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Home / Market / Stock-market-news /  Sebi panel’s proposals on key issues and current norms that govern them

Mumbai: The 25-member panel of the Securities and Exchange Board of India (Sebi) on corporate governance, led by Uday Kotak, on Thursday, proposed a slew of changes in existing capital market rules to enhance fairness and transparency in business dealings by listed firms, confer more powers to independent directors, improve the quality of audits and improve disclosure standards for listed firms, among others.

Here’s a list of key proposals and how they compare with current rules.

Disclosure and transparency

Current norm: No disclosure norm for depository receipt (DR) holders of listed firms.

Proposal: Names of DR holders to be disclosed if such holding amounts to 1% or more shareholding in the company. Company to obtain information about all DR holders once every month.

Current norm: No specific disclosure norm for listed firms on credit ratings.

Proposal: Ratings on all outstanding instruments to be revealed and updated immediately in the event of any rating revision. Annual reports to mention all rating actions.

Current norm: No norm for disclosures on utilisation of proceeds from qualified institutional placements (QIPs)/preferential allotments.

Proposal: Annual report should include details of funds raised through these routes

Current norm: No norm on disclosure of the basis of valuations in schemes of arrangements.

Proposal: Valuation report standards be improved. Specific disclosure on assets, liabilities and turnover in the valuation reports of such schemes.

Current norm: No norm to disclose company’s business strategy.

Proposal: Company to disclose medium- and long-term strategies in annual reports as per the board’s suggestion.

Accounting and audit-related issues

Current norm: If the impact of audit qualifications is not quantifiable, the management shall make an estimate and the auditor shall review the same. If the management is unable to make an estimate, it shall provide the reasons.

Proposal: The management to mandatorily make estimate and the auditor has to review the same. The management may be relieved from providing estimate on matters like going concern or sub-judice matters.

Current norm: No norm to enable an auditor to get external opinion on audit.

Proposal: In case an auditor is not satisfied with the opinion of the management or of any expert, it will have the right to independently obtain external opinions and such costs will be borne by the company.

Current norm: No specific norms for dealing in treasury stock.

Proposal: In case a company holds its shares in its name or of any trust, no voting rights attached to such shares shall be exercisable with effect from 1 April 2021.

Leniency mechanism

Current norm: Central government has powers to grant immunity to anyone from prosecution/penalty imposition. But there is no specific norm to empower Sebi to grant leniency or to protect a whistleblower or an informant about any alleged violation inside a listed company.

Proposal: Any entity making vital disclosures on alleged defaults may be given a lesser penalty or be waiver by Sebi. Additionally, Sebi can treat the identity of the informant and the information as confidential and require the concerned company to offer protection to the informant against victimisation.

Composition and role of directors

Current norm: No minimum number of directors specified. At least one woman director must. Directors’ attendance not mandated. No specific norm on disclosure of director’s expertise.

Proposal: Companies need to have minimum six directors, and at least one woman independent director. If he/she does not attend one board meeting in one fiscal year, then re-appointment to be ratified by shareholders. Disclosure in annual report of relevant skills (business and sector) of directors.

Current norm: Companies hold four board meetings to discuss financial results.

Proposal: Additional fifth meeting on succession planning, governance and strategy

Current norm: No norm to keep CMD post separate. No independent director can serve more than seven firms.

Proposal: Chairperson of the board cannot be the managing director of the company. An independent director can be on the board of directors of eight firms.

Current norm: Minimum 33% of the board to consist of independent directors. A promoter cannot become an independent director.

Proposal: Minimum 50% of the board to consist of independent directors . An independent director cannot be a member from the promoter group.

Current norm: With regard to remuneration, based on the provisions of Companies Act, a maximum of Rs1 lakh sitting fee stipulated.

Proposal: Minimum fee of Rs5 lakh overall, minimum sitting fee of Rs50,000.

Current norm: No specific provision on role of audit committees.

Proposal: Reviewing the utilization of loans and advances from investment by the holding company.

Composition of nomination and remuneration committee (NRC)

Current norm: At least 50% of the directors shall be independent directors.

Proposal: Two-thirds of the members of the committee shall be independent

directors.

Membership and chairpersonship limit

Current norm: A director shall not be a member in more than 10 committees or act as chairperson of more than five committees. Sebi LODR (Listing Obligations and Disclosure Requirements) considers only the Audit Committee and Stakeholders Relationship Committee.

Proposal: In determining the maximum number of committees in which a director can be a member/chairperson, NRC should also be included and thereby treated at par with the audit committee and stakeholders’ relationship committee.

Obligation on the board of the listed entity with respect to subsidiaries

Current norm: Material subsidiary shall mean a subsidiary whose net income exceeds 20% of the consolidated income or net worth of the listed entity and its subsidiaries.

At least one independent director on the board shall be a director on the board of directors of an unlisted material subsidiary, incorporated in India.

Proposal: Material subsidiary shall mean a subsidiary whose net income exceeds 10% of consolidated income or networth of the listed entity and its subsidiaries.

At least one independent director shall be a director on the board of an unlisted material subsidiary, whether incorporated in India or not.

Current norm: No specific provision on the scope of secretarial audit.

Proposal: Listed entity shall undertake secretarial audit and annex with its annual report, a secretarial audit report, given by a company secretary in practice.

Re-classification of promoters/classification of entities as professionally managed

Current norm: The existing promoters may be re-classified as public shareholders, subject to approval of the shareholders in a general meeting.

Proposal: The existing promoter(s) may be re-classified as public shareholders, on receipt of request from promoter(s), subject to approval of the board of directors and the shareholders in a general meeting in which the promoter, promoter group and persons acting in concert shall not vote.

Approval of related party transactions

Current norm: All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

Proposal: All material related party transactions shall require approval of shareholders through resolution and no related party vote to approve on such resolutions whether the entity is related to the particular transaction or not.

Royalty and brand payments to related parties

Current norm: The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions.

Proposal: Any transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds 5% of the annual consolidated turnover of the listed entity.

Remuneration of non-executive directors

Current norm: No specific provision.

Proposal: 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.

Materiality policy

Current norm: The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions.

Proposal: The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions, including clear threshold limits duly approved by the board of directors. Such policy on materiality shall be reviewed by the board of directors at least once every three years and updated accordingly.

Jayshree P. Upadhyay and Bidya Sapam contributed to this story

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