Clause 49 of the Listing Agreement -Analysis of important changes By CA Shailesh Bathiya Workshop organised by Bombay Chartered Accountants Society on Friday, 17 th October, 2014 1
Corporate Governance Core of the Board s Existence. The buck stops at the Board of Directors. Boards that lead. Raising the bar on Corporate Governance. Enron, Parmalat, Satyam. Increased accountability and responsibility of independent directors and Board. Listing Agreement vs. Listing Regulations. New concepts:-principles of Corporate Governance, Greater independence, Duties of Independent directors,, woman director, Evaluation mechanism, Whistle blower policy, Risk Management Committee, Approval to Related Party Transactions, Nomination and Remuneration committee, immunity, alignment with CA 2013, etc. 2
Evolution of Corporate Governance in India December, 1995: CII set up a task force to design voluntary code of Corporate Governance. April, 1998: CII released a publication Desirable Corporate Governance - A Code May, 1999: SEBI set up the Kumar Mangalam Birla Committee to formulate Code of Corporate Governance. February, 2000: Clause 49 introduced pursuant to K.M. Birla Committee Report. 2002: Ministry of Finance and Company Affairs set up Naresh Chandra Committee on Corporate Audit and Governance. 3
Evolution of Corporate Governance in India 2003: Narayana Murthy Committee set up by SEBI to review Clause 49 of Listing Agreement, submitted Report. October, 2004: Clause 49 modified by SEBI by a Master Circular to reflect some of Narayana Murthy Committee s recommendations. December, 2005: Deadline for compliance with modified Clause 49. 2008: Few Circulars issued by SEBI for amendment of Clause 49. Draft Companies Bill introduced in parliament. 17 April, 2014: Revised Clause prescribed by SEBI by a master circular superseding all other earlier circulars on clause 49. Circular No. CIR/CFD/POLICY CELL/2/2014 15 th September, 2014: Clause 49 amended by SEBI. Circular No. CIR/CFD/POLICY CELL/7/2014. 4
Revised Clause 49 of Listing Agreement- Applicability Revised clause 49 applicable from 1 st October, 2014. Revised clause 49 applicable to all Listed Companies but not mandatory, for the time being, in respect of : 1) Companies having paid up equity share capital not exceeding Rs. 10 crore and Net Worth not exceeding Rs. 25 crore, as on the last day of the previous financial year. 2) Companies whose equity share capital is listed exclusively on the SME and SME-ITP Platforms. 5
Overview of Revised Clause 49 6
49.I Implementation and Interpretation The company agrees to comply with the following provisions of Clause 49 which shall be implemented in a manner so as to achieve the objectives of the principles as mentioned below. In case of any ambiguity, the said provisions shall be interpreted and applied in alignment with the principles. 7
Clause 49.I- Principles 8
49.I. A Rights of Shareholders-Principle 1. Company should seek to protect and facilitate exercise of Shareholders rights. 2. Company should provide adequate and timely information to shareholders. Regarding date, location, agenda and issues of general meetings. Capital structures and arrangements that give disproportionate control. Regarding rights attached to all series and classes of shares before they purchase 3. Ensure equitable treatment to all shareholders including minority and foreign shareholders Exercise of voting rights by foreign shareholders Devise a framework to avoid insider trading, etc. 9
49.1.B Role of stakeholders in Corporate Governance-Principle. 1. Company should recognize the rights of stakeholders and encourage co-operation between company and the stakeholders. a. Rights of stakeholders to be respected. b. Stakeholders to have opportunity for effective redress for violation of their rights. c. Encourage mechanisms for employee participation. d. Stakeholders should have access to relevant, sufficient and reliable information timely and regularly to participate in corporate governance process. e. Devise an effective whistle blower mechanism. 10
49.I.C Disclosure and Transparency-Principle 1. Company should ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership and governance of the company. a. Information should be prepared and disclosed as per prescribed standards on accounting, financial/nonfinancial disclosure. b. Channels for disseminating information should provide for equal, timely, cost efficient access to relevant information. c. Maintain minutes of the meeting explicitly recording dissenting opinions, if any. d. Implement the prescribed AS in letter and spirit in preparation of financial statements considering interest of all stakeholders and ensure that annual audit is conducted by an independent, competent and qualified auditor. 11
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49.I.D Responsibilities of the Board-Principles 1. Disclosure of information a. Directors and key executives to disclose whether they directly or indirectly or on behalf of third parties have a material interest in any transaction or matter directly affecting the company. b. Meet expectations of operational transparency vs. maintaining confidentiality to foster a culture of good decision making. 2. Key functions of the Board 9 key functions 3. Other responsibilities. 14 responsibilities. 13
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49.II Board of Directors A. Composition of Board Board shall have an optimum combination of Executive and Non-Executive Directors with at least one woman director and not less than 50% comprising of Non- Executive Directors. (woman director provision applicable w.e.f. April 01, 2015) At least 1/3 rd of the Board should comprise of Independent Directors, in case Chairman is a nonexecutive director. At least ½ of the Board should comprise of Independent directors, in case Chairman is an executive director or in case non executive chairman is a promoter or related to any promoter or person occupying management position at Board level or one level below the Board. 15
49.II Board of Directors B. Independent Directors Independent Director shall mean a non executive director other than a nominee director of a company, Who in opinion of Board is a person of integrity and possesses relevant expertise and experience. Who is or was not a promoter of the company/holding/subsidiary/associate company Not related to promoters or directors in the company/holding/subsidiary/associate company Apart from receiving director s remuneration has or had no material pecuniary relationships with the company/holding/subsidiary/associate company or their promoters or directors, during 2 preceding FY or current FY 17
49.II Board of Directors B. Independent Directors.(contd.) None of whose relatives has or had pecuniary relationship with company/holding/subsidiary/associates/their promoters/directors. Neither himself nor any of his relatives Holds or has held position of KMP or is or has been employee of the company/holding/subsidiary/associate company in any of the preceding 3 FY Been an employee/proprietor/partner in any preceding 3 FY, of o Firm of auditors/cs/cost auditors of the company/holding/subsidiary/associate company or o Legal/consulting firm that has or had transaction with the company/holding/subsidiary/associate company, amounting to 10% or more of gross turnover of such 18 firm.
