India: India's Tough New Corporate Governance Regime – Impact On Promoters

Last Updated: 29 January 2019
Article by Rishabh Shroff, Tanmay Patnaik and Kavya Keshari

In recent years, the issue of corporate governance in India has been a hot topic of discussion. As India Inc. has grown by leaps and bounds, corporate India's attention has evolved from simple 'management' to 'governance', and now 'effective governance'. Given the unique challenges that India Inc. faces due to the predominance of family run businesses, there is a pressing need to move from the 'Raja' and 'Praja' model of governance (wherein the self-interests of the promoter family precedes the interests of other stakeholders) to the 'Custodian' model of governance (which is designed to serve the interests of all stakeholders). While some promoters have consciously worked hard to establish a "Ram Rajya" (a democratic-righteous rule), many are still reluctant to yield power and fear that it may lead to an abdication of their throne.

Kotak Committee

In June 2017, Securities and Exchange Board of India (SEBI), constituted a high powered committee under the chairmanship of Mr. Uday Kotak (Kotak Committee) with the aim of improving governance standards of Indian listed companies which came out with detailed recommendations (Kotak Report)1. The legal experts on the Kotak Committee included our Firm's Managing Partner, Mr. Cyril Shroff.

On March 28th, 2018, SEBI's Board decided on these recommendations whereby (i) 40 out of 80 were accepted without any modifications; (ii) 15 were accepted with modifications; and (iii) 18 were rejected.

Kotak Committee – Key recommendations accepted by SEBI

The Kotak Committee suggested numerous amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which will consequently impact all listed entities. In this article, we dissect some of the critical proposals and their impact on Indian Promoters. For a full list of recommendations accepted by SEBI, please refer to the press release2.

  • Moves to introduce newer faces in the boardroom

Ceiling on maximum number of Directorships

The maximum number of listed entity directorships held by a single individual will be reduced from 10 to 8 by April 1st, 2019 and to 7 by April 1st, 2020. Further, any person who is a Managing Director (MD) or a whole time director in a listed entity can no longer serve as an independent director in more than 3 listed entities. 

Multiple directorships often leads to a director not being able to devote sufficient time to a particular company. While this may cause practical difficulties in the short run, it will reduce the 'step child' treatment meted out by directors to certain companies.

Separation of 'C' from 'MD'

With effect from April 1st, 2020, top 500 listed companies can no longer have the same individual as the chairperson as well as the MD / Chief Executive Officer (CEO). There may be a further requirement from April 1st, 2022 which stipulates that only a non-executive director can be appointed as a chairperson.

The separation of role of the chairperson and the MD / CEO will hopefully bring about a higher level of involvement of the MD in day-to-day affairs of the company as they will no longer be precariously juggling two extremely demanding roles. However, this may impose a risk of conflict by creating twin power centers.

  • Independent Directors

Revised eligibility criteria; exclusion of board inter-locks

Persons who constitute the 'promoter group' of a listed company cannot be appointed as independent directors. The amendment also prohibits board inter-locks arising due to common non-independent directors on boards of listed companies.

To illustrate: If Mr. A is an executive director of ABC Co. and is also an independent director of XYZ Co., then no non-independent director of XYZ Co. can be an independent director on the board of ABC Co.

Until now, it was common practice for promoters to be independent directors in each other's companies or to appoint relatives as independent directors. This amendment has widened the net of exclusions so as to implement a system of 'true independence'.

Compulsory to have a woman independent director

Boards of top 500 listed companies in India will now be required to have at least 1 woman as an independent director by April 1st, 2019 and of top 1000 listed companies by April 1st, 2020.

SEBI had previously made it compulsory for all boards to have at least 1 woman director. This move is a step further, as appointment of a woman 'independent' director will curtail the 'check the box' approach of placing a female family member in the board room.

  • Board Composition

Minimum 6 directors on a board

Boards of top 1,000 listed companies by April 1st, 2019 and top 2,000 by April 1st, 2020 will be required to comprise of at least 6 directors instead of the current minimum requirement of 3 directors.

Whilst having more directors will enable the board to discharge its duties in a robust manner, boards with even directorships may face frequent dead lock situations.

Quorum for Board Meetings

The quorum for board meeting shall be 1/3rd of the size of the board or 3 members, whichever is higher for top 1,000 listed companies from April 1st, 2019, and for top 2,000 by April 1st, 2020.

  • Disclosure of expertise of directors

All listed companies will now be required to disclose in their annual report a matrix setting out the competencies that it 'believes' its directors should possess and the skill set that each director 'actually' possesses and additionally, from March 2020, disclose their names in the matrix.

While this may ensure constitution of a wholesome board, India Inc. has seen a great many examples wherein individuals with lesser qualifications have brought significant value addition to the board.

  • Good governance to trickle down to subsidiaries

The definition of the term "material subsidiaries" now includes subsidiaries whose income or net worth exceeds 10% of the consolidated income or net worth of the listed company and its subsidiaries. Additionally, at least 1 independent director of the listed entity will be required to be a director of unlisted foreign material subsidiaries. Further, all listed companies need to carry out secretarial audit of their Indian material subsidiaries and disclose the same in their annual report.

  • Effect on Related Party transactions

Enhanced disclosure of RPTs and related parties to be permitted to vote against RPTs

Previously, many transactions with promoter/promoter group entities were not being disclosed as such entities were not getting classified as "related parties". From April 1st, 2018, all promoters / promoter group entities that hold 20% or above in a listed company will be considered as "related parties". All related party transactions as well as transactions with promoters/promoter group entities holding 10% or more will need to be disclosed half-yearly on a consolidated basis. Further, related parties will now be allowed to cast a negative vote on related party transactions requiring shareholders' approval as such a vote cannot amount to a conflict of interest.

Royalty and brand payments to related parties

From 1st April 2018, payments made to related parties on account of brand usage or royalty which are higher than and exceed 2% of consolidated turnover will require shareholders' approval.

What does all this mean for corporate governance in India?

The changes brought about by the recommendations of Kotak Committee will keep naughty promoters in check, and will protect the interests of the weaker "Praja" of the corporate world. Whilst their implementation could pose immediate practical challenges for some listed entities and an increased cost of compliance, it will ensure better utilisation of the time of promoters and establish sound governance systems across all listed companies. True democracy will finally be institutionalized in India Inc.

Footnotes

1 https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html

2 https://www.sebi.gov.in/media/press-releases/mar-2018/sebi-board-meeting_38473.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions