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Amendments to SEBI Listing Regulations pursuant to Kotak Committee recommendationsAn overview

June 2018

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Table of contentsAn introduction

Composition and role of the board

Board committees

Overview

Institution of independent directors

Monitoring group entities and related parties

Accounting and audit related matters

Disclosures and transparency

Investor participation

01

0 3

13

02

09

17

At a glance – mapping of disclosures 35

Glossary 37

33

27

23


An introduction


The Securities and Exchange Board of India (SEBI) recently issued certain amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) vide its circulars on 9 and 10 May 2018. These amendments have come as a follow up to the decisions taken at the last SEBI Board meeting, wherein it had accepted a number of recommendations of the Committee on Corporate Governance constituted by SEBI under the chairmanship of Uday Kotak (the Kotak Committee).

The Kotak Committee was formed on 2 June 2017 with the aim of improving standards of corporate governance of listed companies in India. The Kotak Committee submitted its report to SEBI on 5 October 2017, wherein it provided 80 recommendations. The report was placed for public comments till 4 November 2017. The recommendations covered many areas of governance, including the composition, role and functioning of the board and its committees, oversight over group entities and related party transactions, promoter related arrangements, enhancing transparency and disclosures, strengthening the financial reporting and audit oversight functions, investor engagement and participation and governance in public sector enterprises.

The SEBI received more than 120 comments letters from various stakeholders including Ministry of Finance, Ministry of Corporate Affairs, industry, government, global associations, institutional investors, lawyers, etc.

SEBI has accepted most of the recommendations of the Kotak Committee without modification and a few others with modifications. Certain recommendations have been referred to various agencies (i.e. government, other regulators, professional bodies, etc.) since the matters pertain to them. There are also certain other recommendations that relate to best practices, where the implementation has been left to the discretion of the board of directors of listed entities.

The recommendations that have been accepted are being implemented through amendments to the Listing Regulations and other related guidance being issued by SEBI through its circulars. The amendments to the Listing Regulations are being made applicable in a staggered manner to allow listed entities enough time to implement the changes and put in place the required resources and processes. Accordingly, in this publication we have categorised the amendments to the Listing Regulations in seven themes and within each theme we have highlighted them in the chronological order of their applicability. It is important to note that while most of the amendments are applicable from 1 April 2019, there are certain recommendations that are applicable immediately.

We welcome the steps taken by SEBI based on recommendations of the Kotak Committee, which we are sure will go a long way in improving the corporate governance practices in the Indian listed entities.

With most of the Kotak Committee recommendations getting codified into regulations, we have amongst the best corporate governance regulations in the world. However, the real test will come from implementation. The Kotak Committee recognised the need to move from compliance in letter to compliance with the spirit; this should be at the heart of any corporate governance reform that every company or board should seek to drive.

Arun M. KumarChairman and CEO, KPMG in India and a Member of the SEBI Committee on Corporate Governance

1


Overview of the amendments to the Listing Regulations based on the recommendations of the Kotak Committee The amendments issued by SEBI to the Listing Regulations to operationalise the recommendations of the Kotak Committee have been grouped into seven themes (see diagram below). The key changes under each of these themes have been discussed in the following sections of this document.

The Kotak Committee recommendations

Composition and role of the board


Disclosures and

transparency

Accounting and audit related

matters

Monitoring group entities

and related partiesBoard

committees

Institution of independent

directors

1

2

34

5

6

7

2SEBI amendments pursuant to Kotak Committee recommendations - An overview

Chapter i3


Composition and role of the boardAmendments in relation to directors and Board of Directors (BoD)

Gender diversity on the BoD (Effective from 1 April 2019 for top 500 listed entities and 1 April 2020 for top 1,000 listed entities)

Background

The 2013 Act and the Rules require at least one woman director on the BoD of every listed entity.

The Listing Regulations also currently require at least one woman director on the board of a listed entity.

Diversity, including gender diversity, is often seen to have a positive impact on the decision-making processes of corporate boards.

Minimum number of directors on a BoD (Effective from 1 April 2019 for top1 1,000 listed entities and 1 April 2020 for top 2,000 listed entities)

Maximum number of directorships (Reduce to eight by 1 April 2019 and to seven by 1 April 2020)

Background

The Companies Act, 2013 (2013 Act) requires a minimum of three directors on the board of a public limited company.

There is no similar requirement in the Listing Regulations.

The BoD play an important role in a company’s governance and performance. It is, therefore, essential that a company has a sufficient number of directors on its board to ensure that it is able to carry out its functions effectively.

Background

The 2013 Act provides that the maximum number of public companies in which a person can be appointed as a director should not exceed 10.

The Listing Regulations state that a person should not serve as an independent director in more than seven listed entities and if the director is a whole-time director in one listed entity, then he/she cannot serve as an independent director in more than three listed entities.

Multiple directorships beyond a reasonable limit may lead to a director not being able to allocate sufficient time to a particular company, thus may hinder their ability to play an effective role.

1. Relevant top entities to be determined on the basis of market capitalisation as at the end of immediate previous financial year.

A minimum of six directors would be required on the BoD of top listed entities in a phased manner.

The maximum number of directorships (including any alternate directorships) in listed entities would be reduced to seven (irrespective of whether the person is appointed as an independent director or not).

This change will be achieved in a staggered manner. The maximum number of listed entity directorships held by a person would be brought down to eight by 1 April 2019 and to seven by 1 April 2020. A person would not serve as an independent director in more than seven listed entities.

Additionally, any person who is serving as a whole-time director/Managing Director(MD) in any listed entity would serve as an independent director in not more than three listed entities.

For the purpose of calculation of maximum number of directorships, the count of listed entities on which a person is a director/independent director would be only those whose equity shares are listed on a stock exchange.

Amendment

Amendments

Top listed entities would be required to appoint at least one independent woman director on their BoD.

Amendment



Approval for non-executive directors on attaining a certain age (Effective from 1 April 2019)

Separation of the roles of non-executive chairperson and MD/Chief Executive Officer (CEO) (Effective from 1 April 2020 for top 500 listed entities)

Background

The 2013 Act provides that the same individual should not be appointed/reappointed as the chairperson of a company as well as its MD/CEO, unless so required by the articles of the company or else the entity does not undertake multiple businesses.

The Listing Regulations do not mandate such a separation of the posts of chairperson and CEO but instead leave it to the discretion of the listed entity.

Chairperson of the board of top 500 listed entities would be a non-executive director and not be related to the MD or the CEO in accordance with the definition of ‘relative’ as per the 2013 Act.

The above requirement would not be applicable to listed entities that do not have any identifiable promoters as per the shareholding patterns filed with stock exchanges.

Amendments

Quorum for board meetings (Effective from 1 April 2019 for top 1,000 listed entities and 1 April 2020 for top 2,000 listed entities)

Background

The 2013 Act requires a quorum of one-third of the total strength of the BoD or two directors, whichever is higher, for every board meeting.

The Listing Regulations do not prescribe any quorum for meetings of BoD.

Due to enhanced obligations of the boards of listed entities, a higher quorum may be required vis-à-vis other entities. Also in the interest of all stakeholders, especially minority shareholders, the presence of at least one independent director would be required for every board meeting.

Background

The 2013 Act provides that a person may be appointed/continue as an MD, whole-time director or manager on attaining the age of 70 years by passing a special resolution. However, no such provision exists for non-executive directors.

While age itself may not be a determinant of efficiency or capability of a person or the basis for disqualification of a director, a higher level of shareholder endorsement may be required for directors to continue in their position beyond a certain age.

In order to appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years, a listed entity would require a special resolution to be passed to that effect. Additionally, an explanatory statement should be annexed to the notice for such motion that would provide the justification for appointing such a person.

Amendments

The quorum for every meeting of the BoD of the top listed entity would be one-third of its total strength or three directors, whichever is higher, including at least one independent director.

The participation of the directors by video conferencing or by other audio-visual means would also be counted for the purposes of such quorum.

Amendments

5

Disclosures

Disclosure of expertise/skills of directors (Effective from financial year ending 31 March 2019/ 31 March 2020)

Disclosures on board evaluation (Effective from 10 May 2018/1 April 2019)

Background

The 2013 Act and the Listing Regulations require the disclosure of a brief profile of a director on his/her appointment, including expertise in specific functional areas. However, there is no specific requirement under the 2013 Act or the Listing Regulations for listed entities to disclose the required and available expertise of the board on a regular basis.

A group of individuals with varied skill-sets and experience is critical for providing comprehensive guidance and direction to a company.

Background

Both the 2013 Act and the Listing Regulations contain broad provisions on board evaluation i.e. evaluation of the performance of the board as a whole, individual directors (including independent directors and chairperson) and various committees of the board.

In addition, a guidance note on board evaluation has also been issued by SEBI vide circular dated 5 January 2017.

The corporate governance report would include a chart or a matrix setting out the skills/expertise/competence of the BoD in the following manner:

a. List of core skills/expertise/competencies identified by the BoD as required in the context of its business(es) and sector(s) for it to function effectively and those actually available with the board. This requirement would be effective for financial year ending 31 March 2019 and

b. Names of directors who have such skills/expertise/competence. This requirement would be effective from financial year ended 31 March 2020.

