Mumbai, December 18, 2017
There has been criticism that many recommendations of the Udak Kotak committee on corporate governance will drive up compliance costs and encroach into other regulators’ turf
Two months after the Uday Kotak committee on improving corporate governance at listed companies submitted its report, the Securities and Exchange Board of India (Sebi) is finding it hard to implement its recommendations, following criticism that many of them will drive up compliance costs, and encroach into other regulators’ turf, two people aware of the matter said.
An email sent to Sebi on Tuesday was not answered until press time.
However, Ajay Tyagi, chairman, Sebi said that the regulator is seriously considering the recommendations. “We have received hundreds of comments on the report; the examination is on,” Tyagi said at a conference organized by Association of Investment Banks of India on Tuesday.
Sebi panel recommendations on improving governance in listed companies spanned areas such as the composition of the board, minimum number of directors to be 6, the make-up of board committees, treatment of subsidiaries, information sharing with promoters and related-party transactions, audit evaluations, and conduct of annual general meetings.
On overlap with other regulators, he said Sebi does not want to step in to the areas of other regulators.
“There is recommendation about auditors in the report. While we acknowledge that ICAI (Institute of Chartered Accountants in India) is there, we think it is an important area (auditor's role in listed companies) and we will always be vigilant about it (for listed companies),” said Tyagi.
“The comments in response to the governance report are wide-ranging. Most of them are touching upon increase in compliance costs; it might prompt a tick-box approach and not necessarily increase governance standards. Even there are concerns from other regulators which are also being factored in. But all the comments are under consideration and Sebi is not moving ahead in haste,” said the first of the two persons cited earlier in the story.
“I think issues under consideration could have been thought through better, if the committee had more time. Some say because of the time pressure, compromises had to be made to reach agreement among the committee members,” said Vladislava Ryabota, regional corporate governance lead for South Asia at International Finance Corporation, part of World Bank.
Sebi had formed the governance panel on 2 June to overhaul governance norms, and the panel submitted its report on 5 October.
Rayabota says that best corporate governance practice is not a compliance exercise. “Good behaviour cannot be codified or enforced. If companies followed the spirit of law, there would be no need for additional corporate governance rules. Creating stricter and stricter rules does not really help if there is no buy-in from the market participants – it might lead to more box-ticking and window dressing,” said Rayabota.
The likely rise in compliance burden was assessed by data aggregator and primary market tracker, Prime Database. A report by Prime Database on 11 October, which analysed 1,670 companies listed on National Stock Exchange of India Ltd, cites the need for 379 new directors if the committee recommendation to have minimum six directors is accepted. Also, the companies would need to pay an additional Rs132.63 crore, if independent directors are paid a minimum remuneration of Rs5 lakh per annum.
Arun M. Kumar, chairman & CEO, KPMG India and a member of the Kotak committee, said these are implementable measures and does not increase cost exponentially. “The increase could be about 13-15%, which is not exponential. But the truth is if there is more demanding governance, then there is going to be an additional cost. However, there is value to this cost addition, that is better governance and risk mitigation for minority shareholders,” said Kumar.
The report's dissent note shows criticism of several key recommendations from the Ministry of Corporate Affairs, finance ministry and ICAI.
“It is not actually a dissent; it is more about the manner of implementing these changes, whether it should be through amendment to Companies Act or through Sebi Act. The panel has made recommendations on unlisted subsidiaries, so the question arises whether Sebi is trying to regulate unlisted space. But an investor invests not just in the listed entity but the entire economic entity for which MCA should consider a proper oversight for the entire group,” said Sai Venkateshwaran, partner and head, accounting advisory services, KPMG India.
However, Rayabota says that legislation should correspond to the market needs and level of development. “Introducing progressive concepts too early may not lead to the desired effects,” she said.