49.II Board of Directors B. Independent Directors.(contd.) Holds together with his relatives 2% or more of voting power of the company Is a chief executive or director of any NPO that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company Is a material supplier / service provider / customer / lessor / lessee 19
49.II Board of Directors B. Independent Directors ( contd.) 2. Can serve as an independent director only in 7 listed companies, and if he is serving as a WTD in any listed company than can serve as ID in not more than 3 listed companies 3. Maximun Tenure of IDs shall be in accordance with Companies Act, 2013 and clarifications/circulars of MCA. 4. Company shall issue formal letter of appointment in the manner as provided in CA 2013. The terms and conditions of appointment shall be disclosed on the website of the company. 5. Performance evaluation of independent directors to be done by Board (excluding concerned director) and determine whether to extend or continue term of ID. Company shall disclose criteria for evaluation in Annual report. 6. To hold at least 1 separate meeting of independent directors in a year. 7. Familiarisation Programme for Independent Directors. 20
49.II. Board of Directors C. Non Executive director s compensation and disclosures. Important change. Independent directors shall not be entitled to any stock option. Section 197(7) of CA Act, 2013 also has a similar provision. D. Other provisions as to Board and Committees. The Board shall meet at least four times a year with a maximum time gap of one hundred and twenty days. Similar to section 173 (1) of CA Act, 2013. 21
49.II Board of Directors-E. Code of Conduct. The Board shall lay down a code of conduct for all Board members and senior management of the company which shall be posted on company website. All Board members and senior management personnel shall affirm compliance. The Annual Report shall contain a declaration to this effect signed by the CEO. 3. The Code of Conduct shall suitably incorporate duties of independent directors as laid down in CA Act, 2013. Schedule IV clause III of CA Act prescribes 13 duties of IDs. 4. An Independent director shall be liable only if acts or omission or commission by a company had occurred with his knowledge attributable through Board processes and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in the Listing Agreement. 22
49.II Board of Directors. F. Whistle Blower Policy 1.Company shall establish a vigil mechanism for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company s code of conduct or ethics policy. 2.Adequate safeguards to be provided against victimization of director(s) / employee(s) who avail of the mechanism and should provide direct access to the Chairman of the Audit Committee in exceptional cases. 3.The details of establishment of such mechanism shall be disclosed on company s website and in the Board s report. 23
49.III Audit Committee A. Qualified and Independent Audit committee-no change. Company to constitute a qualified and independent audit committee giving terms of reference. Shall have minimum three directors as members. two thirds of which shall be independent directors. Chairman to be independent- must attend every AGM. All members financially literate- at least 1 member to be expert- accounting or related financial management. To meet at least 4 times a year and not more than 4 months to lapse between 2 meetings. Quorum = greater of (2 members or 1/3 rd )and there should be at least 2 independent members 24
49.III. Audit Committee C. Powers of Audit Committee-No change. D. Role of Audit Committee. 2. Recommendation for appointment, remuneration and terms of appointment of auditors of the company. Recommending to the Board the appointment, re appointment and,if required, the replacement or removal of the statutory auditor and the fixation of audit fees. 4. Reviewing with the management the annual financial statements and auditor s report thereon before submission to the Board for approval 25
49.III. Audit Committee D. Role of Audit Committee 7. Review and monitor the auditor s independence and performance and effectiveness of audit process. 8. Approval or any subsequent modification of transactions of the company with related parties. 9. Scrutiny of inter-corporate loans and investments. 10. Valuation of undertakings or assets of the company wherever it is necessary. 11. Evaluation of internal financial controls and risk management systems. 18. To review the functioning of the Whistle Blower mechanism., in case the same is existing. 26
Audit Committee Explanation (i) The term related party transactions shall have the same meaning as provided in clause 49(VII) of the Listing Agreement. Earlier clause contained meaning as per AS- 18. 27
49.IV Nomination and Remuneration Committee A. Company through its Board of Directors shall constitute the Nomination and Remuneration committee which shall comprise at least 3 directors, all of whom shall be non-executive directors and at least half shall be independent. Chairman of the committee shall be independent director. Earlier this was a non mandatory requirement. Provided that the chairperson of the company may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee. 28
49. IV. B Role of Nomination and Remuneration Committee 1. Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy relating to the remuneration of the directors, KMP and other employees.2. Formulation of criteria for evaluation of independent directors and the Board. 3. Devising a policy on Board diversity. 4. identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with criteria and recommend to Board their appointment and removal. The company shall disclose the remuneration policy and the evaluation criteria in Annual Report. C. Chairman can remain present at AGM to answer queries. 29