Effective 10 May 2018, the equity listed entities may provide disclosures on board evaluation. Therefore, listed entities may consider the following points as a part of their disclosures on board evaluation:

a. Observations of board evaluation carried out for the year

b. Previous year’s observations and actions taken

c. Proposed actions based on current year observations.

Additionally, with effect from 1 April 2019, the evaluation of independent directors is required to be done by the entire BoD and would include performance of the directors and fulfilment of the independence criteria as specified in the Listing Regulations and their independence from the management. The directors whose performance is being evaluated would not take part in such an evaluation.

Amendments Amendments



Timeline of the amendments

Amendments to the Listing Regulations Applicability date

Disclosures on board evaluation 10 May 2018

Disclosure of expertise/skills of directors on the BoD Financial year ending 31 March 2019

Minimum of six directors required on BoD 1 April 2019 for top 1,000 listed entities 1 April 2020 for top 2,000 listed entities

Gender diversity on board with at least one woman independent director

1 April 2019 for top 500 listed entities 1 April 2020 for top 1,000 listed entities

Maximum number of directorships Eight by 1 April 2019 Seven by 1 April 2020

Quorum for board meetings (one-third or three directors, whichever is higher)

1 April 2019 for top 1,000 listed entities 1 April 2020 for top 2,000 listed entities

Evaluation of independent directors 1 April 2019

Approval for appointment of non-executive directors attaining 75 years of age by special resolution

1 April 2019

Disclosure of expertise/skills of directors identified by names of directors

Financial year ending 31 March 2020

Separation of roles of non-executive chairperson and MD/(CEO)

1 April 2020 for top 500 listed entities


7


The role of the BoD is important in order to provide effective governance and strategic direction to the business of an entity. The BoD are responsible to all stakeholders for meeting the requisite standards of corporate governance. Due to the enormous nature of the responsibilities of directors of a listed entity, the recent amendments to the Listing Regulations attempt to allow companies to benefit by getting the best out of their directors and at the same time put the onus/responsibility on the directors and the company, with an enhanced level of public scrutiny.

Maximum number of directorships

To help directors discharge their role effectively with adequate time on hand, the Listing Regulations have limited the number of directorships to eight listed entities from 1 April 2019 and seven from 1 April 2020. Though the requirement to reduce the number of directorships is applicable from 1 April 2019, independent directors should now start evaluating which listed entities’ boards they are best suited to serve on and accordingly, make their decisions on continuance. The BoD of listed entities, on their part, should start the process of realignment of the composition of the board, and where necessary, start identifying independent directors with requisite skill sets that would either replace the outgoing independent directors or otherwise augment the current board members.

Minimum number of directors on a BoD

Additionally, the Listing Regulations increase the minimum number of directors on a BoD to six and have increased the size of the quorum of the BoD meetings. This is likely to help achieve sufficient number of directors are available to carry out functions of an entity constructively and a smaller number of directors are not burdened for providing oversight to the affairs of an entity. This requirement is applicable from 1 April 2019 but listed entities should start the process of identification of new directors with the requisite skill sets relevant for the business of the entity.

Diverse skill sets

As diverse skill sets are needed for providing comprehensive guidance and direction to an entity, the requirements relating to disclosure of expertise/skills of directors would drive BoDs to make a formal gap assessment of the available skills on the board vis-à-vis the required skills, and this in turn will require them to reassess the board composition. The Listing Regulations also looked at the gender diversity of the BoD and its

Our comments



impact on board functioning; with a view to increase diversity on corporate boards, top 500 listed entities would need to appoint one independent woman director from 1 April 2019 and top 1,000 listed entities from 1 April 2020. These amendments to the Listing Regulations are aimed at bringing right balance in the boards.

Disclosure on board evaluation

The disclosure of board evaluation should not be a boiler plate and move the needle to substance rather than form. These disclosures are likely to bring transparency to stakeholders as they would be able to understand all the aspects of evaluation i.e. observations of board evaluation carried out for the year, previous year’s observations and actions taken and proposed actions based on current year observations. This requirement is applicable from 10 May 2018 and therefore, listed entities that have not yet issued annual reports may consider providing disclosures regarding board evaluation. It is important to note that BoD have discretion in the manner of presentation of disclosures with regard to board evaluation. The circular is effective from 10 May 2018 while the compliance by companies is voluntary.

Separation of roles of non-executive chairperson and MD/CEO

While all of the above amendments are towards empowering the BoD, separation of non-executive chairperson and MD/CEO is expected to provide a better and more balanced governance structure to a listed entity. The separation is likely to ensure that the BoD would be able to concentrate on the governance role while the management led by MD/CEO would focus on management. Generally, the separation of roles is considered as a best practice and few jurisdictions like the U.K. and Australia require it.

The Kotak Committee had recommended that listed entities with more than 40 per cent of public shareholding should separate the roles of the chairperson and CEO/MD with effect from 1 April 2020, with the chairperson being a non-executive director. However, SEBI has accepted this recommendation with a modification; as per the amendments, this is applicable to all top 500 listed entities irrespective of the level of public shareholding. However, this requirement would not be applicable to listed entities that do not have any identifiable promoters as per the shareholding patterns filed

with stock exchanges. It is important to note that the definition of ‘promoter’ in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) covers ultimate parent entities too, and would therefore, impact both multinational companies as well as Indian businesses.

Indian subsidiaries (though professionally run) of global multinational companies, should carefully evaluate the definition of ‘promoter’. If their holding companies are covered in the ‘promoter’ definition then they would need to separate the roles of non-executive chairperson and CEO/MD.

In the context of Indian business companies that are promoter managed, a decision on separation of roles of chairperson and CEO/MD would also require careful evaluation and would need to take into account succession planning. Additionally, with a view to drive compliance in substance rather than form, SEBI has prohibited the appointment of relatives of chairperson as CEO/MD or vice versa, as the Listing Regulations specifically mention that chairperson, MD or CEO should not be relatives of each other.

Board inter-locks

The Listing Regulations also prohibit board inter-locks. This requirement is applicable from 1 October 2018. Therefore, the listed entities should start evaluating the composition of their BoD to identify if there is a situation of board inter-lock. Additionally, they would need to ensure that processes are in place for prior consultation with directors while they accept new positions in other listed entities in the future.

Recommendation not accepted by SEBI

One recommendation of the Kotak Committee that has not been accepted by the SEBI relates to matrix reporting structure. The Kotak Committee had proposed that the corporate governance report should carry a confirmation that the BoD are responsible for the business and overall affairs of the listed entity in the relevant financial year and that the reporting structures of the listed entity, formal or informal, are consistent with the BoD’s responsibility. The SEBI felt that BoD are already responsible for the overall affairs of a listed entity as per the law irrespective of a listed entity’s internal structures. Therefore, this recommendation was not accepted.

Chapter ii9


Institution of independent directorsEligibility criteria for independent directors (Effective from 1 October 2018)

Alternate directors for independent directors (Effective from 1 October 2018)

Background

The 2013 Act and the Listing Regulations set out certain objective criteria for determination of independence of a director.

Evaluation of ‘independence’ of an independent director should entail both objective and subjective assessments and such assessments should be both continuing and genuine. The Kotak Committee noted some instances of persons who are relatives of promoters being appointed as independent directors. Therefore, it was recommended that the net of exclusions be appropriately expanded to avoid the appointment of family associates as independent directors.

Additionally, a self-assessment of ‘independence’ be required of every independent director, the veracity of which would need to be confirmed by the board.

The trend of ‘board inter-locks’ may run a structural vulnerability of quid-pro-quo and is undesirable from a good governance standpoint.

Background

The 2013 Act permits appointment of alternate directors for all directors including independent directors (for a director during his absence for a period of not less than three months from India). It also states that a person holding any alternate directorship for any other director in the company (or holding directorship in the same company) would not be appointed as an alternate director. Additionally, it provides that no person shall be appointed as an alternate director for an independent director unless he/she is qualified to be appointed as an independent director under the provisions of the 2013 Act.

There is no specific provision pertaining to alternate directors in the Listing Regulations.

Independent directors are elected to the board for their skills, experience, acumen, network and objectivity. These qualities are distinct to the relevant appointee and are not replaceable with an alternate.

Eligibility criteria for a director to be an independent director would be as follows:

a. Specifically exclude persons who constitute the ‘promoter group’ of a listed entity

b. Exclude ‘board inter-locks’ arising due to common non-independent directors on boards of listed entities (i.e. a non-independent director of a company on the board of which any non-independent director of the listed entity is an independent director, cannot be an independent director on the board of the listed entity).

For example, if Mr. A is an executive director on the board of company A (being a listed entity) and is also an independent director on the board of company B, then no non-independent director of company B can be an independent director on the board of company A.

Appointment of an alternate director for an independent director would not be permitted.

