Kotak Committee Recomemendations (Corporate Governance)

Capital market regulator Securities and Exchange Board of India (SEBI) has approved sweeping
changes to the corporate governance framework for listed companies. The new measures are based
on recommendations made by a 25 members committee headed by Mr. Uday Kotak, Executive Vice
Chairman and Managing Director of Kotak Mahindra Bank. The Kotak Committee was formed on
June 02, 2017 with the aim of improving standards of Corporate Governance of listed companies in
India.

The Kotak Committee submitted its report to the Securities and Exchange Board of India (SEBI)
on October 05, 2017 wherein the Committee provided 80 recommendations to improve the
Corporate Governance Standards. Some of the proposals faced oppositions from industry and other
regulators. The Securities and Exchange Board of India (SEBI) had to take all stakeholders on board
to ensure implementation of the measures suggested the Committee. As a result, the market regulator
couldn’t implement all the 80 recommendations and has accepted 40 recommendations without any
modifications; 15 with modifications; 18 were rejected and eight have been referred to other
agencies.

 Broad Categories of amendments:

 Following are some of the recommendations of Kotak Committee which are accepted by the
Securities and Exchange Board of India (SEBI) with/ without modifications which are summarized
below;

Composition and Role of the Board

 Minimum Six Directors on Board which shall be applicable to top 1,000 listed
entities by April 01, 2019 and to top 2,000 listed entities by April 01, 2020;
 At least one Independent Woman Director which is applicable to top 500 listed
entities by April 01, 2019 and to top 1,000 listed entities by April 01, 2020;
 Maximum number of directorship shall be reduced to eight by April 01, 2019 and shall be
reduced to seven  by April 01, 2020;
 The listed entities with more than 40% of public shareholding shall separate the roles of
Chairperson and Managing director (MD) or Chief Executive Officer (CEO) which shall be
applicable to top 500 listed entities by April 01, 2020 and the Chairperson shall be a Non-
Executive Director;
 The Quorum for Board Meeting shall be one-third of its total strength or three directors,
whichever is higher, including at least one Independent director which is applicable to top 1,000
listed entities by April 01, 2019 and to top 2,000 listed entities by April 01, 2020;
 The Board of Directors of every listed entities shall require to list out the
competencies/expertise that it believes that its directors shall possess and actually possess and
disclose competencies of its Board Members against every identified competency/expertise without
disclosing names in the Annual Report for financial year ending March 31, 2019 and detailed
disclosures along with the names of Directors with effect from March 31, 2020.

Institution of Independent Directors

 The Independent Director shall not be a member of the Promoter Group and a Non-

Independent Director of a company on the board of which any Non-Independent Director of the
listed entity is an Independent Director, cannot be an Independent Director on the board of the
listed entity which was made applicable from October 01, 2018;
 Appointment of an Alternate Director for an Independent Director shall not be
permitted which came into effect from October 01, 2018;
 Mandatory Directors and Officers (D&O) insurance for Independent Directors of top
500 listed entities with effect from October 01, 2018;
 Declaration by the Independent Director stating that He/ She meets the criteria of
independence and He/ She is not aware of any circumstance or situation, that could impair or
impact his/her ability to discharge his/her duties which shall be applicable from April 01, 2019;
 Disclose detailed reasons for resignation of an Independent Director before the expiry of
his/her tenure within seven days of resignation to the stock exchange which shall applicable
from April 01, 2019;
 Board Committees

 The Audit Committee need to review the utilisation of loans and/or

advances from/investment by the Holding Company in the subsidiary exceeding Rs.100 Crore or
10% of the asset size of the subsidiary, whichever is lower which shall be effective from April 01,
2019;
 Nomination and Remuneration Committee (NRC)shall recommend all payments made to
senior management to the Board of Directors.
 Senior Management shall include all members of management one level below the Chief
Executive Officer (CEO)/ Managing Director (MD)/ Whole Time Director (WTD)/
Manager (including Chief Executive Officer (CEO)/ Manager, in case not part of the board) and
specifically include the Company Secretary (CS) and the Chief Financial officer (CFO);
 The quorum for a meeting of the Nomination and Remuneration Committee
(NRC) would be either two members or one-third of the members of the committee, whichever
is greater, with at least one independent director;
 Stakeholders Relationship Committee (SRC)shall consist of at least three Directors as
members with at least one Independent Director. Additionally, the Chairperson of the
Stakeholders Relationship Committee (SRC) shall be present in Annual General Meeting to
answer queries of the security holders;
 Enhanced role of Stakeholders Relationship Committee (SRC) to review the measures
taken for effective exercise of voting rights by Shareholders and reducing the quantum of
unclaimed dividends;
 The constitution of Risk Management Committee (RMC) shall be applicable to top 500
listed entities and the role of Risk Management Committee (RMC) shall specifically include Cyber
Security which shall be applicable from April 01, 2019.
 Nomination and Remuneration Committee (NRC), Stakeholders Relationship
Committee (SRC) and Risk Management Committee (RMC)shall require to necessarily meet at
least once in a year.

