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In this blog post, Mrinal Litoria, a student pursuing his BA LLB from the Rajiv Gandhi National
University of Law, Patiala and a Diploma in Entrepreneurship Administration and Business
Laws from NUJS, Kolkata, analyses the amendments made to Clause 49 of the Listing
Agreement of SEBI.
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
Listing means an admission of the securities to dealings on a recognized stock exchange[1].
Separate Listing Department grants approval for listing of securities of Companies by the
provisions of the Securities Contracts (Regulation) Act, 1956, Securities Contracts
(Regulation) Rules, 1957, Companies Act, 2013, Guidelines issued by SEBI and Rules, Bye
laws and Regulations of the Exchange. Companies enter into a Listing agreement with the
Exchange and make certain disclosures and perform certain acts. Listing Department
monitors the compliance of the companies.
Clause 49 of the Listing Agreement by Securities Exchange Board of India explains on the
issue of Corporate Governance and endorses the standards under which the Companies are
ordered to work. After the enactment of the new Companies Act, 2013; SEBI through an
official circular has amended Clause 49 of the Listing Agreement to bring it into conformity
with the new Act. SEBI, vide Circular No. CFD/POLICY CELL/2/2014 dated April 17, 2014, has
amended the provisions of Clause 49 of Listing Agreement relating to Corporate Governance,
mandating, interalia, that the Board of Directors of listed entities shall have an optimum
combination of executive and nonexecutive directors with at least one woman director.
Further, vide Circular No. CFD/POLICY CELL/7/2014[2] Dated September 15, 2014; the
timeline to comply with the requirement mentioned above was extended to March 31, 2015.
Applicability of Clause 49[3] Extends to all listed companies
except –
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Companies with equity share capital of less than Rs 10
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Companies having a net worth not exceeding of Rs 25
crore and
Companies listed on SME and SMEITP platforms of the stock exchanges.
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
However, it has been clarified by SEBI that the exemption is “for the time being,” and in case
applicability of Clause 49 is extended to the exempted categories in future, then such
companies shall have 6 (six) months to comply with the provisions of Clause 49.
Provisions relating to the constitution of Risk Management Committee shall apply to top 100
listed companies by market capitalization as at the end of the immediate previous financial
year. Clause 49 is also applicable to other listed entities which are not companies, but body
corporate or are subject to regulations under other statutes (e.g. Banks, financial institutions,
insurance companies, etc.). The clause 49 will apply to the extent that it does not violate
their respective statutes and guidelines or directives issued by the relevant regulatory
authorities.
Following the amendment, clause 49 has laid out the principles of corporate governance. It
likewise explicitly expresses that if there should be an occurrence of any ambiguity, the
provisions might be translated and connected incongruity with the said principles. The
principles are:
The rights of shareholders –
The company should seek to protect and facilitate the exercise of shareholders’ rights.
The company should provide adequate and timely information to shareholders.
The company should ensure equitable treatment of all shareholders, including minority
and foreign shareholders.
Role of stakeholders in corporate governance –
The company should recognize the rights of stakeholders and encourage cooperation
between the company and the stakeholders.
Disclosure and transparency –
The company should ensure timely and accurate disclosure on all material matters
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including the financial situation, performance, ownership, and governance of the
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company.
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Responsibilities of the Board of Directors –
Disclosure of information
Key functions of the Board of Directors
Other responsibilities
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
Board of Directors
Composition of Board of Directors
Woman Director – The Board of Directors of a listed company shall have at least one
woman director, with effect from 1 April 2015
A minimum number of independent directors– Clause 49 has been reworded in this
context as to replace the reference to executive director with the regular nonexecutive
director. It adds that if the chairperson of the Board is a regular nonexecutive director
who is also a promoter of the company or is related to any promoter or person
occupying management positions at the Board level or one level below the Board, then
at least onehalf of the Board should comprise of independent directors.
Independent Directors
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
Separate meetings of independent directors– The recent amendment stipulates that the
independent directors of the company shall hold at least one meeting in a year, without
the attendance of nonindependent directors and members of management. They shall:
Performance evaluation of independent directors– The amendment clarifies that the
Nomination Committee shall lay down the evaluation criteria for performance evaluation of
independent directors. It shall be done by the Board of Directors and shall form the basis
for determination of reappointment of the independent director. The company shall
disclose the criteria for performance evaluation in its annual report.