AmendmentsAmendment

Directors and Officers (D&O) insurance for independent directors (Effective from 1 October 2018 for top 500 listed entities)

Background

The 2013 Act specifies that the letter of appointment of independent directors should include a provision for D&O, if any. However, for a company to undertake such D&O insurance is not mandatory under the 2013 Act.

The Listing Regulations do not have a specific provision on this matter.

Top 500 listed companies are required to undertake D&O insurance for their independent directors. The quantum and the risks to be covered under D&O insurance would be determined by BoD.

Amendments



Declaration by independent directors (Effective from 1 April 2019/annual report for the year ended 31 March 2019)

Background

The 2013 Act provides that every independent director is required to provide a declaration that he/she meets the legal criteria of independence, at the first meeting of the relevant board in which he or she participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his/her status as an independent director.

Further, at the time of appointment of an independent director, the board needs to certify that in the opinion of the board, the independent director proposed to be appointed fulfils the conditions specified in the 2013 Act and the rules made thereunder and that the proposed director is independent of the management.

Each independent director would submit a declaration on the following occasions:

• At the first meeting of the board in which he/she participates as a director

• At the first meeting of the board in every financial year

• Whenever there is any change in the circumstances which may affect his/her status as an independent director.

The declaration should state that he/she meets the criteria of independence and he/she is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his/

Amendments

Disclosures on resignation of independent directors (Effective from 1 April 2019 /annual report for the year ended 31 March 2019)

Background

The 2013 Act provides that a director who resigns before the expiry of his/her term is required to give detailed reasons to the registrar of companies. There is no specific provision on this aspect in the Listing Regulations.

Within seven days of the date of resignation, listed entities would be required to disclose to the stock exchanges, detailed reasons for resignation of independent directors along with the confirmation by such director that there are no other material reasons other than those provided. (Effective from 1 April 2019)

Detailed reasons for the resignation of an independent director before the expiry of his/her tenure is also required to be given in the corporate governance section of the annual report. (Effective for annual report for the year ended 31 March 2019)

Amendments



Eligibility criteria for independent directors 1 October 2018

Alternate directors for independent directors 1 October 2018

D&O insurance for independent directors 1 October 2018 for top 500 listed entities

Confirmation by the BoD regarding fulfilment of specified conditions by the independent directors

Annual report for the year ended 31 March 2019

Disclosures on resignation of independent directors - In the annual report - To the stock exchanges

For the year ended 31 March 20191 April 2019

Declaration by independent directors 1 April 2019

her ability to discharge his/her duties with an objective independent judgement and without any external influence.

The board of the listed entity would take on record the declaration and confirmation submitted by the independent director after due assessment of the veracity of such declaration. (Effective from 1 April 2019)

Additionally, the BoD would be required to provide a confirmation in the corporate governance section of the annual report, that in its opinion, the independent directors fulfil the conditions specified in the Listing Regulations and are independent of the management. (Effective for annual report for the year ended 31 March 2019)

11


A set of good and truly independent directors is a prerequisite for good corporate governance of any company. Independent directors are expected to bring objectivity into the functioning of the BoD and improve its effectiveness. The Listing Regulations strengthen and support the institution of independent directors and the amendments seek to bring focus on the spirit of ‘independence’ of independent directors.

Eligibility criteria for independent directors

The eligibility criteria specifically now excludes relatives of the promoter/promoter group to be appointed as independent directors and also prohibits any board inter-locks. The timeline for applicability of this requirement is from 1 October 2018. Given that a limited time frame is left for the implementation date, listed entities should start the process of carefully evaluating the eligibility criteria of their independent directors and in case they need to appoint new independent directors then they should consider initiating the process.

Declaration by independent directors

Additionally, independent directors have to provide a ‘subjective’ declaration of their independence, including the absence of any current or anticipated situations that may impact their ability to discharge their duties objectively and also conduct a continuous assessment of the independence criteria.

D&O insurance for independent directors

The Listing Regulations also mandate a D&O insurance for independent directors as they have significant responsibilities and liabilities. In practice, many large listed entities provide D&O insurance for their independent directors. This requirement is more relevant for mid-size listed entities and is expected to provide some relief to independent directors.

Our comments



Alternate directors for independent directors

Alternate directors in place of independent directors may not be able to bring same kind of skills, experience, acumen, network and objectivity. Therefore, appointment of an alternate director for an independent director is not permitted.

Recommendations not accepted by SEBI

Some of the recommendations made by the Kotak Committee but have not been included in the amendments to the Listing Regulations are as follows:

1. At least once every year, an interaction to be required between non-executive directors and senior management

2. Minimum number of board meetings to be increased from four to five and specific agenda items like strategy, Environment, Sustainability and Governance (ESG), board evaluation, etc.

3. Minimum compensation to independent directors

4. Formal updation programme for the board on changes in laws every year

5. Formal induction programme for independent directors

6. Appointment of lead independent director

7. More exclusive meetings of independent directors

8. Setting up of an IT committee.

The SEBI has indicated that the adoption of these practices may be left to the discretion of the listed entities. Considering that these are good practices, companies should consider to voluntarily adopt these above mentioned recommendations as these are aimed at further strengthening the effectiveness of independent directors and executive management. Additionally, these practices are expected to help the former gain better insights into the business of the company and its functioning. Further, the appointment of a lead independent director will also help amplify the collective voice of independent directors in the board room, and make their role effective.

Two recommendations of the Kotak Committee that have not been accepted by the SEBI relate to the requirement for ‘minimum number of independent directors’ and requirement of ‘shareholders’ approval on appointment in case of casual vacancy of directors’.

Regarding the recommendation for ‘minimum number of independent directors’, SEBI felt this requirement is likely to burden the listed entities as there is a concern on availability of independent directors with requisite skills/expertise.

In case of casual vacancy of directors, SEBI pointed out that the Companies (Amendment) Act, 2017 requires shareholders’ approval for the said appointment. Hence, there is no need to introduce this provision under the Listing Regulations.

Chapter iii13

Board committeesRole of an audit committee (Effective from 1 April 2019)

Role of Nomination and Remuneration Committee (NRC) (Effective from 1 April 2019)

Quorum for NRC meetings (Effective from 1 April 2019)

Background

The 2013 Act and the Listing Regulations specify the role for the audit committee members. However, there is no specific requirement in the 2013 Act or the Listing Regulations for audit committee members to review the utilisation of funds given to unlisted subsidiaries by a listed holding company.

Therefore, the audit committee should review the utilisation of funds of the listed entity infused into unlisted subsidiaries including foreign subsidiaries. In order to ensure such an obligation is not onerous on the audit committee, the report provides a limit for scrutinisation of the loans/advances/investment from the holding company to the subsidiary.

Background

The 2013 Act and the Listing Regulations cast responsibility on NRC members to identify and recommend persons who can be appointed in senior management based on the criteria specified.

Background

The 2013 Act does not prescribe quorum requirement for committee meetings. The Listing Regulations currently prescribe quorum requirement only for meetings of the audit committee, which is either two members or one-third of the members of the audit committee, whichever is greater, with at least two independent directors.

The audit committee members would need to review the utilisation of loans and/or advances from/investment by the holding company in the subsidiary exceeding INR100 crore or 10 per cent of the asset size of the subsidiary, whichever is lower. The thresholds would include existing loans/advances/investments existing as on 1 April 2019 (the date when this provision comes into force).

The Listing Regulations have amended the definition of senior management. As per the amendment, the persons in senior management would include all members of management one level below the CEO/MD/whole-time director/manager (including CEO/manager, in case CEO/manager is not part of the board) and should specifically include the company secretary and the Chief Financial Officer (CFO). Further, it has been clarified that administrative staff would not be included.

Also the NRC members would need to recommend the remuneration payable to the senior management.

The quorum for a meeting of the NRC would be either two members or one-third of the members of the committee, whichever is greater, with at least one independent director.

Amendments

Amendments

Amendments



Composition and role of Stakeholders’ Relationship Committee (SRC) (Effective from 1 April 2019)

Applicability and role of Risk Management Committee (RMC) (Effective from 1 April 2019 to top 500 listed entities)

Minimum number of committee meetings (Effective from 1 April 2019)

Background

The 2013 Act and the Listing Regulations provide detailed provisions on composition and role of the SRC and specify that the role of the SRC should be, inter alia, to consider and resolve the grievances of the security holders of a listed entity including complaints related to the transfer of shares, non-receipt of annual report and non-receipt of declared dividends.

In order to increase the role of SRC, the scope and responsibilities of SRC have been significantly increased. The recommendation on composition of members is made to reshape the SRC by inducting new skills (including adding an independent director).

Background

The Listing Regulations require the constitution of a RMC by the top 100 listed entities determined on the basis of market capitalisation, as at the end of the immediate previous financial year. The 2013 Act does not prescribe any such requirement.

Further, the Listing Regulations does not specify the role of the RMC.

Background

The 2013 Act does not provide a requirement for minimum number of meetings.

The Listing Regulations require at least four meetings of the audit committee every year with a maximum gap of 120 days between any two meetings. However, there is no requirement of minimum number of meetings for other committees under the Listing Regulations.

