BACKGROUND
With the objectives to align with the provisions of the Companies Act, 2013 and the rules made there under, adopt best practices on corporate governance and to make the corporate governance framework more effective, SEBI has pursuant to its circular issued on April 17, 2014 amended and revised clause 35B and clause 49 of the equity listing agreement.
MAIN PROVISIONS OF REVISED CLAUSE 35B
This clause requires the company to provide e-voting facility to its shareholders, in respect of all shareholders’ resolutions, to be passed at general meetings or through postal ballot.
The e-voting facility has to be kept open for at least 1 day and maximum 3 days.
Issuer shall continue to enable those shareholders, who do not have access to e- voting facility, to send their assent or dissent in writing on a postal ballot as per the provisions of the Companies (Management and Administration) Rules, 2014.
Issuer is required to mention the Internet link of such e-voting platform in the notice to their shareholders.
The revised Clause 35B would be applicable to all listed companies and the modalities would be governed by the provisions of Companies (Management and Administration) Rules, 2014 stands amended to that extent.
MAIN PROVISIONS OF REVISED CLAUSE 49
Relating to rights of shareholders
Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes;
Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings;
Shareholders should have the opportunity to ask questions to the board, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations;
Effective shareholder participation in key Corporate Governance decisions, such as the nomination and election of board members, should be facilitated;
The Company should have an adequate mechanism to address the grievances of the shareholders;
Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress;
The company should devise a framework to avoid Insider trading and abusive selfdealing;
Company procedures should not make it unduly difficult or expensive to cast votes.
Relating to role of stakeholders in corporate governance
Stakeholders should have the opportunity to obtain effective redress for violation of their rights;
Company should encourage mechanisms for employee participation;
The company should devise an effective whistle blower mechanism enabling stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices.
Relating to disclosure and transparency
The company should ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the company; \
The company should maintain minutes of the meeting explicitly recording dissenting opinions, if any;
The company should implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders;
Relating to responsibilities of Board
Disclosure of information
Members of the Board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the company;
Key functions of the Board
Aligning key executive and board remuneration with the longer term interests of the company and its shareholders;
Ensuring a transparent board nomination process with the diversity of thought, experience, knowledge, perspective and gender in the Board;
Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions;
Ensuring the integrity of the company’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.
Other responsibilities
The Board should set a corporate culture and the values by which executives throughout a group will behave;
The Board should encourage continuing directors training to ensure that the Board members are kept up to date;
Where Board decisions may affect different shareholder groups differently, the Board should treat all shareholders fairly;
Boards should consider assigning a sufficient number of non-executive Board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest;
The Board should ensure that, while rightly encouraging positive thinking, these do not result in over-optimism that either leads to significant risks not being recognised or exposes the company to excessive risk;
The Board should have ability to ‘step back’ to assist executive management by challenging the assumptions underlying: strategy, strategic initiatives (such as acquisitions), risk appetite, exposures and the key areas of the company’s focus;
The Board and senior management should facilitate the Independent Directors to perform their role effectively as a Board member and also a member of a committee;
Relating to Board of directors
Composition of Board
The Board of Directors of the company shall at least one woman director and not less than fifty percent of the Board of Directors comprising non-executive directors;
Where the Chairman of the Board is a non-executive director, at least 1/3rd of the Board should comprise independent directors and in case the company does not have a regular non-executive Chairman, at least ½ of the Board should comprise of independent directors;
Where the regular non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors; a) If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it. b) If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it;
The definition of “independent director” in the amended clause is similar to and in sync with that of Companies Act, 1956.
Limits on number of directorships
A person cannot not serve as an independent director in more than 7 (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 companies;
Maximum tenure of independent directors
An independent director can hold office for a term up to 5 (five) consecutive years on the Board of a company and shall be eligible for reappointment for another term of up to 5 (five) consecutive years on passing of a special resolution by the company.
a person who has already served as an independent director for 5 (five) years or more in a company as on October 1, 2014 will be eligible for appointment, on completion of his present term, for 1 (one) more term of up to 5 (five) years only;
an independent director, who completes his above mentioned term shall be eligible for appointment as independent director in the company only after the expiration of 3 (three) years of ceasing to be an independent director in the company;
The company has to issue a formal letter of appointment to independent directors in the manner as provided in the Companies Act, 2013 and the letter of appointment along with the detailed profile of independent director has to be disclosed on the websites of the company and the stock exchanges not later than one working day from the date of such appointment;
Performance evaluation of Independent Directors
The Nomination Committee has to lay down the evaluation criteria for performance evaluation of independent directors and the same has to be disclosed in the annual report;
The performance evaluation of independent directors has be done by the entire Board of Directors (excluding the director being evaluated);
On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director;
Separate meetings of the Independent Directors
The independent directors of the company have to hold at least 1 (one) meeting in a year, without the attendance of non-independent directors and members of management. All the independent directors of the company have to strive to be present at such meeting;
The independent directors in the meeting have to amongst other things: a) review the performance of non-independent directors and the Board as a whole; b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors; and c) 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 their duties.
