April 2019 – Dawn of a New Era in Indian Corporate Governance?

2018 was an eventful year for the corporate governance regulatory framework in India. The Securities and Exchange Board of India (SEBI) not only approved a host of recommendations made by the Kotak Committee on Corporate Governance (Kotak Committee), but also gave these recommendations the required regulatory impetus by notifying the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018.

Come April 1, 2019, a slew of these amendments (Amendments) will come into effect and all listed entities will be required to ensure their readiness in terms of implementation and compliance. Broadly, the Amendments have four intended targets: the board of directors, the listed company, the investors and the promoters.

The Board of Directors – Emphasis on Independence, Diversity and Transparency

The majority of the Amendments are dedicated to boards and their machinations, and not without reason – in their essence, boards are the bedrock of corporate governance, presumed at all times to be acting in the best interests of the company and the shareholders. To achieve the twin objectives of stopping directors dividing their attention and time amongst too many stakeholders, and increasing the diversity of each board, the Amendments will now place restrictions on the maximum number of directorships (independent and otherwise) that each director can hold in a listed entity (listco).

An additional layer of scrutiny has been added for independent directors, which requires such directors to make declarations to the board on an ongoing basis regarding their independence, and the board to formulate a policy for evaluating the performance of all independent directors. The compliance requirements stretch even after the resignation by an independent director – the board is now required to disclose to stock exchanges the why as well as the when regarding the resignation.

In keeping with the spirit of board reform, the Amendments also touch upon another widely-debated topic – managerial remuneration. As a result, for every year in which the annual remuneration payable to a single non-executive director exceeds 50% of the total remuneration payable to all non-executive directors, shareholders’ approval will be required.

The Amendments do not merely stop at the board level either – they acknowledge the significance of board-level committees as well as senior management in the day-to-day operation and management of a company, and seek to regulate them appropriately. The roles and responsibilities of nomination and remuneration committees and stakeholder relationship committees are now expanded and better defined. On the other hand, expanding the scope of ‘senior management’ will now ensure that tools of corporate governance such as succession planning and code of conduct govern a wider array of employees.

Shareholder Information Rights – More Power to the People

Regulation of complex markets and corporations aside, the objective of SEBI remains simple – protection of investors’ interest. The same objective remains the running theme of the Kotak Committee recommendations and are reflected in the Amendments as well. A listco’s website – which will need to include a copy of the annual report, details of board/committee composition, code of conduct, policies, etc. under separate sections – will now be a mini-repository of information for any discerning investor.

Annual reports will also need to be e-mailed to shareholders’ registered IDs, and shall mandatorily include, amongst other matters, disclosures in relation to utilisation of funds, transactions with promoter/promoter groups, details of changes in key financial ratios, details of other directorships, a competence matrix of the board, credit ratings, and auditor fees. To sum up, post-Amendments, the shareholders will be afforded a wider and deeper view into the workings of their investee companies.

Of Corporates and Corporate Governance

While the popular notion of ‘corporate governance’ may be that of the ability to govern boards, it is at times best to take a step back and look at the literal phraseology – the governance of corporations. The Kotak Committee appears to have done exactly this and, in the process, introduced some Amendments that corporations need to think through well, especially the large ones. For instance, what may at first appear to be minor typical changes – mandatory submission of quarterly results, limited review of consolidated entities, amended definition of material subsidiary (for certain select aspects only) and half yearly statement of cash flows – could potentially have wide-ranging implications on group structuring, audit & reporting, and costs.

Speaking of costs, another industry practice that will now become the regulatory norm applicable to all listcos is the secretarial audit of the listco and its material unlisted Indian subsidiaries. The Amendments also specifically recognise the systemic impact that may result from any lapse of governance at large corporates, and as a result there are several changes that the top 100, 500 and 2,000 listed companies will have to adjust to.

Steps Towards Promoter Governance?

A peculiarity that is often highlighted by international academics (and critics) looking at any corporate law regime in India, is the omnipresence of promoter-run, promoter-owned companies both in the listed and unlisted space. The adherence to corporate governance ideals by such companies, in letter as well as spirit, has similarly been a frequent topic of consternation. The abundance of promoter-driven companies is the result of many factors, including the socio-cultural and political landscape in which Indian corporations have evolved, and on which the Amendments are unlikely to place any fetters. However, they have sought to take a step towards filling gaps in the regulatory framework.

By placing persons belong to the promoter group and holding a minimum stake within the definition of ‘related parties’, the Amendments have sought to subject hitherto unsupervised dealings amongst promoters, companies and their related entities and affiliates, to additional scrutiny at board and shareholder levels. To strengthen this, the Amendments also mandate that no related party shall vote on any related party transactions. Similarly, typical listco-promoter arrangements such as brand usage or royalty exceeding prescribed thresholds will now be deemed to be material related party transactions. The board, on the other hand, is required to formulate a policy for dealing with material related party transactions, and make bi-annual disclosures of related party transactions to the stock exchanges.

Another key change to be introduced by the Amendments on this aspect is the limit on fees/remuneration payable to executive directors who are part of a promoter group, and the requirement to obtain shareholders’ approval in case such thresholds are breached.

Parting Thoughts

In its 2018 report on corporate governance in key Asian jurisdictions, the Asian Corporate Governance Association gave a score of 54% to the Indian corporate governance regime, ranking it seventh amongst 12 Asian countries. Similarly, SAHA Ratings, in its 2018 World Corporate Governance Index of 150 countries, placed India in Group 2, comprising countries eligible to enter Group 1, but requiring further steps in the field of corporate governance.

The good news is that these rankings predate both the Kotak Committee recommendations and the Amendments, which are aimed at all four aspects of corporate governance – fairness, transparency, responsibility and accountability. What remains to be seen is how well equipped the Indian corporates, boards and promoters find themselves to implement the Amendments, in letter and in spirit. For shareholders, the Amendments in their fully-implemented avatar will definitely usher in a new era of transparency, accountability and corporate governance.


 

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Photo of Vijay Parthasarathi Vijay Parthasarathi

Partner in the Capital Markets Practice at the Bangalore Office of Cyril Amarchand Mangaldas. An experienced practitioner in equity capital markets and debt capital markets, focusing on public offerings of securities, including IPOs, qualified institutions placements, institutional placement programmes and foreign currency convertible bonds. He has also been associated with debt offerings. Vijay has an LLM degree from the New York University School of Law. He has been recognised as a noted practitioner by IFLR 1000 in 2018. He can be reached at vijay.parthasarathi@cyrilshroff.com

Photo of Rohit Tiwari Rohit Tiwari

Senior Associate in the Capital Markets practice at the Bangalore office of Cyril Amarchand Mangaldas. Rohit has advised clients across a wide range of sectors on public offerings of securities, including IPOs, REITs, qualified institutions placements and bond issuances. He has also contributed to the firm’s publications on private equity, corporate governance and REITs. He can be reached at rohit.tiwari@cyrilshroff.com