Preamble
On June 02, 2017 Securities and Exchange Board of India (“SEBI”) constituted a committee (“Committee”) under the chairmanship of Shri Uday Kotak, with the aim of improving standards of corporate governance of listed companies in India. The Committee submitted its report (“Report”) in October 2017 proposing various amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). SEBI after considering comments received from various stakeholders accepted the recommendations of the Committee (some with and some without modifications) in March 2018.
This article aims to summarize certain significant “To Dos” for a listed entity and its managerial personnel pursuant to acceptance of the Committee’s recommendations by SEBI. For ease of understanding the said “To Dos” have been categorized under four buckets, i.e., relating to the (i) Composition and meetings of Board (ii) related party transactions (iii) constitution and role of the committees of board; and (iv) other management and administrative affairs of the listed entity. Most of these “To Dos” will be effective (save and except otherwise provided) from April 01, 2019.
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Composition and meetings of the Board
- Minimum number of board of directors
The listed companies would be required to have minimum of six (6) directors on its board. The top 1000 listed companies by market capitalization would be required to comply with this requirement by April 01, 2019 and top 2000 listed companies by April 01, 2020.
- Quorum for board meetings
The quorum for the board meetings would be 1/3rd of the total strength of board or 3 directors, whichever is higher with the presence of at least one independent director. The top 1000 listed companies by market capitalization would be required to comply with this requirement by April 01, 2019 and top 2000 listed companies by April 01, 2020.
- No “CMD” but “C” and “MD”
The chairperson of the board of the listed entity is required to be a non-executive director and shall not be related to the Managing Director or Chief Executing Officer (in accordance with the definition of ‘relative’ prescribed under the Companies Act, 2013). The requirement would apply to top 500 listed companies with effect from April 01, 2020. The requirement would significantly impact some blue chip listed companies of India who have same individual as the Chairman and Managing Director (CMD) as such companies would now be required to restructure their board in accordance with this requirement.
- Maximum number of directorship of the listed companies
The maximum number of directorships which a person can hold in the listed companies shall not be more than eight (8) with effect from April 01, 2019 and seven (7) with effect from April 01, 2020. Further, if a person is appointed as a whole-time director or a managing director in listed company, shall not serve as an independent director of more than three (3) listed companies.
- Woman-independent director
The top 500 listed companies are required to have at least one-woman independent director on their board by April 01, 2019 and top 1000 listed companies shall have at least one independent woman director by April 01, 2020.
- Independent director
The scope of independent directors has also been widened. It has been clarified that the person who is the promoter of the listed company or a member of its promoter group, or is a promoter of its holding, subsidiary or associate company of listed company shall not be appointed as its independent director. This requirement shall be applicable with effect from October 01, 2018.
- No “Board-Interlocks”
A person who is appointed as a non-independent director of a company on whose board any non-independent director of the concerned listed company is an independent director, shall not be appointed as an independent director of the concerned listed company.
Illustration: Mr. X is a non-independent director on the board of a company A (listed company) and he is also appointed as the independent director on the board of a company B. In such a case, no non-independent director on the board of company B shall be appointed as an independent director on the board of company A (listed company).
The above requirement is also applicable with effect from October 01, 2018.
- Related Party Transactions (RPTs)
- Certain ‘promoters’ to be considered as related parties
The person or entity belonging to the promoter group and holding 10% or more shareholding of the listed company would now be considered as the related parties of such listed company. The Companies Act, 2013 specifies that the body corporates who are associates (i.e. control of 20% or more voting power) of a company shall be related parties of such company.
However, the expression ‘promoter group’ also includes individuals who are related to promoters. Therefore, the individuals belonging to promoter group and holding 20% shareholding of the listed entity shall be deemed as the related party of such listed entity.
- Enhanced disclosure of RPTs
Every listed company from half year ending on March 31, 2019 shall provide a disclosure of RPTs to the stock exchanges in the format specified in the accounting standards within 30 days of date of publication of its financial results. Such disclosure shall also be published on the website of the listed company.
- Royalty and brand payments to related parties
All listed companies shall require approval of its shareholders for payment of royalty or brand usage to a related party if such payment in a financial year exceeds two percent of the annual consolidated turnover of the listed entity as per its latest audited financial statements.
- Voting by related parties
The related parties shall now be allowed to vote on material transactions requiring approval of shareholders however subject to a condition that they shall not vote to approve such RPTs. Therefore, the related parties can only vote to reject such related party transaction.
- Constitution and role of committees of board
- Risk Management Committee
- The requirement of constitution of risk management committee has been extended to top 500 listed companies;
- The function of risk management committee delegated by the board of directors shall specifically include the cyber security review of the company;
- The risk management committee of the listed company shall meet at least once in a year.
- Audit Committee
The Audit Committee is now required to review the utilization of funds (whether in the form of advances or investment or loans) from holding company to the subsidiary company exceeding 100 crore or 10% of the asset size of the subsidiary whichever is lower including existing loans, advances, investments existing as on April 01, 2019.
- Nomination and Remuneration Committee
The nomination and remuneration committee is now required to review all remuneration payable to the senior management. The definition of ‘senior management’ has also been amended to include one level below chief executive officer, managing director, whole time director, manager which shall include company secretary and chief financial officer.
- Detailed role of Stakeholder Relationship Committee
Detailed roles and responsibilities of the stakeholder relationship committee have now been specified in the LODR Regulations. Such roles inter-alia provide for resolving of grievances of security holders of listed entity, review of measures for effective exercise of voting rights by the shareholders, review of measures for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants, annual reports and statutory notices by the shareholders of the listed entity.
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Significant “To Dos” pertaining to management and administration of the listed company
- Annual General Meeting
The top 100 listed companies would now be required to convene their annual general meetings within five (5) months from the end of financial year i.e. August 31, 2019. Further, to provide an opportunity to the shareholders who are unable to physically attend the annual general meeting, it has been mandated that such top 100 listed companies would be required to provide one way live web cast of the proceedings of the annual general meetings.
- Independent directors of the listed entities to be on the board of foreign material subsidiaries
At least one (1) independent director on the board of listed company is required to be on the board of foreign material subsidiaries also apart from Indian material subsidiaries.
- Secretarial Audit
The Indian material unlisted subsidiaries of the listed entity also required to undertake a secretarial audit and annex the report of the secretarial auditor with its annual report.
- Disclosures at the website
The disclosures made by a listed entity at its website shall be in a searchable format which allows the stakeholders to easily access the information.
- Director expertise matrix
The board of directors of listed entity are required to determine a chart or matrix having core skills, expertise and competencies which the board of directors are required to possess on the basis of business of such listed entity and ones which the board of directors actually possess, in the corporate governance section of the annual report. This requirement is required to be complied with effect from financial year ending March 31, 2019. Further, with effect from financial year ending March 31, 2020, the names of directors who have the requisite skills and competence are also required to be provided.
Conclusion
Acceptance of the majority of the recommendations of the Committee shows SEBI’s strong desire for enhancing the corporate governance practices of listed companies in India. The in-spirit compliance of the Committee’s recommendations would require the listed companies to gear up well before the implementation date and undertake an in-depth analysis of their internal governance practices for smooth implementation of new set of compliances in their existing system.
[The authors are Senior Associate and Associate, respectively, in Corporate law practice, Lakshmikumaran & Sridharan, New Delhi]