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The Next Phase Of Corporate Governance Reforms


The report of the committee appointed by the Securities and Exchange Board of India under the chairmanship of Uday Kotak represents an important milestone in Indian corporate governance. Coming nearly two decades after the first corporate governance endeavour in India, in the form of the CII Code issued in 1998, the committee’s recommendations have upped the ante on governance. They have also built upon the strong foundation laid by the efforts of previous committees that were tasked with the issue, as well as the resulting legislative and regulatory developments.

The enactment of the Companies Act, 2013 and SEBI’s subsequent reforms to its regulations to bring them in line with the legislation have elevated India’s governance norms to among the best in the world, at least on paper. To that extent, the Kotak-led committee had the advantage of starting from a higher base. Understandably, it embraced the motto of “evolution not revolution”. Consistent with this approach, most of the recommendations in the committee’s report are incremental in nature, while a few are far-reaching.

Among the radical suggestions includes one where a transparent framework is to be established by which companies may share unpublished price sensitive information with their controlling shareholders (more commonly referred to as promoters). Under the current dispensation, there is a rather loose arrangement by which information flows from companies to their promoters, effectively creating no wall between the two. The committee’s recommendations seek to translate the current informal trend into more formal, transparent and regulated arrangement that imposes obligations on promoters to safely receive and hold the information.

These, along with recommendations that significantly tighten the monitoring of related party transactions, reflect the present corporate landscape in India that is dotted with companies with concentrated shareholding and dominant promoters, some of whom may be self-serving (a phenomenon that the committee refers to as the “Raja” or monarch model).

Unlike corporate governance reviews of the past that sought to look elsewhere and adopt governance mechanisms prevalent in other jurisdictions such as the United Kingdom and the United States, the Kotak Committee has conducted an introspective exercise and attempted to devise customized solutions for local problems.

This is indeed a welcome step.

Several other recommendations focus on the composition of the board, its independence and functioning, the role of auditors, shareholder participation and the enhancement of corporate disclosures. Some of the more significant changes include the increase of the board size for listed companies to six directors, mandating that at least half of listed company boards be comprised of independent directors and that they have at least one woman director who is independent. The report also places considerable emphasis on process-oriented matters. Apart from the material changes, most of the recommendations involve incremental steps.

One can envision the merits of such an approach. Minor changes, although cumulatively substantial, may be more palatable to the business community rather than a big bang adoption. Being objective, they might also be easier for the regulator to enforce. However, considerable downsides are evident as well. A process-oriented approach may transform corporate governance into a mechanical check-the-box exercise. Although the committee has demonstrated care in facilitating “the true spirit of governance”, the tenor of the recommendations may have the effect of form prevailing over substance. Moreover, the penetration of unyielding corporate regulation into the boardroom may have unintended adverse consequences.

The Gordian knot in the realisation of the committee’s labour lies not in its own recommendations, but in the stance adopted by the Ministry of Corporate Affairs (MCA), which was also represented on the committee.

Other bodies such as the Ministry of Finance and the Institute of Chartered Accountants of India have also expressed reservations on specific aspects.

In a letter addressed to the committee coinciding with the release of its report, the MCA has raised significant objections to several recommendations in the report. MCA’s concerns appear to be two-fold. First, the turf war between the MCA and SEBI regarding regulation of corporate governance has resurfaced, with the MCA’s position being that the field is occupied by the Companies Act, 2013 and the rules issued thereunder, thereby limiting the SEBI’s realm to regulate on broader issues of governance. Although the committee took great pains to ensure that its recommendations, to the extent they go beyond the companies’ legislation, is applicable only to listed companies, MCA’s position indicates that this is possible only “in exceptional circumstances”. MCA’s protestations to several recommendations of the committee have been grounded on this premise.

Historically, there have been issues revolving around the MCA and SEBI sharing territory over corporate governance matters. While some of the earlier efforts in enhancing governance norms were spearheaded by SEBI, the MCA appeared to have wrested control over the process with the Companies Act, 2013 and its ability to promulgate extensive rules thereunder. The present regulatory contest can be attributed to those state of affairs wherein matters of corporate governance have been entrenched in the primary companies’ legislation rather than dealt with through securities regulation or corporate governance codes. This poses problems as it makes corporate governance less flexible. But, nothing prevents SEBI from enforcing more stringent norms for listing companies, as the committee has precisely recommended.

By insisting on some level of parity between the governance of listed companies and unlisted ones, MCA’s stance may have the effect of reducing the standards for listed companies and enhancing them for unlisted ones.

This does not bear any merit. The issue of who exercises regulatory domain should not dictate the nature of regulation that applies; rather, it should be the other way around.

The second, and more intriguing, aspect of MCA’s comments relates to the philosophical foundation of governance efforts. The committee’s approach is grounded on the logic that corporate governance “is an integral part of the broader governance of the country”, and that corporate India plays a significant role in nation-building, but the MCA seems to be focused on the ease of doing business (as evident from the tone of the amendments under consideration to the Companies Act).

While the two may not be mutually contradictory, SEBI and the MCA appear to be approaching the issue from opposite ends of the spectrum.

Unless there is consensus on the philosophical underpinnings of the problem at hand, solutions may be hard to arrive at.

In all, while the committee’s efforts are laudable, it remains to be seen whether, and the extent to which, they are implemented by the regulators and accepted by corporate India. The more important question is whether the turf battle between SEBI and the MCA will prove to be the spanner in the works.

Umakanth Varottil is an Associate Professor of Law at the National University of Singapore. He specialises in company law, corporate governance and mergers and acquisitions.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.