Mumbai: The 25-member Uday Kotak panel on corporate governance submitted its report to the markets regulator on Thursday. Through the wide ranging recommendations, the committee has tried to create legitimate channels for information sharing, enhance board structures and look at the role of auditors.
In an interview, Krishnamurthy Subramanian, associate professor of finance, Indian School of Business and a member of the Sebi panel, said that the committee was focused on the three gatekeepers of corporate governance—board, auditors and the regulator. Edited excerpts:
What is the basic thought process that has gone behind in the drafting of the report?
The basic idea of the report was to push India Inc to the next level in terms of governance standards and setting higher benchmarks. While many cases of governance in the past couple years acted as a precursor on drafting the report, the committee felt that three gatekeepers need to be strengthened. The three gatekeepers, according to the committee are the board, the auditor and the regulator. A lot of effort has gone into improving the institution of independent directors to enhance the board. The number of independent directors have been increased to 50% of the board members, two-thirds of the remuneration committee needs to be independent directors.
This is perhaps a rare proposal to hold auditors accountable?
The committee has tried to address the role of auditors and has recommended that the regulator, Securities and Exchange Board of India or Sebi can impose penalties if it comes across cases of fraud and gross negligence by auditors. The nodal body for auditors is the Institute of Chartered Accountants of India (ICAI); we have made proposals to improve their oversight. The Quality Review Board for auditors could be made more independent.
As you mentioned that ICAI is the nodal body for CAs and the committee has recommended that Sebi imposes penalties on auditors for lapses, is there possibility of regulatory overlap?
The main pole-star is to improve corporate governance -- the regulators are subservient to that goal. Regulatory collaboration is the key to achieving this goal.
While regulators have attempted to bring in a better governance culture in companies through various laws, enforcement is always an issue...
You are right, the committee was seized of the issue that drafting a law or policy is not enough. There has to be effective implementation and enforcement. The committee has taken a unique approach to address capacity building at Sebi for effective enforcement. India has about 5,000 listed companies and the regulator has 780 employees making a ratio of one Sebi officer looking at six listed companies. On the other hand its counterpart Securities Exchange Commission (SEC) has 4,500 officers ensuring that one officer is looking at one company. Sebi just doesn’t have the bandwidth to deal with so many companies. The committee has recommended a revolving door hiring policy to improve the quality and quantity of Sebi officers.
The committee has made some recommendations on the remuneration of independent directors. How will this impact the current compensation?
The thought process was to have some minimum compensation for independent directors and, at the same time, not to make it too onerous on the small companies. The committee has prescribed a minimum fee of Rs5 lakh and Rs50,000 as sitting fees (for every meeting) as a base incentive. Companies who can pay higher in accordance with the Companies Act 2013 (which prescribes Rs1 lakh maximum sitting fee) can continue to do so. This is to address the governance issues in smaller firms with low paying capacity.
The committee has also made some recommendations on Public Sector Enterprises (PSE), which at times fall behind their private sector counterparts in terms of governance?
The committee was clear that if a company is listed it has to adhere to Listing Obligation and Disclosure Requirements (LODR). The committee has asked that PSEs should adhere to disclosures about their areas of interest and focus. In addition we have also specified that PSEs should be independent of the nodal ministry; this is good for valuation and overall public shareholders’ acceptability.
Another key concern has always been on sharing information between the promoter and the listed entity?
The panel has prescribed a specific green channel that will allow legitimate sharing of information so that any misuse can be avoided.