In a board meeting in Delhi yesterday, markets regulator SEBI made a series of decisions that amount to a major overhaul of corporate governance rules. The board also passed a long-term mutual fund policy, some of which are new measures that SEBI will implement but others are simply a wish list presented to the government.
Corporate Governance Decisions
(i) Exclusion of nominee Director from the definition of Independent Director
(ii) Compulsory whistle blower mechanism
(iii) Expanded role of Audit Committee
(iv) Prohibition of stock options to Independent Directors
(v) Separate meeting of Independent Directors
(vi) Constitution of Stakeholders Relationship Committee
(vii) Enhanced disclosure of remuneration policies
(viii) Performance evaluation of Independent Directors and the Board of Directors
(ix) Prior approval of Audit Committee for all material Related Party Transactions (RPTs)
(x) Approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting
(xi) Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees shall be independent.
(xii) At least one woman director on the Board of the company
(xiii) It has been decided that the maximum number of Boards an independent director can serve on listed companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed company
(xiv) To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if a person who has already served as an Independent Director for 5 years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more term of 5 years only.
(xv) The scope of the definition of RPT has been widened to include elements of Companies Act and Accounting Standards.
Mutual Fund Proposals / Decisions
SEBI made a series of tax-related proposals. These are all in the nature of requests to the government. It is notable that all of these are revenue-negative and given the near-bankrupt situation that the profligate UPA regime finds itself in, they are likely to be non-starters.
(i) 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 may be introduced.
(ii) Alternatively, the limit of section 80C of the Income Tax Act, 1961, may be enhanced from INR 1 lakh to INR 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.
(iii) 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.
Non-tax related proposals
(i) Capital Adequacy i.e. minimum networth of the Asset Management Companies (AMC) be increased to INR50 crore.
(ii) The concept of seed capital to be introduced i.e. 1% of the amount raised (subject to a maximum of Rs.50 lacs) to be invested by AMCs in all the open ended schemes during its life time.
(iii) EPFOs be allowed to invest upto 15% of their corpus in Equities and Mutual Funds. Further, the members of EPFOs who are earning more than INR6500 per month be offered an option for a part of their corpus to be invested in a Mutual Fund product of their choice.
(iv) 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.
(v) 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 monthly basis on respective website of AMCs and on consolidated basis on website of AMFI.
(vi) In order to improve transparency as well as encourage Mutual Funds to diligently 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 quarterly basis on their website. This is to be certified by Auditor annually and reviewed by board of AMC and Trustees.
(vii) Towards achieving the goal of financial inclusion, a gradual approach to be taken such that initially the banked population of the country may be targeted with respect to Mutual Funds investing. SEBI will work towards achieving the goal that the basics of capital markets and financial planning may be introduced as core curriculum in schools and colleges. Printed literature on Mutual Funds in regional languages be mandatorily made available by Mutual Funds. Investor awareness campaign in print and electronic media on Mutual Funds in regional languages to be introduced.
(viii) In order to develop and enhance the distribution network PSU banks may be encouraged to distribute schemes of all Mutual Funds. Online investment facility need to be enhanced to tap the internet savvy users to invest in Mutual Funds. Also, the burgeoning mobile-only internet users need to be tapped for direct distribution of Mutual Funds products.
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