Revised Clause 49 of the Listing Agreement
Revised Clause 49 of the Listing Agreement Corporate Governance is concerned with holding the balance between economic and social goals. The governance framework is to encourage the efficient use of resources and equally to require accountability for the stewardship of Corporate Resources. The objective is to align as nearly as possible the interest of individuals, corporations, and society.
Corporate Governance as a concept aims to balance the interest of the various parties involved. It may be referred to as the rules or system through which the company may be directed or controlled. By balancing the interest of all stakeholders, management, shareholders, consumers etc, it formulates ways to attain the objectives of the company. The concept of corporate Governance became the central issue after the Sarbanes Oxley Act was introduced in the United States.
SEBI REVISION OF CLAUSE 49 OF THE LISTING AGREEMENT
Through a circular dated April 17th 2014, SEBI released the amendments to Clause 49 of the Equity Listing Agreement. The revised Clause 49 updates and aligns the Listing Agreement with corporate governance changes bought out in the Companies Act, 2013. There are also certain changes which are stricter than that mandated in the new Companies Act, 2013. The following report lists out the provisions according to the new Clause 49 of the Listing Agreement.
ON SHAREHOLDER RIGHTS
Listing Agreement enumerates the following rights of the shareholders, which must be met by the Company: Shareholders must be sufficiently informed about the fundamental corporate changes and must get a right to participate in it. They must have an opportunity to participate and vote in general shareholder’s meetings. They should have a right to place items on the agenda of the meeting (general), propose resolutions etc.
The shareholders must have the opportunity to exercise ownership rights. Minority protection from the abusive action of the majority must be protected. Further, the Company must adequately and timely inform the shareholders about the general meetings, capital structures and arrangements, rights attached to shares or class of shares they seek to invest in. The Company must design ways to avoid Insider Trading and abusive self-dealing. Finally, there must be the equitable treatment of all shareholders. Revised Clause 49 of the Listing Agreement
ON DISCLOSURE AND TRANSPARENCY
Disclosures must be made regarding proper compliance of prescribed standards of accounting, financial and non- financial disclosure. Maintenance of records containing minutes of the meeting must be done, specifically recording dissenting opinions.
ON BOARD COMPOSITION
The Board should have an optimum combination of Executive Directors (ED),and-Executive Directors (NED), satisfying the following criteria:
- If the Chairman is an Executive Director, at least half of the Board should be Independent Directors.
- If Chairman is a Promoter or related to a Promoter, at-least half of the Board should be independent Directors. .
- If Chairman is related to anyone occupying management position at the Board level or one level below the Board, at least half of the Board should be Independent Directors.
- If the Chairman is an ID, at least one-third of the Board should be Ids:-
- If the Board does not half a regular non-executive Chairman, at-least half of the Board should be IDs.
- The Board should have at least one woman director.
ON INDEPENDENT DIRECTORS
Clause 49 defines an Independent Director as a Non-Executive Director who:
- Is NOT a Nominee Director
- Is/Was NOT a promoter/relative of the promoter of the Company or its holding, subsidiary or associate company.
- Has/had NO pecuniary relationship (apart from directorial remuneration) with the Company, it’s holding, and subsidiary, associate company or the promoters or directors during two immediately preceding financial years.
- Whose relatives DO NOT have/had any pecuniary relationship with the Company its holding, subsidiary, associate company or the promoters or directors, amounting to 2% or more of its total income or Rs. 50 lakh during the two immediately preceding financial years.
- Who is/was NOT an employee of the Company its holding, subsidiary, an associate company in the any of the three immediately preceding financial years.
- Who is/has NOT been an employee/proprietor/partner of an audit /legal /consulting/any other firm which has transaction with the Company its holding, subsidiary, associate company, amounting to 10% or more of the gross turnover of that firm, in any of three preceding financial years.
- Who is NOT a CEO/Director of a non-profit firm that receives 25% or more of its receipts from the Company it is holding, subsidiary, associate company, promoters, or its directors, or holds 2% or more voting power of the Company.
- Who is NOT a material supplier, service provider or customer or a lessor or lessee of the company?
- Who is NOT less than 21 years of age.
Clause 49 enforces certain restrictions on the IDs as well, like:
- Outside Directorship:
- A person not to serve as an ID in more than 7 listed companies.
- A whole-time director of one company not to serve as an ID in more than 3 listed companies.
- An ID can only hold office for two terms of five years each. Reappointment for the second term has to be sought from shareholders through a special resolution.
- If a person has already served as an ID for 5 years or more in a company as on October 1st 2014, he will be eligible for one more term of up to 5 years only.
- An ID will be eligible for reappointment as an ID only after allowing a 3 years cooling-off period, after completion of two terms.
