Five themes Sebi panel on corporate governance is working on


Mumbai: As the end of September draws near, the Uday Kotak panel on corporate governance is examining a plethora of issues, which have been points of debate and have become case studies in themselves.

The recent boardroom battles at Tata Group of companies and Infosys Ltd and learnings emerging out of them make the bulk of the proposals by the Securities and Exchange Board of India (Sebi) panel. In addition, capping royalty payments, splitting of the post of the chief managing director (CMD), as reported by Business Standard, is also a part of terms of reference for the governance panel.

At the capital markets summit organised by FICCI in Mumbai on Wednesday, Sebi chairman Ajay Tyagi said, “We are very serious about issues that affect minority investors,” said Tyagi.

The issues being considered are independent directors, board evaluation, and monitoring-related party transactions.

“It is not a routine exercise but we will implement the recommendations seriously,” Tyagi added.

Here are five major themes that the governance panel is working on.

Role of promoters: The Sebi panel is working to ensure that promoter-driven companies are subject to the same level of transparency as companies with higher public shareholding. In many instances, the holding company is not listed and the promoters themselves may have a governance framework, and decisions taken through such a framework would have implications for all listed companies under the same management, as was observed in the case of Tata Sons.

“In such a scenario the decisions taken by promoters are not subject to the same level of transparency and governance norms as listed companies are,” said a person familiar with the regulator’s view, on the condition of anonymity.

The Sebi panel is working to ensure that investors of listed operating companies are assured that a holding company is just the dominant shareholder and one individual isn’t running the whole group of companies.

“In this regard the Sebi panel will also form rules on what information can be shared with promoters (if they are not a part of the board), how much and when,” said S. Raman, Sebi’s whole-time member.

‘Independence’ of independent directors: The debate started with former chairman of Tata Sons Cyrus Mistry’s complaint that many independent directors on Tata group companies were not truly independent. This has prompted the regulator to write to the ministry of corporate affairs that removal of independent directors should also require a special resolution. It is also the appointment of independent directors that is subject of debate and resignation without citing a reason.

A survey conducted by Hunt Partners, AZP & Partners and PwC in November 2015 found that 25% of Indian companies have independent directors who are relatives of the owners. A study by Prime Database in 2016 found that over 75% of directors resigned without giving a reason. The Sebi panel is mulling to have rules around these gaps.

Disclosure and transparency: Lack of transparency is one of the major concerns in listed companies. Annual reports are often not released on company and exchange websites. The Sebi panel is trying to change this by ensuring that annual reports are on websites a day after they are released to shareholders of the company.

The panel is also working on improving the quality of financial disclosures including those related to party transactions and during initial public offers. The first check on regulatory and disclosure compliances is the audit committees. The Sebi panel is considering whether auditing can be made a regular task. Also, strengthening the auditing committee by providing them autonomy might help.

Evaluation of directors: Performance evaluation of directors was a voluntary concept introduced by Sebi in 2004 until the Listing Regulations and the Companies Act made it mandatory. The Sebi panel may make recommendations on how directors’ role and performance will be evaluated.

Role of auditors: The Sebi panel is mulling on having norms to examine the role of auditors. An auditor could be barred from the listed space if the audit fails to give a true picture. In addition, splitting the post of chief managing director is another focus area of the Sebi.