Kotak Committee Recommendations on Corp. Governance

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Kotak committee headed by Uday Kotak (on Corporate Governance) submitted has submitted its recommendations to the Securities and Exchange Board of India (SEBI) last week. The committee has recommended sweeping changes that will make corporate affairs more transparent as well as improve the standard of corporate governance in listed companies.

Background –

In improving the standard of corporate governance, India has made progress over the years. Committees in the past, such as those led by Kumar Mangalam Birla and N.R. Narayana Murthy, contributed to the process. The Kotak committee has extensively examined the current state and has made recommendations that will help improve governance and enhance investor confidence.

Recommendations of the committee –

The committee has delved into areas such as the size and composition of the board, number of independent directors and their role, and disclosure and dissemination of information.

Following are the recommendations of the committee –

  • Committee has recommended that a listed company should have a minimum of six directors, at least one independent woman director, and a minimum 50% of the directors should be non-executive.
  • The committee has laid down the path for greater presence and role of independent directors. No board meeting can be conducted without the presence of an independent director. The committee has recommended that at least half of the board members should be independent directors.
  • Given the importance of independent directors in ensuring transparency in governance, it has been recommended that listed companies should have to give detailed reasons if an independent director resigns.
  • The committee has also recommended the separation of roles of chairperson and managing director, and the chairperson should be a non-executive director.
  • The committee has suggested that the number of board meetings in a year should be increased from four to five and aspects such as succession planning, strategy and broad evaluation should be discussed at least once a year.
  • It has advocated several changes that will help small investors. For instance, it has recommended that disclosures by companies to stock exchanges and on their own websites should be in a format that allows investors to find information with ease.
  • It also recommended that companies explain significant changes in select financial ratios in the annual report. Additionally, it has recommended that all listed companies should publish cash flow statements on a half-yearly basis.
  • The committee is of the view that if an audit firm leaves before the expiry of its term, the company should give reasons for this as it could be a cause of concern for investors. It has also recommended that SEBI should have the power to act against auditors if the need arises.

Conclusion –

Overall, the recommendations of the Kotak committee will enhance transparency and effectiveness in the way boards of listed companies function. Since some of the proposed changes are structural in nature, it has provided timelines for implementation. However, effective implementation and regulation remains an issue. The securities market regulator will need to develop capabilities to be able to regulate listed companies more effectively and protect the interests of small shareholders.

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