and six directors is a good number," said Tandon.

The Sebi committee further said all listed firms should be required to pass a special resolution and ask all shareholders if it decides to appoint anyone aged 75 or above as a non-executive director. At present, there are at least 972 non-executive directorship positions occupied by individuals aged 75 or more. 

MCA said this proposal will unduly impinge upon the freedom of the management of the company to decide its non-executive directors.

In order to ensure the company board is independent of the company’s management, the Sebi panel said chairmanship should be solely non-executive, and suggested segregating the roles of chairman and managing director (CMD).

Out of 1,670 firms listed on NSE, there are at least 640 firms that will have to segregate these roles and 860 firms will have to reappoint their chairman on a non-executive role, according to the data by Prime Database.

“As far as splitting of CMD post is concerned, we have proposed three years for companies to comply; so this is doable," committee member Tandon said.

Currently, there is no Sebi rule on remuneration of independent directors in listed firms and companies adhere to norms laid down in Companies Act. The panel suggested that independent directors should be paid at least lakh a year for top 500 firms and the minimum sitting fees per board meeting for these directors should be 50,000 for the top 100 firms.

According to Prime Database, in 2016-17, considering only those independent directors who were on boards from 1 April 2016 till 31 March 2017 (excluding all mid-year appointments and cessations), in 3,755 of the 5,686 independent directorship positions (or 66 %), remuneration for independent directors was below Rs5 lakh. In case the requirement suggested by the Sebi panel was there in 2016-17, an additional Rs132.63 crore would have to be paid to independent directors by corporate India, Prime Database said.

MCA opposed these norms entirely, stating there is no need to fix the lower limit of compensation. Even on the changes on composition of nomination and remuneration committee in listed companies, MCA said the proposals, if implemented, will have the effect of making the provision in the Companies Act, completely non-effective, which is not desirable.

“Basic remuneration for independent directors (IDs) is to ensure that IDs are compensated adequately and perform their duties," committee member Gupta said.

MCA has also opposed the panel’s suggestion that listed firms mandatorily disclose resignation of independent directors and the reasons thereof. MCA has argued that if this proposal is accepted, clarity will be required as to what will be the consequence of saying there was no material reason for resignation, when there was actually a material reason.

Since 1 January 2014, for as many as 2,046 out of a total of 2,703 independent directorship resignations (76%), no reason was given or reasons such as personal reason, pre-occupation etc. were given.

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