Impact of Kotak Committee Recommendations on Family Businesses In India

Khushi Maheshwari

The recommendations of the Kotak Committee are very much a step in the desired direction with respect to transparency and corporate governance aspects; however, it would be difficult to implement them with respect to kinship.

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In June 2017, the Securities and Exchange Board of India constituted the Uday Kotak Committee (the “Kotak Committee”) on corporate governance, to improve the standards of corporate governance for listed entities in India. The committee delivered its report in October 2017 and many recommendations come into force on 1 April 2019.

Today the world demands an efficient and transparent management coupled with proper checks and balances at appropriate places and periods so as to ensure smooth functioning of the organization. Corporate governance is the key to this and therefore has become a very important consideration for investors and stakeholders and consequently for promoters alike.

Through this article, the impact of the enforcement of the recommendations of the Kotak committee on family businesses in India are analysed. The simple reason for the focus on family businesses as listed entities is the fact that according to Credit Suisse Research Institute’s latest CS Family 2018 report, at 111, India has the third highest number of mega family owned publicly listed businesses in the world. China leads the pack with 159 companies followed by the USA at 121. Some of the family owned publicly listed companies are the TATAs, Ambani, Godrej, Birla and Adani to name a few, whose span of control stretches from owning retail shops to huge empires in the area of IT, automobile and financial services. Entrepreneurial capitalism, which fuels family businesses is the driving force of and major contributor to the Indian economy and therefore, analyzing the impacts of these recommendations on such business becomes crucial. If they are not disciplined and properly governed it will inevitably affect the national economy. Although they are family business so to say, there are many other public stakeholders involved and therefore ensuring the proper functioning of these businesses becomes essential.

The main aim of the reforms suggested by the committee is to ensure efficient corporate governance through the creation of Independent Boards. This majorly affects the working of family businesses as most members on the Board of such businesses are kith and kin of the promoter. While some reforms are positive regulations, the implementation of quite a few of them will also lead to over regulation and hamper the working of such businesses. They have been discussed below.

Reforms which are Positive Regulations

A significant recommendation which will affect listed family businesses like Reliance, Wipro, Future Retail and many others is the appointment of separate individuals for the roles of Chief Executive Officer/Managing Director and Chairperson.[1] The chairperson of the company cannot be related to the Executive Director or CEO or MD of the company according to the definition of “relative” under Companies Act, 2013[Section 2(77)]. The two persons must not be related and must be independent. In many cases what happens is that while there exists a different person for the two roles, power is generally vested on one person, the other being only a signing authority for all statutory papers. Currently, Mr. Mukesh Ambani is the Chairman as well as the MD of Reliance Industries Ltd. Similarly, Mr. Azim Premji and Mr. Kishore Biyani hold roles in both capacities. With the recent amendment, a choice will have to be made by these individuals (and many others in similar positions) to choose between either of these two roles. Moreover, if they want their next generation to take over these positions of responsibilities, they will have to step down. This reform will ensure that power is not concentrated in the hands of a single individual or individuals from the same family.

Another important suggestion is to enhance the role of the audit committee, receive nominations and remuneration and risk management committee. With respect to the auditor, the committee has suggested that the remuneration of the auditor, the reason for resignation should be documented and published.[2] This would help in creating transparency in the appointment of auditors and more importantly the risk management committee.

The recommendation with respect to accountability of utilization of funds received from QIP/ preferential issues is also one in the desired direction.[3] This is because many organizations use funds for purposes other than that for which they have collected. For example, instances where organizations raise capital which is supposedly to be utilized for a new project but instead use it to repay a previous loan are not uncommon. Accountability will infuse confidence in investors and stakeholders and help them make informed decisions.

Reforms which will lead to Over Regulation

With the recent amendment that there be an independent woman director, the Kotak Committee calls for a divorce between professional management and kinship.[4] Consequently, some organizations could be in a dilemma to choose between the outside professional management and the relationship management. This could also affect the working of the organization. For example, Amruta Velumani has been a part of Thyrocare Technologies for 15 years now. With this amendment coming into force, she (and many others like her) might no longer be fit to be appointed as an independent director but only as an executive director. This change in the top management could affect the working of Thyrocare.

