Upcoming Mandatory Compliance by Listed Companies towards "Good Corporate Governance"

1.   An Introduction

The Market Regulator, Securities and Exchange Board of India (SEBI) issued amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 vide its circular dated 09^th and 10^th May 2018 taking into consideration the recommendations issued by Kotak Committee under the chairmanship of Mr. Uday Kotak in the field of Good Corporate Governance. Most of the amendments were effective w.e.f. 1st April, 2019, while other amendments applicable on listed entities w.e.f. 1st April, 2020. This article will acquaint readers about those amendments which are decided to be effective from 01.04.2020.

Explanation for reader: The top 500 and 1000 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

2.   Amendments to be effective from 01^st April 2020

  v  Composition of Board

A proviso to Regulation 17 (1)(a) has been inserted which reads as:

“Provided that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020; “

Commentary: The women director is now proposed to be independent for top 1000 Listed entities. At present, most of the women directors are either from the family of the promoters or the wife/daughter of the directors. Therefore, in order to increase gender diversity on the Board and reduce the biasness to make the board effective.  the SEBI took such initiative.

  v  Minimum no. of directors in listed entities

  

       New sub-clause to regulation 17(1)(c) as appended below:

“the board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.”

Commentary: The proposed amendment mandates the minimum no. of directors to be not less than six, which is double the requirement for public companies as prescribed under Companies Act 2013, for the top 2000 listed entities.

 v Separation of role of Non-Executive Chairman and Managing Director/Chief Executive Office (MD/CEO)

  

       New sub-clause to regulation 17(1B) as appended below:

“(1B). With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall -

(a) be a non-executive director;

(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013”

Commentary: In order to ensure working of the board in best interest of the Company and all stakeholder, the Chairman of 500 listed would required to be a non-executive director and not related to MD or the CEO in light of definition of relative provided under the Companies Act, 2013.

However, the SEBI as on January 10, 2020 vide notification No. SEBI/ LAD-NRO/GN/2020/02. notified Securities and Exchange Board Of India (Listing Obligations And Disclosure Requirements) (Amendment) Regulations, 2020, hence in the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, in regulation 17 (1B), the number “2020” shall be substituted by the number “2022”, which means the amended regulation 17(IB) shall be effective from 01.04.2022. 

v  Quorum of BM

New regulation 17(2A) as appended below:

“(2A) The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director”

Commentary: The proposed regulation requires 1/3rd of the total strength or 3 directors, whichever is higher, including at least one independent director, w.e.f. 01.04.2020 for top 2000 listed entities. As this is more stringent than provisions as specified in Companies Act 2013, which requires the presence of 1/3rd of the total strength or 2 directors, whichever is higher, for a valid meeting , this amendment was inserted  so that strength of board increased would be enhance along with presence of at least one independent director to ensure the working of board in best interest of all stakeholders especially minority shareholders.

  v  Number of directorship

 New regulation 17A as appended below:

“(1) A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020:

Provided that a person shall not serve as an independent director in more than seven listed entities.”

(2) Notwithstanding the   above, any person   who is serving   as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities”

Commentary: The regulations have been stricter because the Committee believes that multiple directorships beyond a reasonable limit may lead to a director not being able to allocate sufficient time. Hence, w.e.f. 01.04.2020, number of listed entities in which a person can hold directorship is restricted to 8 from 01.04.2019 and to 7 from 01.04.2020. Further, a person who has been appointed as a whole time director or as a managing director in any listed company would not be able to serve as an independent director in more than three listed company.

Views expressed are personal and do not necessarily reflect the views of the Firm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.