As part of its ongoing efforts to usher in transparency and improve corporate governance, the Securities and Exchange Board of India has directed listed companies with a large number of unlisted subsidiaries to monitor their governance through a dedicated committee comprising members of the Board. This will have an impact on large conglomerates such as Reliance Industries, Aditya Birla Nuvo and Godrej Industries.
The decision of setting up a governance committee would lie with the board of directors of the listed entity, the market regulator said in a circular. “The listed entity may monitor their governance through a dedicated group governance unit or governance committee comprising the members of its board of directors,” SEBI said. There are currently no provisions under the Companies Act or SEBI Listing Obligations and Disclosure Requirements Regulations with respect to a group governance unit/ governance committee or a group governance policy.
The changes, which were first recommended by the Uday Kotak-led committee on corporate governance seven months ago, have now been accepted and notified by SEBI.
“As companies grow in scale and operations go global, businesses become more complex. Business and structural compulsions (both legal and financial) often necessitate the creation of holding and operating entities. The committee notes that several listed entities in India operate through a network of entities where some companies have over 200 subsidiaries, step-down subsidiaries, associates and joint ventures,” the Kotak panel had stated.
“While investors hold direct equity only in the listed holding company, they have valued the entire business structure at the time of investment. Therefore, it is important for boards to ensure that good governance trickles down to the entire structure,” it added.
The Companies Act does not provide for the board of the listed entity to oversee the affairs of its subsidiaries.
In many instances, the global subsidiaries are as large as the Indian listed entity.
SEBI observed that an appropriate level of review and oversight is required of the board of the listed entity over its unlisted subsidiaries for protection of the interests of public shareholders.