Another recommendation is reduction in the maximum number of directorships that an individual can hold in listed entities.[5] The SEBI Listing Obligations and Disclosure Requirements (SEBI LODR) have reduced the maximum number of listed entity directorships that can be held by an individual from 10 to 8 by 1 April, 2019 and this is to further reduce to 7 by 1 April, 2020. The motive behind this reduction is to ensure that an individual while serving as a director in a particular entity is able to effectively contribute in terms of her expertise as well as time. However, despite this reduction it is yet to be seen how an individual will be able to function effectively across as many as 8 or 7 Boards at a given period of time. With the government of India making the independent directors personally liable for any discrepancies, the issue is, would the independent directors have the time and energy to study the various papers or proposals sent to them and effectively contribute to the growth of the organization?

The committee has also recommended that related parties be completely abstained from voting on any material Related Party Transaction. Related parties can now only cast a negative vote.[6] This to ensure that there is no conflict of interest in the voting process. In the opinion of the researcher, this power of casting a negative vote still ensures that the final say remains in the hands of the related parties. Even if all other votes are in favor of the transaction, the negative vote can lead to a situation of deadlock and the purpose of avoiding a vote in conflict is defeated.

Possibility of Implementation of these Reforms

While promoters have been working hard to ensure efficient corporate governance in their firms, the implementation of a few of these reforms, particularly those related to kinship, might be little difficult to implement.

The proposed amendment with respect to the Executive Director and the Chairman of the company has created a ruffling of feathers mainly because it might be difficult to pass on the baton to the next generation – related person. Though his amendment comes into effect from 1 April, 2020 giving promoters reasonable time to ensure a smooth transition of business from one hand to another, this is one reform that might not be accepted easily. Promoters and their preceding generations have invested not just capital but also a significant part of their lifetime in building the company. The thought of not being able to pass on this legacy to their children or grandchildren is not a comfortable one. Trusting a stranger, even if a completely capable one, with the reins of the family business is an equally difficult and time-consuming process. Similarly, that there be an independent women director might now make many women who are part of the family and have been handling the business for years, ineligible to continue on the Board.

However, even if these reforms are practically a little difficult to enforce, they prima facie help firms, especially family businesses towards ensuring efficiency and transparency in their operations. But the question that should be raised is, do we really need more committees and reforms or the real problem lies in the execution?

India already has an elaborate framework on corporate governance which is also in conformity with international standards. The Companies Act of 2013, SEBI Guidelines, Accounting Standards issues by ICAI, Standard Listing Agreement of Stock and Secretarial Standards issued by the ICSI contain detailed rules concerning Board constitution, protection of investors, disclosure of financial statements among many others. The issue of proper implementation of reforms needs to be distinguished from a lack of the same. Also, knee- jerk reactions to problems should take a backseat. Whether it be in areas of criminal law like the Criminal Law Amendment Act of 2013 after the Nirbhaya case or in civil areas like the IL&FS scam that prompted the formation of a committee on corporate governance. As long as the system is running smoothly, by following or violating the rules, there is calm. Possible solutions, amendments and reforms to existing legislations come into the forefront only after damage has been incurred. It is time we adopt stricter enforcement and stringent penalties for our firms who fail to abide by the already existing rules. Let us not wait for another incident like Satyam Computers or another committee to ensure ‘good corporate governance’ in our firms.

Conclusion

The recommendations of the Kotak Committee are very much a step in the desired direction with respect to transparency and corporate governance aspects; however, it would be difficult to implement them with respect to kinship. Finally, it may be concluded that the suggested reforms are a mixed bag of positive regulations and over- regulation. As emphasized before, the real test lies in their strict implementation and not formulation.


Khushi is a II Year student at National Law School of India University, Bangalore.


[1] Page 19, Report of the Committee on Corporate Governance (October, 2017).

[2] Page 37 to 42, Id.

[3] Page 69, Id.

[4]  Page 14, Id.

[5] Page 22, Id.

[6] Page 58, Id.


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