This recommendation is made to ensure that mandatory committees function effectively.

The SRC of every listed entity would specifically look into various aspects of interest of shareholders, debenture holders and other security holders.

Also the SRC should consist of at least three directors as members, with at least one being an independent director. Additionally, the chairperson of the SRC should be present in the Annual General Meeting (AGM) to answer queries of the security holders.

Thus, the role of the SRC has been widened to include the following:

a. Resolve security holders’ grievances including complaints relating to transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue of new/duplicate certificates, general meetings, etc.

b. Review measures taken for effective exercise of voting rights by shareholders.

c. Review of adherence to the service standards adopted by the listed entity in respect of various services being rendered by the registrar and share transfer agent.

d. Review various measures and initiatives taken by the listed entity for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the security shareholders of the entity.

The constitution of RMC would be applicable to top 500 listed entities and the role of RMC would specifically include cybersecurity.

NRC, SRC and RMC would be required to necessarily meet at least once in a year.

Amendments

Amendments

Amendments


15




Role of an audit committee 1 April 2019

Role of NRC 1 April 2019

Quorum for NRC meetings 1 April 2019

Composition and role of SRC 1 April 2019

Applicability and role of RMC 1 April 2019 for top 500 listed entities

Minimum number of committee meetings 1 April 2019

Role of an audit committee

The intent of an audit committee is fairly well understood in terms of its role and responsibilities. The Listing Regulations strengthen the role of NRC, SRC and RMC. This in turn is also expected to help an audit committee to strengthen its role as it is likely to reduce the burden on them and allow them to concentrate on matters relevant from the perspective of oversight of governance.

Role of NRC

As per the amendments, NRC would be required to recommend all payments (in whatever form) to be made to the senior management.

Role of SRC and RMC

The role of SRC has also been enhanced to increase its scope and responsibilities and require it to actively engage and communicate with major shareholders of the listed entity or group. As SRC has to play an important role, the Listing Regulations specify the quorum of the SRC meeting. Additionally, an active RMC has been envisaged in the Listing Regulations and applicable to top 500 listed entities (earlier to top 100 listed entities) and the RMC is specifically required to monitor the cybersecurity risk.

Therefore, the current practice of combining audit committee and RMC may not fulfil the roles and responsibilities identified in the Listing Regulations. It is noteworthy to see that the Listing Regulations are now providing a sound framework for NRC, SRC and RMC to help these committees discharge their roles effectively.

Recommendations not accepted by SEBI

Two recommendations of the Kotak Committee that have not been accepted by SEBI relate to the requirement for ‘at least two-third of the NRC to be independent’ and ‘to add NRC in calculation of membership and chairpersonship limit’.

With regard increasing the number of independent directors in NRC, SEBI felt that sufficient norms are currently in place in the Listing Regulations i.e. NRC currently comprises non-executive directors and half of the directors are independent with an independent chairperson. Therefore, there is no need to increase the number of independent directors in the NRC.

The SEBI received comments to not include NRC to calculate maximum number of memberships/chairpersonship as it may create shortage of right individuals to be part of the committees.



Our comments

Chapter iv17

Monitoring group entities and related partiesGroup governance unit (Effective from 10 May 2018)

Secretarial Audit (Effective from year ended 31 March 2019)

Background

There is no provision under the 2013 Act or the Listing Regulations with respect to group governance unit/governance committee or a group governance policy.

Background

The 2013 Act requires a secretarial audit for listed companies and unlisted companies above a certain threshold.

However, there is no specific provision for secretarial audit under the Listing Regulations.

Secretarial functions are critical to efficient board functioning and extending this requirement to material unlisted subsidiaries incorporated in India would be in accordance with the theme of strengthening group oversight and improving compliance at a group level.

Where a listed entity has a large number of unlisted subsidiaries:

a. The listed entity may monitor their governance through a dedicated group governance unit or governance committee comprising the members of the board of the listed entity.

b. A strong and effective group governance policy may be established by the entity.

c. The decision of setting up of such a unit/committee or having such a group governance policy would rest with the board of the listed entity.

Amendments

Secretarial audit would be mandatory for listed entities and their material unlisted subsidiaries incorporated in India and the report would be annexed with the annual report.

Amendments

Royalty and brand payments to related parties (Effective from 1 April 2019)

Background

The Listing Regulations do not contain any specific provision pertaining to payments made for brand and royalty to related parties.

A listed entity would be encouraged to provide better disclosures on the value it derives from a brand or technology for which it has agreed to pay royalty, brand, or technical fees to the parent entity/promoters. Additionally, the disclosures are expected to provide shareholders an opportunity to comprehend the terms and conditions of such payouts.

Payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than two per cent of consolidated turnover of the listed entity would be considered material.

As currently required by the Listing Regulations such related party payments for royalty and brand would require approval from the shareholders on a majority of minority basis. This sub-limit of two per cent would be considered within the overall 10 per cent limit to determine material RPTs.

Amendments

Related Party Transactions (RPTs)

Governance




Disclosure of RPTs (Effective from half-year ending 31 March 2019/annual report for the year ended 31 March 2019)

Background

The 2013 Act contains provisions on disclosure of RPTs in the board’s report and approval of the shareholders in certain cases, etc. Similar approval and disclosure requirements are also required in the Listing Regulations.

Certain promoters/promoter group entities were not getting categorised as related parties under the Listing Regulations as they did not strictly fall under the definition of related parties as per the relevant accounting standards. Therefore, transactions with such persons were not getting categorised as RPTs under the Listing Regulations.

Approval of RPTs (Effective from 1 April 2019)

Background

The 2013 Act provides that a shareholder cannot vote to approve a contract or transaction which may be entered into by a company if such a shareholder is a related party to that transaction. The Listing Regulations have a blanket restriction on related parties voting on any resolution pertaining to a material RPT.

There is a gap in the legal framework wherein the 2013 Act allowed related parties to vote on (albeit not in favour of) a RPT while the Listing Regulations require such parties to abstain from voting.

The Listing Regulations amend the definition of ‘related party’ by including all promoters/promoter group entities that hold 20 per cent or above in a listed entity.

Additionally, in order to strengthen transparency on RPTs, the following would be disclosed:

a. Half-yearly disclosure of RPTs on a consolidated basis, in the disclosure format required for RPT in the annual accounts as per the accounting standards, on the website of the listed entity within 30 days of publication of the half-yearly financial results. Copy of the same also to be submitted to the stock exchanges (Effective from half-year ending 31 March 2019)

b. Disclosures of transactions with promoters/promoter group entities holding 10 per cent or more shareholding would need to be made annually (even if not classified as related parties in the annual report). (Effective for annual reports filed for the year ended 31 March 2019)

Strict penalties may be imposed by SEBI for failing to make requisite disclosures of RPTs.

Materiality policy (Effective from 1 April 2019)

Background

The Listing Regulations require listed entities to formulate a policy on materiality of RPTs and on dealing with RPTs.

Certain companies have formulated their materiality policy. However, they have not spelt out any threshold limits for determining materiality and therefore, enforcement becomes difficult.

Clear threshold limits, as considered appropriate by the BoD would be required to be disclosed in the materiality policy. Such materiality policy should be reviewed by the BoD at least once every three years and updated accordingly.

All material RPTs would require an approval of the shareholders through a resolution and a related party would not vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

Additionally, all entities falling in the definition of related parties would not vote to approve the relevant transaction irrespective of whether the entity is a related party to the particular transaction or not.

Therefore, the related parties would be allowed to cast a negative vote, as such voting would not be considered to be in conflict of interest.

Amendments

Amendments

Amendments

19

Obligations on the board of a listed entity with respect to subsidiaries (Effective from 1 April 2019)

Background

The 2013 Act does not have any specific provision for the board of the listed entity to oversee the affairs of the subsidiary. The Listing Regulations impose the following specific obligations on the board of the listed entity with respect to its subsidiaries such as:

a. At least one independent director must be a director in unlisted material Indian subsidiaries2

b. Audit committee to review financial statements of unlisted subsidiaries

c. Minutes of the meeting of the BoD of an unlisted subsidiary to be placed before a meeting of the BoD of the listed entity.

The Listing Regulations provide the following amendments:

a. Definition of material subsidiary: The definition of a material subsidiary would be revised to mean a subsidiary whose income or net worth exceeds 10 per cent (from the current 20 per cent) of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

b. Appointment of an independent director: At least one independent director on the BoD of the listed entity would be a director on the BoD of an unlisted material subsidiary, whether incorporated in India or not.

In this case, material subsidiary would mean a subsidiary whose income or net worth exceeds 20 per cent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

c. Significant transaction or arrangement: The management of the unlisted subsidiary should periodically bring to the notice of the BoD of the listed entity, a statement of all significant transactions and arrangements entered into by all unlisted subsidiaries (currently the disclosure is required for material subsidiaries).

Amendments

Remuneration to executive promoter directors (Effective from 1 April 2019)

Remuneration to non-executive directors (Effective from 1 April 2019)

Background

The 2013 Act prescribes a ceiling on the compensation that can be paid to directors.

