Mumbai, October 7, 2017

Many recommendations on corporate governance are in conflict with provisions of the Companies Act

A significant number of recommendations by the Uday Kotak panel on corporate governance are in conflict with provisions of the Companies Act 2013 and also face dissent from the ministry of corporate affairs (MCA) and other regulatory bodies such as the Institute of Chartered Accountants of India (ICAI).

Take, for instance, the proposal for the Securities and Exchange Board of India (Sebi) to penalize auditors if it observes lapses in their review of listed companies’ numbers. Or the one which suggests that Sebi should ask for disclosures on the ultimate beneficiaries of depository receipts. The first falls under ICAI’s purview while the tax department oversees the second.

“The ICAI has expressed its dissent on the above recommendation as the regulation of chartered accountants is covered under the Chartered Accountants Act, 1949 and to avoid jurisdictional conflict and other issues,” said the committee’s report.

Even MCA, in its comments on the report, said Sebi’s powers on auditors of listed entities need “to be examined”.

The Kotak committee had also recommended a penalty of Rs 1 crore on an auditor for any wrongdoing and Rs5 crore for repeat violations. Even on this, ICAI dissented, saying this was beyond the scope of the committee and that disciplinary measures for auditors will come under the proposed National Financial Reporting Authority, a regulatory agency for auditors.

The ministry of finance has objected to the depository receipt proposal. It said that a working group of Sebi, the Reserve Bank of India, the central board of direct taxes and the ministry of finance was working on a proposal to identify such beneficiaries and it would not accept any recommendation of the committee at this stage.

The report, which was submitted by the Sebi-appointed panel on Thursday, has called for public feedback till 4 November.

Of the 24 recommendations on the board of directors alone, the MCA has expressed dissent on 12.

“Even in the past, many well-drafted recommendations have not reached their logical conclusion because regulators are not in sync. There needs to be some mechanism for harmonization between different regulatory authorities so that well-intended regulations are not canned,” said Tejesh Chitlangi, partner, IC Universal Legal.

The committee suggested that a listed company have six directors. Currently, there is no such provision in the listing regulations, and companies rely on provisions of the Companies Act which prescribes a minimum of three directors.

MCA has expressed its reservations on the clause, stating that it will add to costs for firms. However, the ministry of finance has suggested that the increased number of directors be mandated in a phased manner.

The committee recommended that there be one woman independent director on the board to promote gender diversity. MCA has suggested one woman director who is not a relative of promoters or managers.

MCA has also said that requirements for independent directors, such as their qualifications or expertise, should be covered under the Companies Act rather than under multiple statutes.

“In principle, it is not an overlap, MCA is looking at over 7-8 lakh companies whereas Sebi has jurisdiction over only about 5,000 listed companies. So, as a regulator for the listed space, Sebi ideally should be able to draft and prescribe stricter rules,” said Sandeep Parekh, founder, Finsec Law Advisors.

“Clearly, there is a need for a harmonized approach to ensure that rules do not overlap. However, considering Sebi is looking at the listed space, where (its) mandate is deepening the capital market and investor protection, (it) can prescribe stricter regulations,” said Sandip Khetan, partner, EY India.

The Kotak committee also proposed that transactions involving payments made to a related party with respect to brand usage or royalty shall be considered material if the value exceeds 5% of the annual consolidated revenue of a listed entity. MCA wants the threshold to be brought down to 2%.

In New Delhi on Friday, railway minister Piyush Goyal faulted the way independent directors are chosen by companies for corporate governance failures.

“When I run my board, I will choose someone who agrees with me and are ‘yes men’ and that is the whole problem,” Goyal said at the World Economic Forum.

Referring to a suggestion that companies make public the relevant skills of their directors, Goyal said that when he became power minister, he didn’t know even the ‘P’ of power or ‘C’ of coal. “Similarly, IAS officers all over the country—many of them have done illustrious jobs and I don’t think they are some domain experts. Even Sreedharan didn’t know what metro looks like when he became ‘metro man’ of India,” Goyal said, referring to E. Sreedharan, who oversaw the construction of the Delhi Metro network. Goyal praised the suggestion that there be at least one independent woman director on the board. “To my mind you have to encourage diversity of opinion and diversity of experience.”