Maximum tenure of independent directors– it is proposed
to be by the Companies Act 2013. Under the 2013 Act,
the maximum tenure of an independent director is up to
five consecutive years, followed by a reappointment for
another term of up to five consecutive years on passing of
a special resolution by the company. On completion of the
said maximum tenure of 10 years, an individual shall be
eligible for an appointment again as an independent director in that company only after a
coolingoff period of three years. Further, the tenure already served by an independent
director in the past shall not be considered, and for the purpose of determining the
maximum tenure, the only future term shall be considered.
Limit on a number of directorships– An individual shall not serve as an independent
director in more than seven listed companies. Further, any individual who is also serving
as a wholetime director of any listed company shall not serve as an independent director
in more than three listed companies.
Definition of independent director– Disqualification criteria for independent directors has
been expanded which makes the definition more restrictive[4]. Also, the definition
specifically excludes a nominee director.
Review the performance of nonindependent directors and the Board of Directors as a
whole
Review the performance of the Chairperson of the company, taking into account the
views of executive directors and nonexecutive directors, and
Assess the quality, quantity, and timeliness of flow of information between the company
management and the Board that is necessary for the Board to effectively and
reasonably perform its duties.
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started.
Familiarization program for independent directors– The company shall familiarize the
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independent directors with the company, their roles, rights, responsibilities in the
company, nature of the industry in which the company operates, the business model of the
company, etc. through various programs. The company shall disclose the details of such
familiarization programs on its website and also provide that web link in its annual report.
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
Code of Conduct
In the code of conduct of the company shall be incorporate the duties of independent
directors as laid down in the Act. An independent director shall be held liable in respect of
acts by a company that occur with his knowledge or if an independent director doesn’t act
diligently on the requirements of the listing agreement.
unethical behavior,
actual or suspected fraud,
Violation of the company’s code of conduct or ethics policy.
There must also be provided adequate safeguards against victimization of individuals who
utilize such mechanism to report any concerns.
Audit Committee
The new Clause 49 enhances the part of audit committees to include:
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Review and monitor the auditor’s independence and performance, and effectiveness of the
audit process.
Approval or any subsequent modification of transactions of the company with related
parties;
Scrutiny of intercorporate loans and investments.
Valuation of undertakings or assets of the company, wherever it is necessary, and
Evaluation of internal financial controls and risk management systems.
Nomination and Remuneration Committee
A company through its Board of Directors shall constitute a ‘Nomination and Remuneration’
Committee which shall comprise of at least three nonexecutive directors, half of which
should be independent. The chairman of the committee shall be an independent director. The
chairperson of the company, even if an executive, can be appointed as a member, but not as
the chairman, of such committee. Such committee shall be responsible for:
Formulation of the criteria for determining qualifications,
positive attributes and independence of a director
Formulation of criteria for evaluation of independent
directors and the Board
Identifying persons who are qualified to become directors
and who may be appointed by senior management by the criteria laid down, and
recommend their appointment and removal
Recommend to the Board of Directors, the policy for remuneration of the directors, key
managerial personnel, and other employees; and
Devising a policy on Board diversity The company shall disclose the remuneration policy
and the evaluation criteria in its annual report.
Subsidiary Companies
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The amendments now require companies to form a policy for the determination of ‘material
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subsidiaries,’ which is required to be published online. It is also prescribed that at a minimum,
a subsidiary shall be considered as material if the investment of the company in the
subsidiary exceeds 20% of its consolidated net worth as per the audited balance sheet of the
previous financial year or if the subsidiary has generated 20% of the consolidated income of
the company during the previous financial year. The revised Clause 49 mandates a special
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
resolution, except in cases where a scheme or arrangement has been duly approved by a
court/tribunal, to dispose of shares in its material subsidiary which would reduce the
shareholding to less than 50% or results in loss of control over the subsidiary. Further,
selling, disposing and leasing of assets amounting to more than 20% of the assets of the
material subsidiary shall, except in cases where a scheme or arrangement has been duly
approved by a court/tribunal, also require prior approval of shareholders by way of special
resolution. The amendment has also modified the definition of a ‘material nonlisted Indian
subsidiary,’ and replaces the references to ‘turnover’ by ‘income,’ thereby expanding the
applicability of provisions for material nonlisted Indian subsidiary.
Risk Management
The amended Clause 49 requires that the Board of Directors shall be responsible for framing,
implementing and monitoring the risk management plan for the company. It also adds (for
only top 100 listed companies by market capitalization as at the end of the immediate
previous financial year) that a company through its Board of
Directors shall constitute a Risk Management Committee.
