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Updated - January 08, 2018 at 07:51 PM.

The Kotak panel has flagged key impediments to good governance, but offers partial solutions

Raising governance standards at India Inc has for long been on the policymakers’ wish-list, with several committees deliberating this and sweeping amendments being effected to both the Companies Act and SEBI’s LODR (Listing Obligations and Disclosure Requirement) Regulations in recent years. Despite this, shareholders in some of India’s largest corporate groups have been caught in the cross-fire of serious mis-governance allegations this past year. Expectations were running high for solutions from the Uday Kotak committee constituted by SEBI. The committee has accurately homed in on the key impediments to good governance but stopped somewhat short of providing water-tight solutions.

Delving into the inefficacy of corporate boards, the report recommends separating the role of Chairman and MD in widely held firms, a minimum of six directors and five board meetings in a year. It also suggests manning the boards of listed firms with at least 50 per cent independent directors (from one-third now) and one woman independent director. The committee appears to hold the view that the key to better governance lies in numerically large boards with greater diversity. But then, both the Tata-Mistry and the Infosys stand-offs have shown us that large or highly qualified boards do not necessarily stand up for the public shareholder’s interests when they are in direct conflict with that of the founders. In some cases, after correctly identifying loopholes in the governance framework, the committee has taken a non-committal stance. It flags the issue of companies ‘informally’ sharing sensitive information with promoters, but tamely suggests formalising this through a written agreement. It notes that many countries bar listed firms from filing any financials with a qualified audit opinion, but stops short of recommending that India follow suit. But some of the most useful suggestions from this committee relate to areas where it has taken a definitive stance. The idea that minority shareholder approval be mandated when royalty/brand usage fees amount to more than 5 per cent of revenues, is a sound one. So is the requirement of shareholder approval when companies pay their executive promoter-director more than ₹5 crore per annum, or 2.5 per cent of net profit. The requirement that independent directors and auditors provide detailed reasons for premature resignations is critical too, as this may deter them from quietly resigning when called upon to take a stance on contentious issues.

Some of these proposals may be stymied by turf issues. The Ministry of Corporate Affairs has already shot off a missive, warning that adding further layers of compliance under SEBI would conflict with its avowed objective of improving ‘ease of doing business’. Overall, the fear is that this report, like its predecessors, may usher in a host of new regulatory compliances which companies end up observing more in letter than in spirit. After all, the key reason for sub-par governance at India Inc, despite the elaborate laws already on the books, is that there is little serious enforcement of the existing rules.

Published on October 9, 2017 16:38