There are no specific provisions in the Listing Regulations on maximum remuneration payable to executive promoter directors.The Kotak Committee noted cases of disproportionate payments made to executive promoter directors as compared to other executive directors.

Background

In case of non-executive directors, the 2013 Act requires the approval of shareholders for any remuneration payable to such directors exceeding one per cent of the net profits in case there is a MD or whole time director or manager and three per cent in other cases.

The Listing Regulations require the board to recommend all fees and compensation to be paid to non-executive directors. The Kotak Committee observed that certain non-executive directors (generally promoter directors) were receiving disproportionate remuneration from the total pool available vis-à-vis all other non-executive directors.

Shareholders’ approval by special resolution in a general meeting would be required if the total remuneration paid to the following:

a. A single executive promoter director exceeds INR5 crore or 2.5 per cent of the net profit, whichever is higher or

b. All executive promoter directors exceeds five per cent of the net profits.

Such an approval would be valid only till the expiry of the term of such director. Net profits would be calculated under Section 198 of the 2013 Act.

Amendments

Remuneration to directorsObligations in relation to subsidiaries

2. The Listing Regulations provide the threshold for determining ‘material subsidiary’ as a subsidiary whose income or net worth exceeds 20 per cent of the consolidated income or net worth of the listed entity.





Group governance unit 10 May 2018

Half-yearly disclosure of RPTs on a consolidated basis Half-year ending 31 March 2019

Disclosure of transactions with promoters/promoter group entities holding 10 per cent or more shareholding


Secretarial Audit Year ended 31 March 2019

Royalty and brand payments to related parties 1 April 2019

Approval of RPTs 1 April 2019

Materiality policy 1 April 2019

Obligations on the board of a listed entity with respect to subsidiaries 1 April 2019

Remuneration to executive promoter directors 1 April 2019

Remuneration to non-executive directors 1 April 2019

In case the remuneration of a single non-executive director exceeds 50 per cent of the pool being distributed to the non-executive directors as a whole, shareholders’ approval by a special resolution would be required every year, and details of such remuneration would also be disclosed.

Amendments


21


Group governance

Growth in the economy and globalisation have ensured that Indian companies too have expanded their operations significantly. Business of various Indian group entities are carried out through a large number of subsidiaries, both Indian and foreign. The establishment of a group governance policy is expected to provide a structured approach towards the oversight functions. Through the group governance structures, the Listing Regulations aim towards bringing greater transparency and accountability in the governance of groups with multiple entities and/or complex structures. The companies may consider providing this disclosure in their annual reports. The circular is effective from 10 May 2018 while the compliance by companies is voluntary.

Obligations on the board of a listed entity with respect to subsidiaries

Further, the Listing Regulations enhance the oversight of the BoD on all material subsidiaries, while reducing the materiality threshold from 20 per cent to 10 per cent of the consolidated income or net worth. This requirement is expected to significantly enhance the coverage of operations that are subject to oversight by the listed entity’s board. The Listing Regulations also bring global subsidiaries at par with Indian subsidiaries in the context of corporate governance. This is due to the fact that an appropriate level of review and oversight is required by the board of the listed entity over its unlisted entities for protection of interests of public shareholders. Currently, one independent director of a listed entity is appointed on the board of an unlisted material Indian subsidiary. This requirement has been extended to all unlisted material foreign subsidiaries too.

Additionally, the Listing Regulations require that the management of the unlisted subsidiary should periodically bring to the notice of the BoD of the listed entity, a statement of all significant transactions and arrangements entered into by all unlisted subsidiaries (currently the disclosure is required for only a material subsidiary).

Disclosure of RPTs

Our comments



The disclosure of RPTs and other transactions with promoter owned entities will also bring greater transparency on the group’s operations, particularly since definition of related parties are being tried to be streamlined with relevant accounting standards. Therefore, all promoters/promoter group entities that hold 20 per cent or above in a listed entity are to be considered related parties for the purposes of the Listing Regulations. Additionally, in the annual report, disclosures of transactions with promoters/promoter group entities holding 10 per cent or more shareholding would need to be presented annually (even if not classified as related parties).

The penalties included in SEBI circular no. SEBI/HO/CFD/CMD/CIR/P/2018/77 (3 May 2018) would be applicable to the amendments to the disclosures of RPTs.

Royalty and brand payments to related parties

Currently, there is no specific provision in SEBI regulations pertaining to payments made regarding brand/royalty arrangements to related parties. Therefore, to help shareholders comprehend the terms and conditions of such payouts, all listed entities are required to make better disclosures on the value an entity derives from a brand or technology for which it has agreed to pay royalty, brand, or technical fees to the parent entity/promoters and in addition, SEBI regulations would require approval of shareholders on ‘majority of minority’ basis for payments that exceed two per cent of the consolidated revenues. However, it is not clear from the Listing Regulations whether this approval requirement would apply to payments under existing arrangements that have previously been approved by the shareholders.

Approval of RPTs

All material RPTs would require an approval of the shareholders through resolution and no related party would vote to approve such resolutions whether the entity is a related party to the particular transaction or not. As per the amendments, all entities falling within the definition of related parties can now vote to reject the relevant transaction irrespective of whether the entity is a related party to the particular transaction or

not i.e. the related parties would be allowed to cast a negative vote, as such voting cannot be considered to be in conflict of interest.

Remuneration to directors

Specific shareholders’ approval would be required for the remuneration paid to non-executive directors and to executive promoter directors.

Materiality policy

Currently, the Listing Regulations require listed entities to formulate a policy on materiality of RPTs and their transactions with related parties. It was observed by the Kotak Committee that certain entities have formulated their materiality policy. However, they have not spelt out any threshold limits for determining materiality and therefore, enforcement became difficult. Therefore, the amendments require that clear threshold limits, as considered appropriate by the BoD would be required to be disclosed in the materiality policy. Such materiality policy would need to be reviewed by the BoD at least once every three years and should be kept updated.


One recommendation of the Kotak Committee that has not been accepted by SEBI relate to the requirement for ‘information sharing with promoters/other shareholders’. The SEBI felt that giving any shareholder preferential treatment compared to other shareholders for getting access to information may have far reaching implications and therefore, this situation is not desirable. Hence, it did not accept this recommendation.

Though SEBI accepted the Kotak Committee’s recommendation regarding reclassification of promoters/classification of entities as professionally managed, there are several policy concerns raised on the issue and hence, SEBI is likely to revamp this provision through a more detailed set of amendments to the related provisions.

Chapter v23


Accounting and audit related mattersQuarterly financial disclosures (Effective from 1 April 2019)

Audit qualifications (Effective from 1 April 2019)

Background

The 2013 Act does not require a company to submit quarterly financial results. However, the Listing Regulations have detailed provisions for the submission of quarterly financial results by a listed entity to the stock exchanges.

Background

An auditor may qualify the accounts of a company either under the 2013 Act or the Listing Regulations.

a. Consolidated financial results: Disclosure of consolidated financial results has been made mandatory for all listed entities on a quarterly basis.

Stand-alone results would continue to be required to be published.

b. Cash flow statement: A cash flow statement on a half-yearly basis has been made mandatory for all listed entities.

c. Audit/limited review of quarterly financial results: With regard to the financial information of a group, accounting for at least 80 per cent of each of the consolidated revenue, assets and profits respectively would be required to be either limited reviewed/audited every quarter.

d. Limited review for last quarter: The listed entity would need to submit the audited or limited reviewed financial results in respect of the last quarter along with the results for the entire financial year (earlier audited financial results of the last quarter were required to be submitted).

e. Last quarter financial results: Any material adjustments made in the results of the last quarter which pertain to earlier periods would be disclosed by the listed entity as a note in the financial results.

Amendments

Financial results

Group audits (Effective from 1 April 2019)

Background

There is no specific provision with respect to group audits under the 2013 Act or the Listing Regulations. However, provisions for group audits are covered under the Standards on Auditing (SA) 600, Using the work of another auditor issued by the Institute of Chartered Accountants of India (ICAI) which permits the auditor of a holding company to place reliance on the audit performed by the auditor of the subsidiaries and provide an audit opinion on the Consolidated Financial Statements (CFS) based on the audit report provided by the other auditors.

Several international jurisdictions have adopted the International Standards on Auditing (ISA) 600, Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors). This ISA does not permit a division of responsibility between auditors of the holding company and its subsidiaries.

Quantification of audit qualifications has been made mandatory and the auditor would need to review and report, with the exception being only for matters like going concern or sub-judice matters.

For the exceptions, the management would be required to provide reasons, which will be reviewed by the auditors and need to be reported accordingly.

Amendments

Circulars requiring detailed disclosures regarding qualifications have been issued in this regard under the 2013 Act and the Listing Regulations.

The Listing Regulations specifically require quantification of the audit qualification by the auditor and if not possible, the management should make an estimate which is to be reviewed by the auditor.