The majority of the members, and the chairman, of such
committee, shall comprise the members of the Board. The
Board shall define the roles and responsibilities of the Risk
Management Committee and may delegate its said
responsibilities to such committee.
The amended Clause 49 has added a detailed new section on related party transactions. This
section describes ‘related party transactions,’ and defines the term ‘related party.’ This
definition of related party comprises the definition of the related party provided in, both, the
2013 Act as well as the applicable accounting standards. The amended Clause 49 also
prescribes that a company shall form a policy on the materiality of related party transactions,
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and also on dealing with related party transactions. The revised Clause 49 also prescribes
started.
that at a minimum, a transaction with a related party shall be considered material if the
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transaction(s), individually or taken together with previous transactions during a financial
year, exceed 10% of the annual turnover of the company as per the last audited financial
statements of the company[5]. The amendment requires that all related party transactions
shall require prior approval of the audit committee. The audit committee may grant an
omnibus approval if:
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
The audit committee shall lay down the criteria for
granting the omnibus approval in line with the Policy on
Related Party Transactions of the company, and such
approval shall be applicable in respect of transactions
which are repetitive in nature.
The audit committee shall satisfy itself about the need for
such omnibus approval, and that such approval is in the
interest of the company.
Such an omnibus approval shall specify –
the name/s of the related party, nature of transaction, period of transaction, the
maximum amount of transaction that can be entered into,
the Indicative base price / current contracted price and the formula for variation in the
price if any, and such other conditions as the Audit Committee may deem fit. However,
where the need for related party transaction cannot be foreseen, and details above are
not available. Audit Committee may grant omnibus approval for such transactions
subject to their value not exceeding INR 1 crore per transaction
such other conditions as the Audit Committee may deem fit. However, where the need
for related party transaction cannot be foreseen, and details above are not available.
Audit Committee may grant omnibus approval for such transactions subject to their
value not exceeding INR 1 crore per transaction.
The Audit Committee shall review, at least on a quarterly
basis, the details of related party transactions entered
into by the company pursuant to each of the omnibus
approval given.
Such omnibus approvals shall be valid for a period not
exceeding one year and shall require fresh approvals after
the expiry of one year.
Also, all material related party transactions shall require the approval of shareholders through
a special resolution and all related parties shall abstain from voting on such resolutions.
Following transactions shall be exempt from the approvals above of the audit committee and
the shareholders, respectively:
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started.
transactions entered into between two government companies, or
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transactions entered into between a holding company and its whollyowned subsidiary
whose accounts are consolidated with such holding company and placed before the
shareholders at the general meeting for approval.
Conclusion
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05/10/2016 Analysis Of Amendments Made To Clause 49 Of Listing Agreement Of SEBI iPleaders
The amendments are a mix of clarifications and relaxations to the requirements of corporate
governance under Clause 49 of Listing Agreements. It is through the communication between
SEBI and large corporate that has brought to light the prevailing difficulties in interpretation
and recognition of problem areas under the clause. It is a welcome change taking into
consideration the practicality of implementation of provisions for corporate governance.
These changes bring clause 49 of the listing agreement in conformity with the Companies
Act, 2013, but does not completely pave the way for smooth implementation standards.
Alignment of a definition of ‘related parties’ and an increase in the threshold for determining
the materiality of related party transactions to 10 percent of consolidated annual turnover,
and permitting omnibus approvals were muchneeded changes.
References:
[1] Guideline for Company Listing, available at
http://www.bseindia.com/Static/about/listsec.aspx?expandable=2, Last Accessed on
31/07/2016.
[2] Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1410777212906.pdf,
Last Accessed on 31/07/2016.
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[3] According to SEBI circular no. CIR/CFD/POLICY CELL/2/2014, dated April 17 2014; Para
started.
4 ‘Applicability’. Available at:
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http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.pdf, Last Accessed on
31/07/2016.
[4] The independent director should not have any ‘material’ pecuniary relationship with the
company, it’s holding, subsidiary, associate company, promoters or directors, in preceding
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two financial years, except for receiving director’s fee. Earlier an independent director was
prohibited from having any pecuniary relationship, even if it was not material, in the ordinary
course of business and at an arm’s length.
[5] The criteria of 5% of turnover or 20% of net worth, whichever is higher, has been
removed.
Rebecca
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