Monitoring Group Entities and Related Parties

 Where a listed entity has large number of unlisted subsidiaries then the listed entity
may monitor their governance through a dedicated Group Governance Unit or Governance
Committee and a strong & effective Group Governance Policy may be established which shall be
applicable from May 10, 2018;
 Secretarial Audit shall be mandatory for listed entities and their material unlisted
subsidiaries incorporated in India and the report shall be annexed with the Annual Report which
shall applicable from March 31, 2019;
 Shareholders’ approval shall be required for brand payments and/ or royalty to related
parties exceeding 2% of consolidated turnover by the listed entities with effect from April 01, 2019;
 All material Related Party Transactions shall require an approval of the shareholders and
related party will not be able to vote to approve such resolution but related parties are allowed to
cast a negative vote;
 Half yearly disclosures of Related Party Transactions on consolidated basis, in a format
which is required for Related Party Transactions in Annual Accounts as per Accounting Standards on
the website of the listed entity within 30 days of publication of the half-yearly financial results;
 Definition of Material Subsidiary revised to mean a subsidiary whose income or net worth
exceeds 10% of consolidated income or net worth respectively;
 At least one Independent Director on the Board of listed entity to be the director of
unlisted material subsidiary, whether incorporated in India or not;
 Shareholder’s approval by special resolution shall be required if the total remuneration
paid to a Single executive promoter director exceeds Rs.5 Crore or 2.5 % of net profit, whichever
is higher or all executive promoter director exceeds 5% of the net profits;
 Shareholder’s approval by special resolution required every year, in which the annual
remuneration to a single non-executive director exceeds 50 % of the total remuneration payable to
all non-executive directors;
Accounting and Audit related matters

 Disclosure of Consolidated Financial Results mandatory for all the listed entities

on quarterly basis;
 A Disclosure of Cash Flow Statement on half-yearly basis mandatory for all listed entities;
 Limited Review/ Audit of at least 80% of financial information of the group i.e.
consolidated revenue, assets and profits;
 Financial results in respect of last quarter could be audited/ limited reviewed;
 Disclosure to be made by way of note with respect to aggregate effect of material
adjustments made in the results of last quarter pertaining to earlier periods;
 Mandatory disclosures of quantification of audit qualifications except the matters which
are of going concern or sub-judice matters;
 Statutory auditor of listed entity to undertake a limited review of the financial results of all
the entities/ companies whose accounts are consolidated with listed entities;
 Disclosure shall be made with relation to the basis of recommendation for appointment of
an auditor, Total fees paid to the Statutory Auditor and reasons for resignation of an auditor/
audit firm;

Disclosures and Transparency

 Disclose the list of all credit ratings obtained along with any revisions in corporate
governance section of its annual report;
 Disclose the certain key financial ratios in the Section of Management, Discussion &
Analysis in the Annual Report and detailed explanations shall be provided if there is any change
of 25% or more in any Financial Year;
 A Certificate from a Company Secretary in practice shall be required in the Annual
Report that none of the Directors on the board of the company are debarred or disqualified from
being appointed or continuing as directors of companies by any authority;
 Disclosures on the entity’s website shall be in user friendly searchable format and
disclosure to the Stock Exchanges shall be in XBRL (Extensible Business Reporting Language)
Format.
Investor Participation

 Top 100 listed entities shall hold the Annual General Meeting (AGM) by August 31,
2019  i.e. within five months from the end of the Financial Year 2018-19;
 Top 100 listed entities shall have one-way live webcast of the proceedings of the Annual
General Meeting (AGM) which shall be applicable from April 01, 2019;
 The Board of Directors shall provide their recommendations for any resolutions before
placing to the Shareholders;
Thus, the approved changes to corporate governance norms are aimed towards aligning corporate
governance standards to global best practices. Most of the approved recommendations are firmly
rooted in local business realities, where most listed entities are promoter-led as opposed to being
professionally managed, thus increasing risks of promoter-raj at the cost of minority shareholders. To
conclude, while there may exist certain issues and glitches, such as the fact that various
recommendations of the Kotak Committee which have been approved have been made applicable to
top companies in terms of market capitalization, precluding smaller listed entities from such
compliance requirements even though it is usually some of the smaller listed entities wherein
corporate governance standards are found to be wanting, the approved recommendations are indeed
welcome and are expected to extol corporate India to a leadership position with regards to corporate
governance.