Several jurisdictions across the world prohibit a listed company from filing a set of financial results/statements on which the auditor has issued a qualified opinion. These jurisdictions consider that financial statements are not in conformity with the Generally Accepted Accounting Principles (GAAP) and are presumed to be inaccurate or misleading, notwithstanding explanatory disclosures in footnotes or in the auditor’s report.



Statutory auditor of the listed entities would be required to undertake a limited review of all the entities/companies whose accounts are to be consolidated with the listed entity as per Accounting Standard (AS) 21, Consolidated Financial Statements.

Amendment

Disclosures of credentials and audit fee of auditors (Effective from 1 April 2019)

Disclosures of reasons for resignation of auditors (Effective from 1 April 2019)

Background

The 2013 Act provides for the disclosure of remuneration of auditors. But appointment of auditors is not considered ‘special business’ in the 2013 Act (since certain disclosures are required to be made in the notice convening the meeting for each item of ‘special business’ to be transacted at the general meeting) and consequently no statement is made to shareholders for requisite disclosures.

The Listing Regulations also do not prescribe any specific disclosures in relation to appointment of auditors.

Background

The 2013 Act read with Companies (Audit and Auditors) Rules, 2014 require that upon the resignation of auditors, reasons for such resignation shall be filed with the company and the registrar of companies. In accordance with the Listing Regulations, a change in auditor is a deemed material event and disclosure is required to be made to the stock exchanges. However, there is no specific provision for disclosure of detailed reasons for such change.

Total fee paid to an auditor and all entities on the network firms/network entity of which the auditor is a part have to be disclosed by the listed entity in its annual report on a consolidated basis (i.e. paid by the listed entity and its subsidiaries).

The explanatory statement in relation to the item on appointment/re-appointment of auditor(s) in the relevant notice calling an AGM, would include the following disclosures (in addition to any other disclosures that the BoD may deem fit):

a. Basis of recommendation for appointment including the details in relation to and credentials of the auditor(s) proposed to be appointed and

b. Proposed fees payable to the auditor(s) along with terms of appointment and in case of a new auditor, any material change in the fee payable to such auditor from that paid to the outgoing auditor and the rationale for such change.

Amendment

Amendments

Detailed reasons for resignation of an auditor as given by the said auditor would be communicated to the stock exchanges within 24 hours of receipt of such reasons from the auditor.

Amendment

Disclosures on audit and non-audit fee services rendered by the auditors (Effective for the annual report for the year ended 31 March 2019)

Background

The 2013 Act permits auditors to perform only those non-audit services as approved by the board/audit committee and specifically prohibits certain services to be provided by the auditors. The 2013 Act also provides for the disclosure of remuneration of auditors.

Under the Listing Regulations, the audit committee approves payment to statutory auditors for any other services rendered by the statutory auditors.

However, there is no requirement in either the 2013 Act or the Listing Regulations on disclosure of non-audit services rendered by the auditor to the entire network/group.

Disclosures

The auditor of the holding company is responsible for the direction, supervision and performance of the group audit engagement in such cases.

SA 600 differs from the ISA in this respect.

25


Amendments to the Listing Regulations

Applicability date

Disclosure on audit and non-audit fee services rendered by the auditors


Quarterly financial disclosures 1 April 2019

Audit qualifications 1 April 2019

Disclosure of credentials and audit fee of auditors

1 April 2019

Disclosure of reasons for resignation of auditors

1 April 2019

Group audits 1 April 2019


Our comments

Audit qualifications

The requirement of mandatory quantification of audit qualifications except in a few cases where management is to provide the reason and the auditor is to review and report on the same is likely to improve disclosures and transparency as well as there are enhanced disclosures regarding credentials and terms of appointment of auditors. These would help shareholders take informed decisions on the appointment of auditors of listed entities. Disclosure of proposed fees paid to a new auditor as compared to current fees is also expected to improve transparency.



Disclosure of reasons for resignation of auditors

Detailed reasons for resignation of an auditor as given by the said auditor would need to be communicated by the listed entities to the stock exchanges within 24 hours of receipt of such reasons from the auditor.

Disclosure of audit and non-audit fee services rendered by the auditors

Total fee paid to an auditor and all entities in the network firms/network entity of which the auditor is a part have to be disclosed by the listed entity in its annual report on a consolidated basis (i.e. paid by the listed entity and its subsidiaries).

Quarterly financial disclosures

The listed entities would need to gear up for reporting quarterly results on a consolidated basis from 1 April 2019. The SEBI regulations require a listed entity to present following columns in their quarterly financial results:

• Three months ended

• Previous three months ended

• Corresponding three months ended in the previous year

• Year-to-date figures for current period ended

• Year-to-date figures for the previous year ended

• Previous accounting year ended.

As comparative and year-to-date financial results have to be submitted, the listed entities would need to implement this requirement from 1 April 2018 and would need either an audit report or a limited review report from their auditors. KPMG in India conducted a study Indian Accounting Standards (Ind AS): Practical perspectives’ on the Ind AS results of the BSE 100 companies dated 10 February 2017 and observed that close to 40 per cent of the BSE 100 companies file stand-alone quarterly financial results. Therefore, such listed entities should start implementation of processes to prepare quarterly consolidated financial results.

Linked to this requirement is the condition that at least 80 per cent of each of the consolidated revenue, assets and profits respectively would require either limited review or audit for every quarter. It is important to note that though the Listing Regulations refer to AS 21 for preparation of consolidated financial results, for companies following Ind AS road map, Ind AS 110, Consolidated Financial Statements would be applicable.

Group audits

One of the other important amendments relates to the need for the auditor of the listed entity to carry out a limited review of all the entities/companies whose accounts are to be consolidated with that of the listed entity. While the amendment itself appears a little unclear on the expectation from auditors/companies, the Board Memorandum released by SEBI provides more clarity on the expectations. Further, SEBI is expected to issue detailed guidelines in due course to operationalise this requirement. It is important to note that from the intent of the amendment, the companies will need to subject all their subsidiaries to a limited review by the listed entity’s auditor, if the subsidiaries have a different auditor, which may require additional efforts and costs to be incurred by the subsidiaries.

Recommendations referred to other agencies/regulators

There are certain recommendations of the committee which SEBI has forwarded to respective government bodies and regulators. These recommendations are as follows:

• Review of internal financial controls to be extended to foreign subsidiaries as well

• Audit quality indicators to be made public to help with transparency and comparison of the audit quality of different auditors

• Implementation of Ind AS by banks, non-banking financial companies and insurance companies

• Strengthening the role of the ICAI and Quality Review Board.

The SEBI has also accepted the Kotak Committee’s recommendation with regard to ‘powers of SEBI against third party fiduciaries’ and would be formulating suitable regulations for the purpose of clarifying powers of SEBI over such fiduciaries.


One recommendation that SEBI did not accept relates to ‘permit obtaining of independent external opinion by auditors’. It was felt that this provision would put additional burden on the listed entities and if an auditor is not in agreement with the expert opinion, he/she has the option to qualify the financial statements.

Chapter vi27


Disclosures and transparencySearchable formats of disclosures (Effective from 9 May 2018)

Prior intimation of a board meeting to discuss bonus issue (Effective from 1 October 2018)

Background

There is no specific provision in the 2013 Act or the Listing Regulations with respect to ‘searchability’ of the disclosures.

Background

The Listing Regulations require prior intimation to the stock exchange about the meeting of the BoD in which a proposal for the declaration of certain items including bonus shares is going to be discussed. However, where the declaration of bonus by the listed entity is not on the agenda of the meeting of BoD, prior intimation is not required to be given to the stock exchanges.

All the disclosures made by the listed entity on its website and submitted to the stock exchanges would need to be in a searchable format that allows users to find relevant information easily. Additionally, all disclosures made to the stock exchanges by listed entities should be in XBRL format.

An advance notice for consideration of bonus issue by the board would be required to be submitted to stock exchanges, as it is price sensitive in nature.

Amendments

Amendment

Listed entities may provide disclosures on long-term and medium-term strategy. A listed entity may disclose, under the Management Discussion and Analysis (MD&A) section of the annual report, within the limits set by its competitive position, its medium-term and long-term strategy based on a time frame as determined by its BoD.

The listed entity may also articulate a clear set of long-term metrics specific to the company’s long-term strategy to allow for appropriate measurement of progress.

All credit ratings obtained by the entity for all its outstanding instruments would need to be updated immediately on the website as and when there is any revision in any of the ratings. (Effective from 1 October 2018).

Additionally, a listed entity would be required to disclose in the corporate governance section of its annual report, list of all credit ratings obtained along with any revisions thereto during the relevant financial year, for all debt instruments of such entity or any fixed deposit programme or any scheme or proposal of the listed entity involving mobilisation of funds, whether in India or abroad. (Effective for annual report for the year ended 31 March 2019)

Amendments

Amendments

Disclosures on long-term and medium term strategy (Effective from 10 May 2018)

Disclosure of credit rating (Effective from 1 October 2018/annual report for the year ended 31 March 2019)

Background

There is no specific provision on disclosure of medium-term and long-term strategy under the 2013 Act or the Listing Regulations.

