In June 2017, SEBI had set up the Uday Kotak Committee (Committee) to suggest measures to enhance standards of governance of listed companies in India. SEBI has recently amended the SEBI (Listing Obligations and Disclosure Requirements) 2015 (LODR Regulations), to bring into effect many of the Committee’s recommendations. On May 10, SEBI issued a circular to implement certain additional recommendations of the Committee. The Circular does not mandate but only recommends measures that may be taken by listed companies in areas including: i) disclosures related to board evaluation, ii) setting up of governance unit to monitor functioning of unlisted subsidiary companies and iii) disclosures related to medium term and long term strategy of a company.
With regard to first measure, SEBI has recommended companies to consider the following as part of its disclosures on board evaluation, namely, a) observations of board evaluation carried out for the year, b) previous year’s observations and steps taken with regard to the same and c) proposed course of action based on current year observations. The Companies Act and LODR Regulations contain broad provisions on board evaluation. In January 2017, SEBI also issued a guidance note on board evaluation to educate stakeholders on the various aspects of board evaluation. Currently, listed companies require to disclose the evaluation process for inter alia, individual directors, the board and the board committees. From the view point of the investor, disclosures linked to board evaluation outcomes may hold more value than the details about the evaluation process. Therefore, implementation of the aforesaid measures by listed companies may increase transparency, reduce information asymmetry and raise the standards of accountability and efficiency of the board vis-à-vis the shareholders of the company.
With regard to the second measure, SEBI has recommended that companies with large number of unlisted subsidiaries may monitor their governance through a dedicated group governance unit/committee and formulate a group governance policy. Currently, there are no provisions under the Companies Act or LODR Regulations with respect to group governance unit/governance committee or a group governance policy. SEBI has been prudent in giving companies the discretion to implement the aforesaid measures as its implementation will involve substantial cost and time. Alternatively, SEBI could provide a guidance note on best practices for listed companies with regard to same matter.
With regard to third measure, SEBI has recommended that companies may disclose their medium and long-term strategies in their annual report. A company’s medium term and long term strategy cannot remain static and it is subject to change. Given the dynamic environment in which companies operate, mandating such disclosure may not be practically feasible and it will only create additional obligations for the management of a company. SEBI has taken the right decision by granting listed companies the discretion to comply with the aforesaid measures.
Through the first and third measures, SEBI has attempted to promote corporate governance and reduce information asymmetry between the board and shareholders of the company. Further, as the implementation of the aforesaid measures are voluntary in nature, it gives relief to small/medium companies that may not have the time and resources to implement the said measures.