The company has to provide suitable training to independent directors to familiarize them with the company, their roles, rights, responsibilities in the company, nature of the industry in which the company operates, business model of the company, etc
The details of such training imparted shall be disclosed in the Annual Report.
Code of Conduct
The Board has to lay down a code of conduct for all Board members and senior management of the company which has to be posted on the website of the company;
All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO;
The Code of Conduct has to suitably incorporate the duties of Independent Directors as laid down in the Companies Act, 2013;
An independent director will be held 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 with respect of the provisions contained in the listing agreement;
Whistle Blower Policy
The company has to 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;
This mechanism should also provide for adequate safeguards against victimization of director(s) / employee(s) who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases;
The details of establishment of such mechanism has to be disclosed by the company on its website and in the Board’s report;
Relating to Audit Committee
Qualified and independent audit committee
The audit committee is required to have minimum 3 (three) directors as members. Twothirds of the members of audit committee have to be independent directors; Under Companies Act, 2013, a majority of the audit committee should consist of independent directors.
All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise; Under Companies Act, 2013, a majority of the members of the audit committee should be financially literate.
The Chairman of the Audit Committee has to be an independent director;
Role and powers of independent audit committee
The scope of role and functions of the audit committee as prescribed by SEBI is far more detailed vis-à-vis that covered under Companies Act, 2013. Some of the important roles and functions are as follows:
Reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to: (a) matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report as per provisions of the Companies Act, 2013; (b) Changes, if any, in accounting policies and practices and reasons for the same; (c) major accounting entries involving estimates based on the exercise of judgment by management; (d) significant adjustments made in the financial statements arising out of audit findings; (e) compliance with listing and other legal requirements relating to financial statements (e) Disclosure of any related party transactions; and (f) Qualifications in the draft audit report ii. Review and monitor the auditor’s independence and performance, and effectiveness of audit process; iii. Scrutiny of inter-corporate loans and investments; iv. Valuation of undertakings or assets of the company, wherever it is necessary; v. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems; vi. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit; vii. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern; viii. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board; ix. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors; and x. To review the functioning of the Whistle Blower mechanism
Relating to Nomination and Remuneration Committee
The company is required to set up a nomination and remuneration committee comprising of at least 3 (three) directors, all of whom shall be non-executive directors and at least ½ (half) shall be independent. Chairman of the committee has to be an independent director;
The role of the committee inter-alia includes:
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, key managerial personnel and other employees; ii. Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the Board their appointment and removal. The company shall disclose the remuneration policy and the evaluation criteria in its Annual Report.
Relating to subsidiary companies
At least one independent director on the Board of Directors of the holding company has to be a director on the Board of Directors of a material non-listed Indian subsidiary company [i.e. an unlisted subsidiary, incorporated in India, whose income or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated income or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year.]
The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company. “significant transaction or arrangement” means any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year.
A company cannot 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.
Relating to Related Party Transactions:
The provisions relating to related party transactions are applicable to all prospective transactions. All existing material related party contracts or arrangements as on the date of this circular which are likely to continue beyond March 31, 2015 shall be placed for approval of the shareholders in the first General Meeting subsequent to October 01, 2014. However, a company may choose to get such contracts approved by the shareholders even before October 01, 2014.
As per the amended clause 49, a ‘related party’ is a person or entity that is related to the company. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions and includes the following: i. A person or a close member of that person’s family if that person (a) is a related party under Section 2(76) of the Companies Act, 2013; or (b) has control or joint control or significant influence over the company; or (c) is a key management personnel of the company or of a parent of the company;
An entity is related to a company if any of the following conditions applies: a) The entity is a related party under Section 2(76) of the Companies Act, 2013; or b) The entity and the company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others); or c) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member); or d) Both entities are joint ventures of the same third party; e) One entity is a joint venture of a third entity and the other entity is an associate of the third entity; f) The entity is a post-employment benefit plan for the benefit of employees of either the company or an entity related to the company. If the company is itself such a plan, the sponsoring employers are also related to the company; or g) The entity is controlled or jointly controlled by a person in point (i) above;
The term “control” will have the same meaning as that defined in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The company shall formulate a policy on materiality of related party transactions and also on dealing with related party transactions
a transaction with a related party will be considered material if the transaction / transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds 5% (five percent) of the annual turnover or 20% (twenty percent) of the net worth of the company as per the last audited financial statements of the company, whichever is higher;
All material Related Party Transactions will require approval of the shareholders through special resolution and the related parties shall abstain from voting on such resolutions.
