In June 2017, the Securities and Exchange Board of India (“SEBI”) formed the Committee on Corporate Governance (the “Committee”) to examine corporate governance practices in India. Chaired by Uday Kotak, the Committee was also tasked to identify and address the challenges and gaps facing Indian corporate governance practices. The Committee released its report, including its recommendations, on October 5th 2017.
The Committee’s comprehensive recommendations are ambitious for Indian corporate governance, and would be implemented over a multi-year period to allow for the inertia of adjustment. Some notable recommendations include:
- A requirement for every board to have at least one independent woman director, which is a modification of the previous requirement for each board to have one woman director (regardless of affiliation status). All companies would also have to disclose a list of the skills possessed by each director.
- The board independence requirement becoming a uniform 50%. This is would replace the current system of basing board independence on the classification of the board chair, which allows for board independence of as low as 33%.
- The separation of the position of board chair and managing director/CEO for companies with public share ownership exceeding 40% of total issued shares. For all companies with non-independent board chairs, there would be a new requirement for companies to have a lead independent director.
- Increased shareholder ability to vote on promoter director remunerations for both executive and non-executive promoter directors.
- The setting of remuneration standards for independent non-executive directors.
- Increased requirements for board and auditor oversight of subsidiaries, along with stricter auditor accountability.
- Increased attention to related party transactions, including shareholder approval for transactions involving the payment of royalties.
- Implementation of a stewardship code for institutional investors.
- Lengthening e-voting time, along with permitting the webcasting of general meetings.
The Committee’s recommendations may face some regulatory opposition from the Ministry of Corporate Affairs (“MCA”) due to conflicts with existing laws and regulations. In fact, the MCA’s comments are included within the Annexure to the report. Yet, despite the MCA’s selective opposition, the recommendations could take Indian corporate governance to a higher level and perhaps even eclipsing corporate governance practices seen in other Asian markets like Hong Kong.
Although it is unknown which of the Committee’s recommendations may ultimately be implemented, the recommendations highlight a distinct opportunity for India to strengthen and improve its corporate governance practices. Additionally, now is the time for investors to make their voices heard and provide their views on potential changes to Indian corporate governance. Interested parties are invited to respond to the Committee’s recommendations to SEBI through November 4, 2017.
Jeff is a manager covering South Asian and South East Asian markets.