- Stock Options:
IDs will not be entitled to any stock options of the Company.
ON OTHER BOARD PROVISIONS
- Board meeting to be held at least four times a year with a maximum gap of 120 days between two meetings.
- A director can’t be a member in more than 10 committees (Audit and Stakeholders’ Relationship) and Chairman of more than 5 committees across all the Boards of Indian listed companies.
- Independent Directors, who resign or are removed, are to be replaced with new IDs within 3 months or immediate next Board meeting, whichever is earlier, in case the requirement of IDs is not met.
- Board members have to affirm compliance with a ‘Code of Conduct’ on an annual basis.
- Independent Directors to be held liable in acts of omission or commission, which occurs in their knowledge. Company has to mandatorily establish a whistleblower mechanism.
Clause 49 has the following provisions regarding subsidiary companies:
- At least one ID of the company should be a director on the Board of a material non-listed Indian subsidiary.
- The audit committee should review financial statements of and investments made by the unlisted subsidiary.
No company can dispose of shares in the material subsidiary, reducing its shareholding below 50%, without passing a special resolution in its general meeting. Selling, disposing or leasing of more than 20% of assets of the material subsidiary will require the approval of shareholders by way of a special resolution. STARTUP CFO
ON RELATED PARTY TRANSACTIONS
Clause 49 has tightened the provisions and disclosures requirements for related party transactions (RPT). Some of the requirements are:
- Related Party Transactions to require prior approval of the audit committee.
- Material Related party transactions to require shareholder approval through special resolution and concerned related parties to abstain from voting on such resolutions.
- Disclosure of all material RPTs on a quarterly basis with a compliance report on corporate governance.
- Disclosure of policies on dealing with RPTs, on the website and Annual Report.
ON DIRECTORIAL REMUNERATION
The provisions relating to directorial remuneration are kept unchanged. They include-
- Disclosure of all pecuniary relationships of non-executive directors with the company.
- Disclosure of detailed information on remuneration to directors.
- Disclosure of criteria for making payments to non-executive directors.
- Disclosure of shares/other instruments held by non-executive directors.
ON OTHER DISCLOSURES
Clause 49 stipulates mandatory disclosure of many corporate actions. Some of these are:
- Directorial Resignation: Disclosure of letter of resignation of directors along with reasons, on the company website and stock exchange, within one working day of receipt of the letter.
- Letter of Appointment: Disclosure of letter of appointment of an ID along with a detailed profile, on the company website and stock exchange, within one working day of the date of appointment.
- Disclosure of training imparted to IDs, in the Annual Report.
- Disclosure of details of the establishment of vigil mechanism, in company website and Board’s report.
- Disclosure of the remuneration policy and the evaluation criteria in the Annual Report.
NON-MANDATORY REQUIREMENTS OF CLAUSE 49
Most of the provisions in the new Clause 49 are mandatory in nature. However, there are some, which are non-mandatory and are left in the discretion of the companies to adhere. The non-mandatory requirements in the new Clause 49 are:
- The Board may appoint a non-executive Chairman who should be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in the performance of his duties.
- Disclosure of half-yearly financial performance including a summary of the significant events.
- Moving towards a regime of unqualified financial statements.
- Appointment of separate individuals to the posts of Chairman and MD/CEO.
- Reporting of the internal auditor directly to the audit committee.
ON BOARD COMMITTEES
Clause 49 has the following provisions regarding the Audit Committee:
- Members: At-least three members, two-thirds of which shall be IDs
- Chairman: Chairman to be an ID
- Attendance: Chairman of the Committee to be present in AGM
- Meeting: At-least four times a year and not more than four months gaps between meetings
- Quorum: Two or one-third of the members, whichever is greater, but a minimum of two IDs should be present
- Role: Role of the committee also includes reviewing and monitoring auditor independence, approval of related party transactions, inter-corporate loans, valuations, etc.
Clause 49 has the following provisions regarding the Nomination and Remuneration Committee:
- Members: At-least three members, all non-executive directors and at least half to be IDs.
- Chairman: Chairman to be an ID.
Clause 49 has the following provisions regarding Risk Management:
- The Company should form a Risk Management Committee.
- The Board should be responsible for framing, implementing and monitoring the risk management plan.
- The company should lay down procedures to inform Board members about the risk assessment and minimization procedures.
The revised clause 49 has enhanced the role of the audit committee to also include-
- Review and monitor auditor independence.
- Approval or any subsequent modifications of transactions of the company with related parties.
- Scrutiny of inter-corporate loans and investments.
- Valuation of undertakings or assets of the company wherever it is necessary.
Evaluation of internal financial control and risk management.