Relating to Disclosures
Company is required to disclose details of all material transactions with related parties quarterly along with the compliance report on corporate governance and also on its website and annual report.
All pecuniary relationship or transactions of the non-executive directors vis-à- vis the company have to be disclosed in the Annual Report.
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: i. All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc. ii. Details of fixed component and performance linked incentives, along with the performance criteria. iii. Service contracts, notice period, severance fees. iv. Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable.
The company is required to publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report.
Senior management is required to make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.)
[Note: “senior management” shall mean personnel of the company who are members of its core management team excluding the Board of Directors). This would also include all members of management one level below the executive directors including all functional heads.]
The company is required to disclose the letter of resignation along with the detailed reasons of resignation provided by the director of the company on its website not later than one working day from the date of receipt of the letter of resignation.
The details of training imparted to Independent Directors shall be disclosed in the Annual Report.
When money is raised through an issue (public issues, rights issues, preferential issues etc.), the company is required to disclose the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results to the Audit Committee. Further, on an annual basis, the company is required to prepare a statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and place it before the audit committee. Such disclosure is required to be made only till such time that the full money raised through the issue has been fully spent. This statement is required to be certified by the statutory auditors of the company. Furthermore, where the company has appointed a monitoring agency to monitor the utilisation of proceeds of a public or rights issue, it shall place before the Audit Committee the monitoring report of such agency, upon receipt, without any delay. The audit committee is required to make appropriate recommendations to the Board to take up steps in this matter.
COMMENTS AND ANALYSIS
The revised clause 35B and 49 is of course one more step, out of the several taken by SEBI to achieve the overall objective of corporate governance, disclosures and protection of shareholders’ interests.
Effective October 1, 2014 onwards, listed companies will have to make additional compliances in accordance with the revised clauses. The points highlighted above in this update are particularly worth noting. Though the clauses have been revised to bring the requirements in sync with corresponding provisions of Companies Act, 2013, there are still some differences between the two legislations with respect to audit committee, e-voting, related party transactions and independent and of course the listing agreement and demands for stringent compliances vis-à-vis Companies Act, 2013.
Relating to e-voting
Pursuant the general circular no. 20/2014 issued by the Ministry of Corporate Affairs on June 17, 2014, the said Ministry has clarified that the provisions under the Companies Act, 2013 with respect to e-voting are not mandatory till December 31, 2010. However, as mentioned above the revised clause 35B relating to e-voting will come into effect from October 1, 2014. Hence, a clarification in that respect would be required by SEBI.
Key differences with respect to related party transactions (brief overview)
With respect to related party transactions, the amended clause 49 covers a wide set of relationships which are considered to be related parties and includes all the parties treated as related parties under Companies Act, 2013.
The revised clause 49 also requires compliances and contains provisions relating to approval of all the related party transactions by audit committee, approval of members by way of special resolution in case of material related party transactions, requirement of formulating a policy with respect to materiality and dealing of related party transactions, these concepts / provisions not finding place in Companies Act, 2013.
Besides, unlike Companies Act, 1956 which give exemption from compliances in case transactions have been entered into on an arm/s length basis and in the ordinary course of business, the revised clause 49 takes into its ambit any related party transaction whether a price is charged or not. Also under the revised clause 49, a transfer of resources, services or obligations between a company is considered to be a related party transaction, unlike Companies Act, 2013 which have a defined set of transactions prescribed under section 188 of Companies Act, 2013 which are regarded as related party transactions.
Key differences with respect to independent directors (brief overview)
Under Companies Act, 2013, every listed public company are required to have at least one-third of the total number of directors as independent directors. However, under the revised clause 49, where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise independent directors and in case the company does not have a regular non-executive Chairman, at least half of the Board should comprise independent directors and where the regular non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors.
As per the revised clause, a person shall not serve as an independent director in more than seven listed companies and 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 companies. Such restriction is not contained under Companies Act, 2013.
The revised clause also requires the company to provide suitable training to independent directors to familiarize them with the company, their roles, rights, responsibilities in the company, nature of the industry in which the company operates and business model of the company and disclose the same in the annual report, the said mandatory requirements are not mentioned under Companies Act, 2013.
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