Background

There is no specific provision in the 2013 Act with respect to disclosure of credit ratings. The Listing Regulations require the disclosure of revisions in credit ratings.

DisclosuresInformation to be given to stock exchanges



Disclosures of key financial indicators (Effective for annual report for the year ended 31 March 2019)

Disclosures pertaining to directors (Effective for annual report for the year ended 31 March 2019)

Background

There is no specific provision in the 2013 Act or the Listing Regulations that requires an entity with listed equity shares to report key changes in certain indicators and explanations for the same, other than general disclosures in the MD&A section of the annual report.

Disclosures pertaining to disqualification of directors (Effective for annual report for the year ended 31 March 2019)

Background

The 2013 Act or the Listing Regulations do not require a confirmation on a regular basis from the directors of the company that they have been barred to act as directors by any regulatory authority.

Background

The Listing Regulations provide that at the time of the appointment of a director, the names of listed entities in which the proposed director holds directorship and membership of the committees are to be disclosed to the shareholders.

All listed entities would be required to disclose in the section on MD&A in the annual report, certain key financial ratios (or sector-specific equivalent ratios), as applicable, wherever there is a change of 25 per cent or more in a particular financial year, along with detailed explanations thereof. The key ratios would pertain to debtors turnover, inventory turnover, interest coverage ratio, current ratio, debt equity ratio, operating profit margin (in percentage) and net profit margin (in percentage).

Additionally, a listed entity should disclose any change in return on net worth along with a detailed explanation thereof irrespective of the percentage of change in the financial year under the same section.

The corporate governance section of the annual report for the year ended 31 March 2019 would include separately the names of the listed entities where a person is a director and the category of directorship.

Amendments

Disclosure of utilisation of funds from Qualified Institutional Placement (QIP)/preferential issue (Effective for annual report for the year ended 31 March 2019)

Views of committees not accepted by the BoD (Effective for annual report for the year ended 31 March 2019)

Background

The ICDR Regulations require periodic disclosures on utilisation of issue proceeds in case of public issues. However, these disclosures are not required for funds raised by way of preferential allotments and QIPs..

Background

The 2013 Act and the Listing Regulations require the committees of the board (including the audit committee and the NRC) to consider and recommend certain matters to the BoD.

However, the 2013 Act, requires disclosure only in relation to the audit committee and there is no provision for disclosure to shareholders if the recommendations of the relevant committee are not accepted by the board.

A certificate from a company secretary in practice would be required in the annual report that none of the directors on the board of the company have been debarred or disqualified from being appointed or continuing as directors of companies by the SEBI/MCA or any such statutory authority.

The Listing Regulations require that appropriate disclosures would need to be provided with regard to the utilisation of proceeds of preferential issues and QIPs till the time such proceeds are utilised. This disclosure will be included in ‘other disclosures’ section of the corporate governance report.

Amendments

Amendments

In case, the BoD do not accept the recommendations of any committee of the board which is mandatorily required, in a relevant financial year, then the same would need to be disclosed to shareholders along with the reasons thereof in the corporate governance report.

Amendments

Amendments

29


Other key amendments

Following are the other key amendments:

a. Annual report: A listed entity would send the soft copy of the annual report to all those shareholders who have registered their email addresses either with the listed entity or with any depository.

A listed entity should submit the annual report to the stock exchange and publish on its website a copy of the annual report sent to the shareholders along with the notice of the AGM not later than the day of commencement of dispatch to its shareholders.

In the event shareholders approve any amendments to any portion of the annual report, then the revised copy (with details of and explanation for the changes so approved) to be sent no later than 48 hours after the AGM. (Effective for annual report filed for the year ended 31 March 2019)

b. Disclosure of subsidiary accounts: A listed entity is required to place audited financial statements for the relevant financial year of each of its subsidiaries on its website at least 21 days before the date of the AGM. (Effective from 1 April 2019)

c. Disclosures on website: Listed entities would be required to maintain a separate section for investors on its website and provide all the information mandated under the Listing Regulations (Regulation 46(2)). (Effective from 1 April 2019)

30




Searchable formats of disclosures 9 May 2018

Disclosure on long-term and medium term strategy 10 May 2018

Disclosure of any revision of credit rating for all outstanding instruments on website

1 October 2018

Prior intimation of board meeting to discuss bonus issue 1 October 2018

Disclosure of credit ratings along with any revision for all debt instruments/fixed deposit programme/any scheme or proposal involving mobilisation of funds, whether in India or abroad


Disclosures of key financial ratios Annual report for the year ended 31 March 2019

Disclosures pertaining to directors Annual report for the year ended 31 March 2019

Disclosures pertaining to disqualification of directors Annual Report for the year ended 31 March 2019

Disclosures of utilisation of funds from QIPs/preferential issue Annual report for the year ended 31 March 2019

Views of committees not accepted by BoD Annual report for the year ended 31 March 2019

Annual report Annual report for the year ended 31 March 2019

Disclosures of subsidiary accounts 1 April 2019

Disclosures on website 1 April 2019

SEBI amendments pursuant to Kotak Committee recommendations - An overview

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The above given measures are aimed at improving the disclosures in the annual report at one hand and thus, increasing investor confidence on the other hand. Though in the short-term the costs and efforts would be enormous for the listed entities to provide the above disclosures but in the long-run these disclosures would entail benefit in terms of effective investor engagement and may benefit the valuation of the company. Therefore, benefits of extensive disclosures are expected to outweigh the costs of developing them.

Disclosures on long-term and medium-term strategy

The Listing Regulations provide that from 10 May 2018 the listed entities may provide disclosures pertaining to the strategy of the entity both medium-term and long-term in their annual reports under MD&A section. Therefore, listed entities that have not issued their annual reports for the period ending 31 March 2018 may consider providing these disclosures. The circular is effective from 10 May 2018 while the compliance by companies is voluntary.

It is important to note that the requirement in the Listing Regulations regarding medium-term and long-term strategy is directionally in line with the concept of Integrated Reporting (IR). IR is a new approach to business reporting that is built around the organisation’s strategy to create and sustain value in the short, medium and long-term. The framework is developed by the International Integrated Reporting Council (IIRC). On 7 February 2017, SEBI issued a circular advising top 500 listed companies which are required to prepare Business Responsibility Report (BRR) to adopt IR on a voluntary basis from the financial year 2017-18.

Disclosures of key financial indicators

The Listing Regulations now require listed entities to disclose in the section on MD&A in the annual report certain key financial ratios and whenever there is a change of 25 per cent or more in a particular financial

Our comments



year, they should also provide detailed explanations. These ratios are expected to help investors comprehend an entity’s business and financial performance.

Globally, guidance has been issued by the International Organisation of Securities Commissions (IOSCO) and The European Securities and Markets Authority (ESMA) on the manner of presentation of key financial ratios also referred to as Alternative Performance Measures or Non-GAAP Measures. Listed entities may refer to these documents while presenting and disclosing these key financial ratios.

SEBI decisions on other recommendations

Apart from the above recommendations on disclosures and transparency, the Kotak Committee had recommended the following items given in the table below:

Recommendation SEBI decision

Enhanced disclosures on Depository Receipt (DR) holders

This recommendation has not been accepted by SEBI. It was pointed out that there are certain issues on availability of desired information with the global depositories. Additionally, a working group (Department of Economic Affairs (DEA) with SEBI, Reserve Bank of India (RBI), Central Board of Direct Taxes (CBDT), and MCA) is looking at this issue.

Harmonisation of disclosures This recommendation has been accepted by SEBI with modification. It would undertake a separate examination of the recommendations on a common filing platform and harmonisation of disclosures made to MCA and stock exchanges.

To do away with the disclosure of institutional investor meets

The SEBI did not accept this recommendation as this may go against the transparency principle and may deprive the retail investors of key alerts about such calls.

Disclosure on valuation in schemes of arrangement

The SEBI accepted this recommendation and would be issuing separate disclosure guidelines for an overall improvement in standards of information in valuation reports of schemes.

Commodity risk disclosures The SEBI accepted this recommendation and would be issuing detailed reporting format along with the periodicity of disclosures.

Chapter vii33



The top 100 listed entities would be required to hold AGMs by 31 August each year beginning from financial year 2018-19, i.e. within five months from the end of the financial year 2018-19.

Live one-way webcasts of AGMs would be required for top 100 listed entities from financial year 2018-19.

Amendment

Amendment

Timeline for AGMs of listed entities (Effective from the financial year 2018-19 for top 100 listed entities)

Webcast of proceedings of the AGM (Effective from financial year 2018-19 for top 100 listed entities)

Background

The 2013 Act requires listed entities in India to hold AGMs within six months from the end of the financial year. There is no specific provision in the Listing Regulations on this matter.

For each item of special business to be transacted at a general meeting, BoD would need to clearly specify their recommendation to the shareholders. This statement would be annexed to the notice referred in Section 102(1) of the 2013 Act.

Amendments

Resolutions sent to shareholders with board’s recommendation (Effective from 1 April 2019)

Background

While in certain cases the board’s recommendation is required for consideration by shareholders (for example, declaration of dividend), there is no general rule (either in the 2013 Act or in the Listing Regulations) that every resolution placed before the shareholders should have been recommended by the BoD.

