Transparency in governance

Source: The post is based on the article “Transparency in governance” published in “Business Standard” on 27th June 2023.

Syllabus: GS 2 – Statutory, regulatory and various quasi-judicial bodies.

News: The SEBI (Securities and Exchange Board of India) has set significantly higher standards of transparency and corporate governance for listed stocks by amending the LODR (Listing Obligations and Disclosure Requirements) and introducing several critical changes.

What are some of the changes?

KMP: The timeline for filling vacant positions of KMP (key managerial personnel) has been reduced to three months from the earlier six months. Also, interim appointments cannot be made to KMP. Also, reappointment of directors must be cleared by shareholder vote at least once every five years.

New ‘majority of minority’ rule: Minority shareholders will have a say (through vote) in the sale or transfer of an undertaking by a listed company through slump sales. Also, the object and commercial rationale for such transaction must be disclosed to shareholders through a special resolution at a general meeting.

“Material impact”: SEBI has also introduced quantitative thresholds for determining the “materiality” of events and transactions.

Fraud and default: SEBI has clarified the definitions of fraud and default. It has also enhanced disclosures for listed companies on fraud, or defaults, by a director or senior management, and for cybersecurity breaches, or any regulatory action affecting KMP.

Why may some provisions be practically difficult to comply with?

“Mainstream media” has been defined quite broadly to cover both registered newspapers and social-media platforms. SEBI has asked the top listed companies to confirm, deny, or clarify any rumour or information reported in such media within 24 hours.

The implementation of such a provision would place a significant burden on companies. Ensuring full compliance with this requirement would be extremely challenging due to the potential presence of mentions on lesser-known platforms or by obscure influencers.

What will be the impact of the changes?

Changes would mostly lead to tighter governance and protect the interests of minority shareholders. Corporations must disclose all communications from any authority, which would help in bringing more transparency.

However, the regulator should review the directives about responding to rumours in the media and it may need to fine-tune the definition of material impact.