Cyril Shroff On 5 Big Corporate Governance Changes On The Anvil
The key changes proposed to India’s corporate governance norms, explained by Cyril Shroff.
It’s a proposal that will set the governance cat among promoter pigeons across India Inc.
A corporate governance committee appointed by securities regulator SEBI and led by top banker Uday Kotak has recommended that at least half of the members on a company’s board must be independent.
Also among the committee’s recommendations pertaining to board independence...
- At least six members on a board
- At least one female independent director
- A non-executive chairperson in a company in which public shareholding is 40 percent or more
- The separation of the posts of non-executive chairman and managing director or chief executive officer
- At least 50 percent attendance for independent directors
- A designated lead independent director in companies where the chairman is non-independent
The report includes over 70 more proposals covering directors, boards, accounting, disclosures and auditors.
Curiously this proposed overhaul comes close on the heels of the last one – when the Companies Act, 2013 was legislated prompting a slew of changes to SEBI’s governance provisions as well.
Committee member Cyril Shroff, also managing partner at Cyril Amarchand Mangaldas, explains that “the whole conversation around corporate governance, which represents such a big part of India’s prosperity, had become a very emotive issue and it had become so integral to the India story going forward that something had to be done to revamp the entire space”.
SEBI as a market regulator needed both more jurisdiction and sharper tools for governing listed companies. There’s over 5000 listed companies.Cyril Shroff, Member, Corporate Governance Committee
1. Independent Board
To be sure, SEBI’s existing regulations already mandate that where the chairman has executive powers or is related to the promoter, half the board of that company must constitute independent directors. But many companies got around that by appointing a non-executive chairman and thus having to appoint only one-third of the total number of directors as independent. To them, this proposal will stick in the throat.
It also inverts the control debate, depriving a controlling stakeholder of board majority.
There’s a responsibility to a broader set of stakeholders and not just the shareholders. I see your point on whether this dilutes the control debate. But for well-governed companies, which balance the interests of all stakeholders, there is a right balance and there shouldn’t be such a conflict in terms of objectives.Cyril Shroff, Member, Corporate Governance Committee
To emphasise his point Shroff refers to newer age businesses that often come to the market with “very small promoter holding”.
2. Separation Of Chairman And CEO
Currently both the Company Law and the SEBI regulations leave it up to a company to decide if it would like to separate the roles of chairman and CEO. The committee has made the separation mandatory. Shroff says there is a “fundamental disconnect” in having one person occupy both seats as it muddles the job of management and governance.
What this does is separate them into the three constituent parts. Where the chairman, who is non-executive, is responsible for oversight of management and governance and I think it gives a certain purity to that concept. The management has to run the business and to make profits. And the shareholders exercise ownership control over both the organs.Cyril Shroff, Member, Corporate Governance Committee
3. Sharing Insider Information
Among the many proposals, this one stands out because it offers, for the first time, a framework within which company executives can share insider information with the promoter/shareholder or his nominee directors without violating SEBI’s Prevention of Insider Trading Regulations.
“After due consideration and detailed deliberation, the Committee members proposed that the regulatory framework should be amended to provide an enabling transparent framework regulating the information rights of certain promoters (including promoters of the promoter) and significant shareholders to reduce subjectivity and provide clarity for ease of business, along with appropriate and adequate checks and balances to prevent any abuse and unlawful exchange of unpublished price sensitive information (UPSI) i.e. to ensure information moves from one known safe container to another.”
This issue made the headlines more recently when Cyrus Mistry, the former chairman of Tata Sons, alleged that nominee directors of promoter Tata Trusts were sharing insider information with Trusts’ chairman Ratan Tata.
Shroff would not comment on that particular case. But he agrees that often information sharing happens in a regulatory white-space and results in market manipulation.
What this does is that it reinforces the line around the fact that price sensitive information which occurs in the boundaries of a company with insiders should not travel outside the boundaries of the company. But if it has to do so, because controlling shareholders and promoters require access to that information, this creates a green channel.Cyril Shroff, Member, Corporate Governance Committee
Eligibility criteria will apply to those who can sign such agreements and trading on the basis of this information will still be a violation of the anti-insider trading regulations, adds Shroff.
4. Negative Vote By Related Party
This proposal seeks to align SEBI’s regulations with Company Law provisions. While the Companies Act, 2013 says no related party can vote in favour of a related party transaction, SEBI regulations say no related party can vote on any related party transaction.
The committee has proposed aligning the SEBI regulation to the Company Law provision.
Sometimes related parties, say in a family there are two factions, and sometimes people within a group have different views. That block sometimes is used to achieve a certain outcome. But if there’s somebody in that group who also believes there is an abuse taking place, they can vote against but not in favour.Cyril Shroff, Member, Corporate Governance Committee
5. Brand Agreement Loophole Plugged
The bigger change pertaining to related party transactions is the proposal that brand and royalty payments above a certain threshold amount will need approval from a majority of public shareholders’ votes.
‘...payments made by listed entities with respect to brands usage/royalty amounting to more than 5 percent of consolidated turnover of the listed entity may require prior approval from the shareholders on a “majority of minority” basis.’
It is ultimately all about conflicts of interest and not using voting in your favour.Cyril Shroff, Member, Corporate Governance Committee
In 2014, in a controversial move, steel major JSW Steel decided to pay a brand license fee to a company owned by promoter Sajjan Jindal’s wife. Sajjan Jindal and his promoter companies voted in favour of the transaction.
But, at 0.25 percent of net sales that transaction would not be covered by this proposal.
Too Prescriptive?
While the report offers succinct explanations for all the proposals it makes, many might think the 177 page effort to be too prescriptive. After all there are recommendations on detailed disclosures of competencies of every board member, how directors should update knowledge, the constitution of an information technology committee and such.
But Shroff says the committee was keen to do work that “moved the needle”.
One of the other committee members used a very nice phrase that “this committee had both a microscope as well as a telescope”.Cyril Shroff, Member, Corporate Governance Committee