The securities market watchdog has approved proposals for tightening corporate governance standards for listed companies which seeks to provide more leeway as well as accountability for independent directors besides norms for related party transactions (RPTs).
The amendments to the corporate governance norms will be applicable to all listed companies with effect from October 1, 2014, SEBI decided in a meeting in Delhi on Thursday.
SEBI has decided that nominee directors need to be separated from the definition of independent directors and there should be performance evaluation of all directors, including the independent directors. It has also asked for separate meeting of independent directors and prohibited grant of stock options to them.
Moreover, it has decided that the maximum number of boards an independent director can serve on listed companies be restricted to seven and if the person is serving as a whole time director in a listed company, he/she may be an independent director in just three firms.
In addition, it has restricted the total tenure of an independent director to two terms of five years. However, if a person who has already served as an independent director for five years or more in a listed company as on the date on which the amendment to the agreement becomes effective, he/she shall be eligible for appointment for one more term of five years only.
SEBI has also incorporated gender inclusion policy with at least one woman director on the board of the company.
It has also called for a compulsory whistle blower mechanism, expanded the role of audit committees, constitution of stakeholders’ relationship committees and enhanced disclosure of remuneration policies.
The securities market regulator has tightened procedures for intra-group transactions or RPTs by making mandatory prior approval of audit committee for all material RPTs.
In a significant decision, it has also asked for approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting. This would strengthen minority shareholders rights for intra-group transactions as now they would be decide if such transactions can go ahead as against the current practice where promoters owning majority stake push through such deals even if there is a dissent from small shareholders.
SEBI has also made it mandatory to constitute nomination and remuneration committee with the chairman of those committees being independent.
In addition to the above, SEBI approved the proposal to put in place principles of corporate governance, policy on dealing with RPTs, divestment of material subsidiaries, disclosure of letter of appointment of independent directors and the letter of resignation of all directors, risk management, providing training to independent directors, e-voting facility by top 500 companies by market capitalisation for all shareholder resolutions and boards of companies to satisfy themselves that plans are in place for orderly succession for appointments to the board and senior management.
Long term policy for mutual funds
SEBI has also approved a policy for mutual funds in the country to enhance its reach and promote financial inclusion while achieving sustainable growth of the industry and mobilising household savings.
It has called for tax incentives for a long term product such as Mutual Fund Linked Retirement Plan (MFLRP) with additional tax incentive of Rs 50,000 under 80C of Income Tax Act. Alternatively, the limit of section 80C of the Income Tax Act may be enhanced from Rs 1 lakh to Rs 2 lakh to make mutual funds products (ELSS, MFLRP, etc.) as priority for investors among the different investment avenues. RGESS may also be brought under this enhanced limit, it added.
In addition, similar to merger/consolidation of companies, the merger/consolidation of equity mutual funds schemes also may not be treated as transfer and therefore, may be exempted from capital gain taxation.
These tax-related proposals would need to be ratified by the finance ministry.
Among the non-tax related proposals, it has said that capital adequacy i.e. minimum net worth of the Asset Management Companies (AMC) be increased to Rs 50 crore and the concept of seed capital to be introduced—i.e. 1 per cent of the amount raised (subject to a maximum of Rs 50 lakh) to be invested by AMCs in all the open ended schemes during its life time.
SEBI has also said EPFOs be allowed to invest up to 15 per cent of their corpus in equities and mutual funds. Further, the members of EPFOs who are earning more than Rs 6,500 per month be offered an option for a part of their corpus to be invested in a mutual fund product of their choice.
Presently, Navratna and Miniratna Central Public Sector Enterprises (CPSEs) are permitted to invest in public sector mutual funds regulated by SEBI. It has been recommended that all CPSEs be allowed to choose from any of the SEBI-registered mutual funds for investing their surplus funds.
In order to enhance transparency and improve the quality of the disclosures, it has been decided that AUM from different categories of schemes such as equity schemes, debt schemes, etc., AUM from B-15 cities, contribution of sponsor and its associates in AUM of schemes of their mutual fund, AUM garnered through sponsor group/ non-sponsor group distributors, etc. are to be disclosed on a monthly basis on respective websites of AMCs and on consolidated basis on website of AMFI.
Further, in order to improve transparency as well as encourage mutual funds to participate in corporate governance of the investee companies and exercise their voting rights in the best interest of the unit holders, voting data along with rationale supporting their decision (for, against or abstain) be disclosed on a quarterly basis on their websites. This is to be certified by the auditor annually and reviewed by the board of AMC and trustees.
SEBI will also work towards achieving the goal that the basics of capital markets and financial planning may be introduced as core curriculum in schools and colleges.
The proposals relating to tax incentives, allowing EPFO to invest in equities/mutual funds and allowing all CPSEs to invest their surplus fund in mutual funds will be sent to the government for its decision.
Amendment to Know Your Client regulations
An investor who has already done the Know Your Client (KYC) with any SEBI registered intermediary need not undergo the same process again when he/she approaches another intermediary.
However, as per existing regulations, an option is available to the intermediary that he may access the centralised system in case of a client who is already KYC compliant or carry fresh KYC process. SEBI has now approved the amendment to the regulations and the option of taking fresh KYC has been done away with. But, the intermediary can undertake enhanced KYC measures commensurate with the risk profile of its clients.
(Edited by Joby Puthuparampil Johnson)