SEBI Clause 49 and Companies Act 2013 A comparison

Transcription

1 SEBI Clause 49 and Companies Act 2013 A comparison Revised Clause 49 The Companies Act was enacted on August 30, 2013 which provides for major overhaul of corporate governance norms for all companies. With the objective to align with the provisions of the Companies Act 2013, adopt best practices on corporate governance and to make corporate governance norms more effective, SEBI issued revised Clause 49 which would be applicable to all listed companies with effect from October 1, Whilst in many cases clause 49 requirements have been changed to bring it in line with Companies Act 2013 but in few areas revised clause 49 has imposed much stricter requirements than Companies Act This effectively means that listed companies will have to comply with requirements of Companies Act 2013 or revised Clause 49 whichever is stricter. Following are some key highlights of changes in clause 49 and its differences from requirements of Companies Act Overall framework for Corporate Governance Revised clause 49 lays down overall framework or objectives of requirements of clause 49 and companies are expected to interpret and apply those provisions in alignment with the principles. Key components of those framework are (a) Rights of Shareholders (b) Role of stakeholders in Corporate Governance (c) Disclosure and transparency (d) Responsibilities of board and other responsibilities. Many of the principles laid down in this framework are aligned with powers, duties and expectation from various stakeholders especially directors and management in the Companies Act Composition of Board Revised Clause 49 is aligned with requirements of Companies Act 2013 with respect to composition of board of directors. However It seems there is an inadvertent error made in age criteria for independent director revised clause 49 states that director has to a person who is less than 21 years of age instead of who is not less than 21 years of age in old clause 49. It seems word not is wrongly deleted. Limit on number of directorship Companies Act 2013 lays down limit on overall number of directorships whereas Revised clause 49 lays down restrictions on number of companies in which person can serve as an independent director. As per revised Clause 49, a person shall not serve as an independent director in more than seven listed companies. Further, any person who is serving as a whole time director in any listed company shall serve as an independent director in not more than three listed company. Maximum tenure of Independent Directors Maximum tenure of Independent Directors is same in both Companies Act 2013 and Revised Clause 49 i.e. 10 years (5 years + another term of 5 years). However, transition rules to new requirements are different. As per Clause 49, a person who has already served as an independent director for five years or more in a company as on October 1, 2014 shall be eligible for appointment, on completion of his present term, for one

2 more term of up to five years only. Under Companies Act, term of independent directors will be considered prospectively i.e. they can serve for period of 10 years. Non-executive Directors compensation and disclosures Revised clause 49 continues to allow stock options to be granted to non-executive director whereas same is prohibited under Companies Act Audit Revised clause 49 has continued with requirements in old clause 49 to have all members of audit committee to be financial literate and atleast one member shall have accounting or financial management expertise. Companies Act 2013 only requires majority of audit committee members to have ability to read and understand financial statements. Revised Clause 49 has modified role of audit committee to align with requirements of Companies Act For e.g. approval/modification of related party transactions, scrutiny of inter-corporate loans and investments etc. Subsidiary companies Revised clause 49 requires (a) atleast one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non-listed Indian subsidiary company (b) the Audit committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company. These requirements were also enshrined in old clause 49. However similar requirements are not mandated in Companies Act Risk Management Revised Clause 49 requires company to constitute a risk management committee. Such committee is not required under Companies Act Related Party transactions Requirements of related party under revised clause 49 are significantly different from Companies Act 2013 revised Clause 49 is stricter and wider in scope. Some key differences are: a. Definition of related party transaction (RPT) Section 188 of the Companies Act covers specified transaction as RPT whereas revised clause 49 defines RPT as any transaction which involves transfer of resources, services or obligation. b. Definition of related party Revised clause 49 definition is wider than Companies Act It also includes close family members of directors or KMP, private companies in which directors or KMP along their relatives has control, joint control or significant influence. c. Shareholders approval Companies Act 2013 do not require shareholders approval if the same is in ordinary course of business and at arms-length. However revised Clause 49 requires all material related party transaction to be approved by shareholders through special resolution and the related parties shall abstain from voting on such resolutions. d. Revised Clause 49 requires company to lay down its policy for material related party transactions and manner of dealing with related parties.

