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Entrepreneurship - Latest Developments December 5, 2017

SEBI-Appointed Panel on Corporate Governance

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Securities and Exchange Board of India (SEBI) appointed a panel to suggest on enhanced corporate governance of listed companies. This Uday Kotak (of Kotak Mahindra Bank) led panelhas lately submitted its findings and here we discuss some vital takeaways from the report. But to comprehendsensibly the proposals made, we first need to know how corporate governance impacts the working of companies.

Besides the mandatory filing of financial statements and reporting of key events like change in constitution of board, rules on appointment of independent directors, board committees and disclosure of remuneration policy are elements of good governance targeted at transparency in the running of the enterprise. The panel has now proposed an upgrade to these norms so that the opportunities and challenges facing India Inc. in present times are astutely managed.The intent is to boost corporate governance and instill more transparency incomponents that impact long-term financial viability of the enterprise.

Reliance, NTPC and Coal India have a common feature – all of them are currently headed by CMDs. The idea of splitting the role of chairman and that of managing director or CEO,as suggested by the panel hence needs special mention. To decipher this further, we must know that while the Board, headed by the Chairperson, is tasked with monitoring and assessing the overall functioning of the company, the CEO/ MD is the one running operations. Hence, a possible conflict of interest and subsequent abuse of power cannot be ruled outin instances where the chairman and managing director is the same person.

Another key suggestion relates to increasing the number of minimum directors from current 3 to 6, in a way that half of these are independent. Independent directors are not related to the company in any manner and hence their inclusion in decision making process and in board committees like audit committee ensures that companies are inclined toward enhancing the wealth of all stakeholders, not just promoters and senior management. Only time can tell if these bold reforms are introduced as mandatory or as a recommendation by SEBI.

The panel, meanwhile, has also stressed on the need of shift from the Monarch-like model of running an enterprise to the custodian model, a setup that would place stakeholders’ interest above the interests of promoters (the so-called monarchs). The recent feud in the senior management of one of India’s largest conglomerates, Tata, and the resulting fall in stock prices has compelled the regulator, SEBI, to introduce sweeping changes so that minority shareholders do not feel the heat when promoters and senior management lock horns.

Other noteworthy proposals are quarterly filing of consolidated financial statements by listed companies instead of the present norm of filing them annually, keeping large shareholders in loop with respect to unpublished but critical information, increasing the number of meetings of board, matching remuneration of promoter directors with financial performance of entity, barring any related party from voting on a resolution that involves any other related party and a minimum remuneration for independent directors commensurate with the size of enterprise.

Also read: What Amazon’s Entry in Food Retail Means for India

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