49.V Subsidiary Companies At least one independent director of the holding company shall be a director on the Board of material non-listed Indian subsidiary company The Audit Committee of the listed holding company shall review the financial statements, in particular, the investments made by the unlisted subsidiary company The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company 30
49. V Subsidiary Companies D. Company shall formulate a policy for determining material subsidiaries and such policy shall be disclosed on the company's website and a web link thereto shall be provided in the Annual Report. E. A subsidiary shall be considered as material if the investment of the company in it exceeds 20% of its consolidated net worth as per the audited balance sheet of the previous FY or if it has generated twenty per cent of the consolidated income of the company during the previous FY. 31
Subsidiary Companies F. No company shall dispose of shares in its material subsidiary which would reduce its shareholding (either on its own or together with other subsidiaries) to less than 50% or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal. G. Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal 32
49.VI Risk Management A. The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. B. The Board shall be responsible for framing, implementing and monitoring the risk management plan for the company. C. The Board shall constitute a Risk Management Committee and define its roles and responsibilities and may delegate to it monitoring and reviewing of risk management plan and other functions. Applies to top 100 listed companies by market capitalization at the end of immediate previous financial year. D. /E. Majority of committee and chairman shall be directors while senior executives may be members. 33
49.VII Related Party Transactions) 34
49.VII Related Party Transactions A. A related party transaction is a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged B. An entity shall be considered to be related to the company if (a) such entity is a related party under Section 2(76) of the Companies Act, 2013; or (b) such entity is a related party under the applicable accounting standards. 35
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49.VII Related Party Transactions Clause 49 VII applies to all prospective transactions. All existing material RPT likely to continue beyond 31-3-2015 shall require shareholder approval in first General Meeting after 1-10-2014. c. Company shall formulate a policy on materiality of related party transactions and also on dealing with RPTs. Provided that a transaction with a related party shall be considered material if transaction(s) to be entered into individually or taken together with previous transactions during a FY, exceeds 10% of the annual consolidated turnover of the company as per the last audited financial statements. D. All Related Party Transactions shall require prior approval of the Audit Committee. However, the Audit Committee may grant omnibus approval for proposed Related Party Transactions subject to the certain conditions. 37
49.VII Related Party Transactions E. All material Related Party Transactions shall require approval of the shareholders through special resolution and the related parties shall abstain from voting on such resolutions. Provided that sub-clause 49. VII. D and E shall not be applicable in the following cases: (i) transactions entered into between two government companies; (ii) transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated and placed before shareholders. Explanation(i) For the purposes of clause 49(VII) all entities falling under the definition of related parties shall abstain from voting irrespective of whether the entity is a party to the particular transaction or not. 38
49.VIII Disclosures A. Related Party Transactions. 1. Details of all material transactions with related parties shall be disclosed quarterly along with the compliance report on corporate governance. 2. The company shall disclose the policy on dealing with Related Party Transactions on its website and a web link shall be provided in the Annual Report also in the Annual Report. 39
49.VIII Disclosures- E. Shareholders. A stakeholders Relationship Committee shall be formed under chairmanship of a non-executive director and other members as decided by Board to specially look into redressal of grievances of shareholders, debenture holders and other security holders 40
49. IX CEO/CFO certification CEO or MD or Manager (in their absence a WTD) and CFO to certify to the board: 41
49.XI Compliance Company shall obtain a certificate from the auditors or practicing company secretary regarding compliance of conditions of corporate governance And annex the certificate with the Directors Report and send the certificate to the Stock Exchanges along with the Annual Report 42
Annexure Non-Mandatory Requirements The company may appoint separate persons to the post of Chairman and Managing Director/CEO The Internal auditor may report directly to the Audit Committee 43
Conclusion Good corporate governance means to sustainable wealth creation. Positive side of adherence to most rigorous standards in governance for corporations: - Increased importance of corporate governance as an investment criteria among large investors. - Improved Equity Price Performance. - Higher Valuations. - Access to global markets. - Increased investor goodwill and confidence. The journey from Letter to spirit. 44
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