The Uday Kotak committee’s report has been decisively killed, even before it was released. Dissent notes from the ministry for corporate affairs (MCA) and the ministry of finance (MoF) had already torpedoed it; but these do not even find a mention in Uday Kotak’s preface. What is extraordinary, though, is that the government dissenters come across as more sensible and flexible, while the committee, headed by a dynamic, private sector banker, has produced a document that would only add red tape and regimentation to the management of listed companies.
This committee was set up just after the Tatas and Infosys, who are held up as paragons of good governance, made news for the most unsavoury goings-on, such as the unceremonious sacking of the group chairman, ejecting independent directors through brute majority, shady corporate dealings and allegations of exit pay as ‘hush money’. The committee has hardly bothered to address any of these. Allow me to list seven major things that are wrong with the report.
1. Uday Kotak signed the preface note on 5th October. The MCA and MoF’s dissent notes, sent on 3rd October, had ended by saying, ‘it may be difficult to change the recommendations at this stage’; so their letters should be taken on record and shared with SEBI (Securities and Exchange Board of India) either separately or as part of the report. Amardeep S Bhatia, joint secretary and member of the Kotak committee, has signed MCA’s dissent, while that of the MoF is signed by Deepak Ranjan (deputy director, primary markets), although Praveen Garg, joint secretary, was a committee member.
Considering that chapter XI-C of the report is about collaboration between SEBI and other agencies, it has you wondering whether these gentlemen even attended the meetings or paid attention. MCA has objected to half the key recommendations and raised fair questions about jurisdiction; but why wasn’t it done during the committee’s deliberations? Surely, the MCA and MoF joint secretaries were not overruled? Representatives of the Institute of Chartered Accountants (ICAI) and Institute of Company Secretaries (ICSI), who were on the committee, were almost guaranteed to side with the MCA which regulates them. Two marquee lawyers were also members. Didn’t they point out that a spirit of collaboration would require some recommendations to be implemented by amending the Companies Act, 2013, rather than tinkering with the listing agreement? My reading, based on past experience, is that all hell broke loose after someone in the government saw a draft report. That would explain railway minister Piyush Goyal’s outburst, a day after the report was released. MCA and MoF were probably ordered to rush their dissent notes before the report was released. The smart thing for Uday Kotak to do would have been to hold another meeting and try for some common ground or unanimity and retain its credibility. NR Narayana Murthy did exactly that when big honchos of corporate India, led by Ratan Tata (who wrote to Tarun Das of Confederation of Indian Industry), objected to some of the recommendations of the corporate governance committee that he headed and of which I was a member.
2. Addressing CII in May 2017, SEBI chairman, Ajay Tyagi, had described corporate boards as closed clubs where directors were appointed “at the mercy of promoters,” with no prescribed qualifications or procedures. The Kotak committee tried to address this issue by recommendations such as minimum remuneration, educational qualifications and skills and evaluation of directors, etc, which were largely shot down by the two powerful dissenters. The need for such rules about qualification and expertise applies more to listed public sector undertakings (PSUs). The private sector has many examples of entrepreneurs with no relevant qualifications going on to create great wealth. But, whatever its claims about better governance or administration, this government was certainly not going to allow a good governance committee to stop it from installing political appointees, like a Shazia Iilmi or a Sambit Partra, on to the boards of important PSUs. As an aside, this is probably the first corporate governance committee with representation for PSUs (Madhukar Gupta, additional secretary department of public enterprises, and Dr UD Choubey, director general standing conference of public enterprises, were committee members), but that made no difference. The dissent over minimum attendance at board meetings and the practice of ‘alternate’ directors may also be aimed at allowing senior bureaucrats to continue enjoying the perks of PSU directorships, while someone else take the responsibility of attending meetings.
3. The Kotak committee recommends a slew of mandatory practices such as a minimum of six directors per listed company, holding five board and audit meetings per year, 50% of the board comprising independent directors (up from 33% now); two women directors, a minimum remuneration of Rs5 lakh for directors, capping independent directorship at seven per person, etc. MCA has correctly said that many of these recommendations impose a needless cost on companies and some are outside SEBI’s turf. The pertinent questions to ask are: Would any of these new rules, if accepted, prevent a Ratan Tata from throwing out a Cyrus Mistry or a Nusli Wadia in future? Or would they force Infosys to make its internal investigation report public? If not, isn’t this needless tinkering?
4. One recommendation is to make it mandatory to disclose the resignation of independent directors and the reasons. But MCA has opposed this by asking what will be the consequence of a company claiming there was no material reason for a director’s resignation when, in fact, there were? Frankly, neither the recommendation nor the objection protects an independent director who speaks out against bad management. That was Nusli Wadia’s question and it remains unanswered.
5. The committee recommends separation of the post of chairman and managing director (CMD); but it is unclear to me how this would improve governance. Instead, it would have been more pertinent if the committee had said there cannot be two persons heading a company in a non-executive capacity. SEBI allowed Ravi Narain to be appointed as non-executive vice-chairman of the National Stock Exchange, which was directly under its regulatory jurisdiction, despite the questions raised by its legal department. He was on 20-odd committees and virtually enjoyed executive power. Infosys appointed Ravi Venkatesan as joint-chairman to cut R Sheshasayee down to size and appease NR Narayana Murthy. Isn’t this is a bigger problem than the 500-odd companies headed by a CMD?
6. Chapter XI-B of the report recommends creation of a separate department to focus on financial statements and filings to detect reporting, disclosure and audit failures and to create a robust data processing framework which can form the basis of further investigation, detection of violations involving misleading financial statements and disclosures. Apparently, none of the SEBI officials told the committee that former chairman CB Bhave had killed EDIFAR (Electronic Data Information Filing and Retrieval) in 2010. EDIFAR was a statutory reporting system, modelled on the SEC’s (Securities and Exchange Commission) EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database in the US. It is the first step to the analysis and data processing recommended by the Kotak committee. But, hey, who will bring up dodgy decisions of ex-SEBI chiefs?
7. Finally, there were specific recommendations about directors’ risk cover, reclassification of promoters as ordinary investors, concept of holding the auditor ‘responsible’ for audit of unlisted subsidiaries, leniency mechanism (which allows the regulator to let off the small fish in exchange of testimony against big violators of the law), which may have had some merit, but they have either been opposed, or make any discussion futile when so much of the core report is likely to be junked. After all, there is hardly any chance that SEBI chairman Mr Tyagi is going to be able to push through any good governance recommendations through his own board which doesn’t have 50% independent directors to support what may be good for the investing public.