New Delhi: In sweeping changes to the way the listed companies constitute their boards, regulator Sebi has asked them to split the post of chairman and managing director and have at least six independent directors, including a woman.
The changes need to be put in place in phases, Sebi said, while setting a deadline of April 1, 2019 regarding the independent directors. The companies will have more time to split the CMD post, for which the deadline is April 1, 2020.
The move comes after Sebi's board in March accepted 40 of the 80 recommendations of the Uday Kotak panel on corporate governance. The panel had submitted its report to Sebi in October last year. Among the new rules, Sebi has enhanced disclosure of related-party transactions and made mandatory secretarial audits for listed entities and their material subsidiaries.
Further, it has directed listed companies to have at least six directors and at least one of them needs to be a woman. Also, it asked the top 100 listed companies to webcast annual general meetings These regulations will come in to effect in two phases.
Most of the changes will be effective April 1, 2019, and April 1, 2020, the Securities and Exchange Board of India (Sebi) said in a notification. Under the new norms, top 500 listed entities will have to ensure that the chairperson is a non-executive director from April 1, 2020.
It will eventually lead to a split in the post of chairman and managing director. Currently, several firms have integrated the two positions as CMD (chairman-cum managing director) that overlap the board and the management in some cases, which could cause conflict of interest.
The regulator asked top 500 companies to appoint at least one woman independent director by April 1, 2019. The current rules require that there must be one woman on board, irrespective of her being an independent or executive director. It also asked the top 1,000 listed companies to have minimum six directors from April 1, next year.
A person will not hold directorship position in more than eight listed entities from April 1, 2019 and in not more than seven listed firms from from 2020. Further, Sebi said that a person will not serve as an independent director in more than seven listed entities. With regard to related party transaction, Sebi said that any person or entity belonging to the promoter group of the listed entity and holding at least 20 per cent stake in the listed firm will be deemed to be a related party.
Besides, shareholder approval will be needed for making royalty or brand payments to related parties exceeding 2 per cent of consolidated turnover. The new rules also cover issues in accounting and auditing practices by listed companies in order to improve effectiveness of board evaluation practices.
Sebi also said companies will now have to disclose details about utilisation of funds raised through qualified institutional placement (QIP) and preferential issues in their annual reports. Further, companies will have to make disclosure about auditor credentials, audit fees and any material change in such fee as well as detailed reasons for resignation of auditor.
According to Sebi, top 100 listed firms will have to hold their annual general meetings within five months from the date of closing of the financial year. The approval of shareholders will be required every year in cases where the annual remuneration payable to a single non- executive director exceeds 50 per cent of the total annual remuneration payable to all non-executive directors Further, shareholders' approval will be needed if the annual fee payable to executive director, who is part of promoter entity, exceeds Rs 5 crore or 2.5 per cent of the net profits of the listed entity.
Go-ahead is also needed if there is more than one such director and the aggregate annual fee to such directors is more than 5 per cent of the net profits of the listed entity. The quorum for every board meeting of top 1,000 listed firms from April 1, next year and of the top 2,000 listed entities from April 1, 2020 will be one-third of its total strength or three directors, whichever is higher, including at least one independent director.
Besides, public shareholders' nod would be must for non-executive directors over 75 years of age. Regarding credit ratings, Sebi said from October 1, 2018, any changes in ratings of listed firms' outstanding instruments have to be updated immediately. Top 500 listed companies also need to have a risk management committee for cyber security.