SEBI Committee recommends separation of roles for Chairman and MD & CEO, 50% independent directors on board
The Uday Kotak Committee set up by SEBI (the third such committee set up by SEBI over the last two decades) has recommended separation of powers of the chairperson or leader of the board) and chief executive and managing director (CEO/MD) or leader of the management, in phased manner to provide a better and more balanced governance structure. The Committee has recommended limiting directorship to a maximum of eight in listed companies. In addition, the Kotak Committee says from 1 April 2019, at least half of the board of directors should comprise of independent directors.
"After deliberation, the Committee believes that the time is right in India to introduce a separation of the roles of the Chairperson and the CEO/MD for listed entities. The Committee observed that such separation, at least at the stage of introduction of the construct, may be more relevant where public shareholders constitute a large portion of the shareholding of a company. In this regard, the Committee considered various thresholds and concluded at least 40% of public shareholding would be an appropriate threshold. Further, in view of the fact that this would require a significant transition from the existing requirements, the Committee believes that listed entities should be given sufficient time to undertake such a transition," the Report from the Kotak Committee, submitted to SEBI says.
The Committee recommended that from 1 April 2020, all listed companies that have public shareholding of 40% or more will have a chairperson, who is non-executive director. Once implemented, this will remain in effect even if the public shareholding of the company falls below the threshold level of 40%. "After 2020, if deemed fit by SEBI," the Committee says, "the above sub-regulation may be modified and from 1 April 2022, chairperson of each listed company would be non-executive director."
To improve governance, the Committee recommended that every listed entity, irrespective of whether the Chairperson is executive or non-executive, may be required to have at least half its total number of directors as independent directors. "However, given that this may require significant changes to the composition of the boards, the Committee felt that appropriate transition time should be provided for effecting such change. At least half of the board of directors should comprise of independent directors from 1 April 2019, for the top 500 listed entities, determined on the basis of market capitalisation, as at the end of the immediately preceding financial year; and from 1 April 2020, for all listed entities," the Report says.
Recommending to limit number of directorships an individual can hold to eight listed companies, the Kotak Committee says, "No person shall hold office as a director, including any alternate directorship, in more than eight listed entities at the same time of which independent directorships shall not exceed seven, with effect from 1 April 2019 and not more than seven listed entities with effect from 1 April 2020 provided that any person who is serving as a whole time director or MD in any listed entity shall serve as an independent director in not more than three listed entities."
The Committee says it observed that while aspects relating to the composition and role of the board of directors of listed entities have been subjected to gradual reform, a holistic re-assessment is required to further strengthen the same.
"Accordingly, this review by the Committee and the attendant recommendations seek to address aspects relating inter-alia to the size of the board and its diversity, separation of the roles of chairperson and executive management, attendance of directors at board meetings, ongoing updation of knowledge of directors and disclosure of their skills or expertise," the Report says.
Here are other major recommendations of the Committee...
For any listed entity, a minimum of six directors should be required on the board of directors.
Every listed entity have at least one independent woman director on its board of directors.
From 1 April 2018, if a director does not attend at least half of the total number of board meetings held over the Relevant Period, his or her continuance on the board shall be subject to ratification by the shareholders at the next annual general meeting
Board of directors of every listed entity should be required to list the competencies or expertise that it believes its directors should possess
Insert a provision requiring a special resolution for listed entities for the appointment or continuation of non-executive directors (NEDs) on attaining the age of 75 years for the relevant term
Minimum number of meetings of board of directors be increased to five every year
Quorum for every board meeting of the listed entity should be a minimum of three directors or one-third of the total strength of the board of directors, whichever is higher, including at least one independent director
Board of directors should be updated on regulatory and compliance changes at least once every year
An interaction should be required between the NEDs and senior management at least once every year