Governance ahoy!

Kotak Committee proposes big changes to corporate governance…

The high powered Uday Kotak Committee submitted its report on corporate governance framework to SEBI during the week. The committee has proposed some very far-reaching changes to the existing corporate governance framework. It could have major implications for boards, auditors and for shareholders at large.

Revamping the Boards… 

The committee has suggested that all corporate boards to necessarily have a minimum of 6 directors on its board. Currently, there is no stipulation on the minimum number of directors on the board of the company. The Committee has also insisted that at least half of these directors should be necessarily independent directors and one of them should necessarily be a lady director. The committee has gone a step further and insisted that any resignation by an independent director must be followed up by a detailed explanation laying out the reasons and the circumstances leading to the said resignation. The Committee has also proposed to make it mandatory for all directors to necessarily attend half of all the board meetings failing which shareholder approval will be required for their continuance. The Committee has also proposed that the number of directorships of a single independent director be restricted to just 8 companies and only 3 companies if the said person is already the managing director of a company.

Role of auditors… 

The auditors of a company have a very important role to play in upholding the highest standards of corporate governance. However, there are some grey areas here. To begin with, the auditors are still regulated by the ICAI and the SEBI has little by way of control over the functioning of auditors. The Committee has suggested that SEBI should have clear and unambiguous powers to act against the auditors where they are found to be guilty. In addition, the committee has also suggested that all audit qualifications should be quantifiable and accountable. Going ahead, the committee insists that the Board should put the financial implications of auditor qualifications to its shareholders for transparency.

Focus on transparency…

There are two clear focus areas here. Firstly, in case of sharing of information with promoters, the committee has suggested a more transparent and institutional mechanism of sharing information with promoters, especially in case of family run businesses. Secondly, it has also proposed setting up an audit committee to look into utilization of funds invested by a listed entity into an unlisted entity. This has been a common method for re-routing funds and this move could large seal that route. The big beneficiary of most of these moves should be corporate governance! ©

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