3 Remuneration of Directors In addition to the disclosures required under the Companies Act 2013, the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report: 1. All elements of remuneration package of individual directors summarised under major groups 2. Details of fixed and performance linked incentives, along with performance criteria 3. Service contracts, notice period and severance fees 4. Stock option details, if any Management Revised Clause 49 requires senior management to make disclosures to the board meeting relating to all material financial and commercial transactions, where they have personal interest, that may have potential conflict with the interest of the company at large. The term senior management shall mean members of core management team. This will include all members of management one level below the executive directors including all functional heads. Similar requirement is not mandated under Companies Act An overview comparing provisions on corporate governance under these two regulations is given below: Area Clause 49 Revised Companies Act 2013 Overarching principles of Clause 49 Composition of the Board- Independent Directors Definition of Independent Director Inserts a new para (I) emphasising on four broad sets of principles of corporate governance on Rights of shareholders, Role of Stakeholders in corporate governance, disclosure and transparency and Responsibilities of the Board Not less than 50% as non-executive directors and one woman director. At least one-third of directors to be independent if non-executive chairman is not promoter or relative of promoter. Directors( excluding independents), employees or nominees of the promoter company also considered deemed relatives. Independent director definition largely aligned to the Companies Act 2013 provisions. No similar provisions in the Act. At least one-third as independent directors Introduced additional provisions from the earlier provisions of clause 49 in the Act. Declaration of Independence Required Required Tenure of independent directors Two terms of five years each; For second term special resolution of the members required. Only one more term of five years for independent Two terms of five years each. For second term special resolution of the

4 directors who have completed five years or more by October 1, 2014; three years cool off period before members required. First term of five years considered from April 1, 2014; three years cool off period. Appointment Code for Independent Directors Letter of appointment together with profile of the independent director to be sent to exchange and posted on website within one day No separate schedule. Requirements to comply with provisions of Companies Act, 2013 included. Required Introduced through inclusion of provisions specified in Schedule IV Remuneration to Independent Directors Clarity in the liability of Independent/Non- Executive Directors Separation of Offices of Chairman & Chief Executive Officer Number of Directorships Constitution of Audit Aligned with Companies Act, 2013 by introducing that stock options cant be offered to independent directors but can be given to non-executive directors Introduced No explicit provision earlier. Introduced as a non-mandatory provision Upto seven listed companies as independent director except where such person is a WTD, in which case limit is upto three directorships Two-thirds shall be independent Directors. Minimum three directors. No stock options allowed to independent directors Independent director or nonexecutive director liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Separation required unless articles of the company permit otherwise or the company does not has multiple businesses Upto twenty companies but not more than ten public companies Majority shall be independent Directors. Minimum three directors. Majority members,

5 All members of audit committee shall be financially literate and at least one member shall have accounting or related including chairman, shall be persons with ability to read and understand, the financial statements. Performance Evaluation of Independent Directors Role/functions of the Audit Nomination and Remuneration Stakeholders Relationship Risk Management Whistle Blower Related Party Transactions financial management expertise. The Chairman of the Audit shall be an independent director. Earlier a non-mandatory requirement. Now Mandatory. Earlier provisions expanded to align with the requirements of the Act Now a mandatory requirement as against non-mandatory earlier. Also, requirement of the chairman to be independent director retained Introduced now to align with the Act Earlier provisions revised to align with the Act Now mandatory and modified to align with the provisions of Companies Act, 2013 Aligned with the Act. Additionally, it also includes close family members of directors or KMP, private companies in which directors or KMP along their relatives have control, joint control or significant influence as related parties. Fellow subsidiaries; companies with common venturer also included. Shareholders approval required for all material related party transactions; requires company to lay down policy for material related party transactions and manner of dealing with related parties. Required New functions introduced in the Act expanding role of Audit committee Introduced in the Act with significant increase in scope, functions and role of this committee Introduced in the Act with higher clarity on scope of work with this committee Act introduced various new concepts on risk management Introduced new requirements Introduced new provisions on such transactions and related disclosures. Shareholders approval required only board so recommends if the underlying transactions are not in ordinary course or at arms length.