Background

Webcast of the meeting proceedings is not mandatory neither under the 2013 Act nor under the Listing Regulations.



Timeline for AGMs of listed entities Financial year 2018-19 for top 100 listed entities

Webcast of proceedings of the AGMs Financial year 2018-19 for top 100 listed entities

Resolutions to be sent to shareholders with board’s recommendation 1 April 2019



Timeline and webcast of AGMs

The steps related to timelines for holding AGMs by top 100 listed entities within five months of the close of the financial year 2018-19 as well as one way webcast proceedings of AGMs from the financial year 2018-19 are steps in the direction to increase investor participation and enhance timeliness and transparency. However, listed entities would do well to assess their preparedness on such above issues.

SEBI decisions on other recommendations

Apart from the above recommendations on investor participation, the Kotak Committee had recommended the following items:

Recommendation SEBI decision

E-voting till the end of day of the AGM

This recommendation has not been accepted by SEBI as it was felt that allowing e-voting till the end of the day of the AGM may create operational issues in declaration of closure of voting on resolutions.

Stewardship code This recommendation has been accepted by SEBI and it would be issuing a common stewardship code for the entire financial sector.

Treasury stock This recommendation has been referred by SEBI to MCA to make appropriate amendments to the 2013 Act.

Our comments

Chapter viii35


At a glance – mapping of disclosuresThe amended Listing Regulations require the following additional disclosures in the respective sections of an annual report:

• Related party transactions: Transactions of the listed entity with any person or entity belonging to the promoter/promoter group which hold(s) 10 per cent or more shareholding in the listed entity, in the format prescribed in the relevant AS for annual results. (Effective from the year ended 31 March 2019)

• MD&A

a. An entity’s medium-term and long-term strategy based on a time frame as determined by its BoD, within the limits set by its competitive position. (Effective from 10 May 2018)

b. Details of key financial ratios and significant changes (i.e. change of 25 per cent or more as compared to the immediately previous financial year) in those key financial ratios, along with detailed explanations. The following are the key ratios to be disclosed:

i. Debtors turnover

ii. Inventory turnover

iii. Interest coverage ratio

iv. Current ratio

v. Debt equity ratio

vi. Operating profit margin (in per cent)

vii. Net profit margin (in per cent) or sector-specific equivalent ratios, as applicable. (Effective from the financial year ended 31 March 2019).

c. Details of any change in return on net worth as compared to the immediately previous financial year along with a detailed explanation thereof. (Effective from the financial year ended 31 March 2019)

• Corporate governance

Board of Directors (Effective from the year ended 31 March 2019)

a. Names of the listed entities where a person is a director and the category of directorship. (Effective from the financial year ended 31 March 2019)

b. Confirmation that in the opinion of the board, the independent directors fulfil the conditions specified in the Listing Regulations and are independent of the management. (Effective from the financial year ended 31 March 2019)

c. Detailed reasons for resignation of an independent director before the expiry of his/her tenure along with a confirmation by such director that there are no other material reasons other than those provided. (Effective from the financial year ended 31 March 2019)

d. A chart or a matrix setting out the skills/expertise/competence of the BoD specifying the following:

i. List of core skills/expertise/competencies identified by the BoD as required in the context of its business(es) and sector(s) for it to function effectively and those actually available with the BoD for financial year ending 31 March 2019 and

ii. Names of directors who have such skills/expertise/competence with effect from financial year ended 31 March 2020.

Nomination and Remuneration Committee (Effective from 1 April 2019)

The evaluation of independent directors would be done by the entire BoD and would include:

i. Performance of the directors

ii. Fulfilment of the independence criteria as specified and their independence from the management.

General shareholders’ information (Effective from the year ended 31 March 2019)

List of all credit ratings obtained by the entity along with any revisions thereto during the relevant financial year, for all debt instruments of such entity or any fixed deposit programme or any scheme or proposal of the listed entity involving mobilisation of funds, whether in India or abroad.

Other disclosures (Effective from the year ended 31 March 2019)

a. Details of utilisation of funds raised through preferential allotment or QIP as specified under Regulation 32(7A) of the Listing Regulations.

b. A certificate from a company secretary in practice that none of the directors on the board of the company have been debarred or disqualified from being appointed or continuing as directors of companies by the SEBI/MCA or any such statutory authority.

c. Details of recommendations mandatorily required by any committee of board in the relevant financial year that have not been accepted by the board along with reasons thereof.

Annual report

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d. The total fees for all services paid by a listed entity and its subsidiaries (i.e. on a consolidated basis) to the statutory auditor and all entities in the network firm/network entity of which the auditor is a part.

Special resolutions (Effective from 1 April 2019)

Following regulations requires shareholders’ approval by way of a special resolution:

a. Appointment of a person who has attained the age of 75 years or continues to be appointed as a non-executive director.

b. If payment of remuneration to executive directors who are promoters or members of the promoter group exceeds the given threshold:

i. In case of one executive director - annual remuneration payable to such executive director exceeds INR5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher

ii. In case of more than one executive director - aggregate annual remuneration to such directors exceeds five per cent of the net profits of the listed entity.

c. Annual remuneration payable to a single non-executive director exceeds 50 per cent of the total annual remuneration payable to all non-executive directors.

Notice of appointment/reappointment of statutory auditor (Effective from 1 April 2019)The notice being sent to shareholders for an AGM where the statutory auditor(s) is/are proposed to be appointed/re-appointed would include the following disclosures as a part of the explanatory statement to the notice:

i. Proposed fee payable to the statutory auditor(s) along with terms of appointment

ii. In case of appointment of a new auditor, any material change in the fee payable to such auditor from that paid to the outgoing auditor along with rationale for such a change

iii. Basis of recommendation for appointment including the details in relation to credentials of the proposed statutory auditor (both existing and new).

Disclosures on the website

A listed entity is required to make the following disclosures on its website:

a. Separate audited financial statements of each of its subsidiaries in respect of a relevant financial year, uploaded at least 21 days prior to the date of the AGM which has been called to, inter alia, consider accounts of that financial year (Effective from 1 April 2019).

b. All credit ratings obtained by the entity for all its outstanding instruments, updated immediately as and when there is any revision in any of the ratings (Effective from 1 October 2018).

c. Disclosure of RPTs on a consolidated basis, in the disclosure format required for RPT in the annual accounts as per the accounting standards, on the website of the listed entity within 30 days of publication of the half-yearly financial results. (Effective from half-year ending 31 March 2019)

Disclosures to stock exchanges

A listed entity is required to make the following disclosures to the stock exchanges:

a. Prior intimation to stock exchange about the meeting of the BoD in which the proposal for declaration of bonus securities (communicated to the BoD of the listed entity as part of the agenda papers) is due to be considered. (Effective from 1 October 2018)

b. Disclosure of RPTs on a consolidated basis in the format specified in the relevant AS for annual results within 30 days from the date of publication of stand-alone and consolidated financial results for the half year. (Effective from the half-year ending 31 Match 2019)

c. Detailed reasons for resignation of an independent director before the expiry of his/her tenure within seven days of resignation. (Effective from 1 April 2019)

d. Detailed reasons for resignation of an auditor as given by the said auditor not later than 24 hours of the receipt of such reasons from the auditor. (Effective from 1 April 2019)

Mandatory financial disclosures in financial results (Effective from 1 April 2019)a. Consolidated financial results to be submitted on a

quarterly basis.

b. Cash flow statement to be submitted on a half-yearly basis.

c. In case of quarterly consolidated financial results, at least 80 per cent of each of the consolidated revenue, assets and profits, respectively, should be subject to audit or in case of unaudited results, subjected to limited review.

d. Financial results in respect of last quarter could be audited/limited reviewed.

e. Disclose by way of note aggregate effect of material adjustments made in the results of the last quarter pertaining to earlier periods



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Glossary2013 Act Companies Act, 2013

AGM Annual General Meeting

AS Accounting Standard

BoD Board of Directors

CEO Chief Executive Officer

CFO Chief Financial Officer

CFS Consolidated Financial Statements

CMD Chairperson and Managing Director

CBDT Central Board of Direct Taxes

D&O Directors and Officers Insurance

DEA Department of Economic Affairs

ESG Environment, Sustainability and Governance

GAAP Generally Accepted Accounting Principles

ICAI The Institute of Chartered Accountants of India

Ind AS Indian Accounting Standards

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IRDAI The Insurance and Regulatory Development Authority of India

ISA International Standard on Auditing

KMP Key Management Personnel

MCA The Ministry of Corporate Affairs

MoF The Ministry of Finance

MD Managing Director

NRC Nomination and Remuneration Committee

RMC Risk Management Committee

RBI The Reserve Bank of India

RPTs Related Party Transactions

SA Standard on Auditing

SEBI The Securities and Exchange Board of India

SRC Stakeholders’ Relationship Committee

Listing Regulations SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

The Kotak Committee Kotak Committee on Corporate Governance


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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