Sebi accepts Kotak Committee recommendations

In light of various developments in the realm of corporate governance across the globe and in continuation of its role as a proactive regulator, the Securities and Exchange Board of India (SEBI) constituted a committee under the chairmanship of Uday Kotak in June 2017 to suggest suitable policy and regulatory changes required to be carried out in order to enhance the efficiency of corporate governance norms for Indian listed entities (Kotak Committee).

The Kotak Committee, submitted its report (Report or Kotak Committee Report) on October 5, 2017 after careful and detailed deliberation with various experts and stakeholders. The Report contained recommendations pertaining to a plethora of regulatory changes to align Indian corporate governance norms with global best practices, while being premised on local business realities unique to India, such as the prevalence of large, concentrated shareholding blocks (as opposed to a dispersed shareholding pattern observed in few developed markets such as the United States of America), family run businesses and ‘promoter-raj’.

News reports suggested that the recommendations of the Kotak Committee were to be considered and implemented in a phased manner. In its board meeting on March 27, 2018, SEBI, after detailed consideration and due deliberation, accepted several recommendations of the Kotak Committee without any modifications and accepted a few other recommendations with certain modifications as to timelines for implementation, applicability thresholds among others.

SEBI also decided to refer certain recommendations, which were criticized by market participants as being an example of jurisdictional over-reach, to various agencies (i.e. government, other regulators, professional bodies, etc.), considering that the matters involved related to them.

Key Recommendations of the Kotak Committee approved by SEBI Increasing Transparency -Enhanced Disclosure Requirements Corporate governance norms are aimed at reduction of agency costs for residual owners of a corporation (its shareholders) incurred by them in monitoring and ensuring effective functioning of a corporation as per its objectives (by the management). Effective disclosures, thus, are fundamental to corporate governance. The Kotak Committee, had made various recommendations pertaining to enhancing disclosure requirements of listed entities. Some recommendations of the Kotak Committee, which have been approved by SEBI pertain to the followingDisclosure of Utilization of Funds from Qualified Institutional Placement (QIP) /Preferential Issues-Full disclosure of utilization of funds raised through Preferential Allotment and QIPs undertaken in the relevant financial year have to be made in the Annual Report of the listed company until such funds are fully utilized.

Disclosures of Auditor Credentials, Audit Fee, Reasons for Resignation of Auditors-A listed entity will now be required to disclose in its Annual Report, the details of all fees paid by the listed entity and its subsidiaries (on a consolidated basis) to the statutory auditor and to all other entities in the network firm/network entity of which the auditor is a part. Further, the notice being sent to shareholders for an Annual General Meeting (AGM) where the statutory auditor(s) is/are proposed to be appointed/re-appointed will have to include the following disclosures as a part of the explanatory statement to the notice:-
(i) Proposed fees payable to the statutory auditor(s) along with terms of appointment and in case of a new auditor, any material change in the fee payable to such auditor from that paid to the outgoing auditor along with the rationale for such change.
(ii) Basis of recommendation for appointment, including the details in relation to and credentials of the statutory auditor(s) proposed to be appointed. Apart from the above, detailed reasons for resignation of an auditor as given by the said auditor has to now be disclosed to the stock exchanges.