Introduction

 The Companies Act, 2013 was enacted on August 30, 2013 which provides for a major overhaul in the Corporate Governance norms for all companies. The rules pertaining to Corporate Governance were notified on March 27, 2014. SEBI decided to review the provisions of the Listing  Agreement  in  this  regard  with  the  objectives  to  align  with  the  provisions  of  the Companies Act, 2013, adopt best practices on corporate governance and to make the corporate governance framework more effective. Hence, Clause 35B and Clause 49 of the Equity Listing Agreement   have   been   replaced   by   new   text   through   Circular   No.   CIR/CFD/POLICY CELL/2/2014 dated 17th April, 2014 and Circular No. CIR/CFD/POLICY CELL/7/2014 dated 15th September, 2014. This article highlights the major changes brought about in the above mentioned clauses of the Equity Listing Agreement.

 Clause 35B

 Applicability:

 Clause 35B shall be applicable to all listed companies.

 E-voting Facility:

• The Company  shall  provide  e-voting  facility  to  its  shareholders,  in  respect  of  all shareholders’ resolutions, to be passed at General Meetings or through postal ballot.
• Such e-voting facility shall be kept open for such period specified under the Companies (Management and Administration) Rules, 2014 for shareholders to send their assent or dissent.
• The Company 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.
• The Company shall utilize the service of any one of the agencies providing e-voting platform, which is in compliance with conditions specified by the MCA, Government of India, from time to time.
• Issuer shall mention the Internet link of such e-voting platform in the notice to their shareholders

 Clause 49

 Applicability:

•  The Clause 49 of the Listing Agreement shall be applicable to all companies whose equity shares  are  listed  on  a  recognized  stock  exchange  from  1st  October,  2014. However, compliance of Clause 49 is not mandatory for the time being, for the following class of companies:
  • Companies with Paid-up share capital <= Rs 10 crores and Networth <= Rs 25 crores on the last day of the previous financial year. When these provisions become applicable to such companies, they shall comply with its requirements within 6 months from the date from when the provisions become applicable
  • Companies whose equity share capital is listed exclusively on the SME and SME- ITP Platforms.
• The  provisions  relating  to  constitution  of  a  Risk  Management  Committee  shall  be applicable to top 100 listed companies by market capitalization as at the end of the immediate previous financial year.
• The provisions with regards to the Related Party Transactions shall be 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.
• It shall not be applicable to mutual funds

 Objectives of Principles:

This is Clause 49(I) of the Listing Agreement. It states the purpose for which the Clause 49 is instated. In case of any ambiguity, the  provisions of Clause 49 shall be interpreted and applied in  alignment  with  these  principles. This objectives  have  been  divided into  four headings:

• The Rights of Shareholders
• Role of stakeholders in Corporate Governance
• Disclosure and transparency
• Responsibilities of the Board

 Board of Directors (“BOD” or “Board”):

•  Women Director: The Board shall have atleast 1 woman director. This provision regarding appointment of woman director shall be applicable with effect from April 01, 2015.

• Independent Directors:
  • Composition of Board with respect to Independent directors:
    • Where the Chairman of the Board is a non-executive director, at least 1/3rd of the Board should comprise independent directors.
    • In case the company does not have a regular non-executive Chairman, at least 1/2 of the Board should comprise 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 1/2 of the Board of the company shall consist of independent directors.
  • Qualification requirement:
    • Person with age of 21 years or more,
    • Person of integrity who possesses relevant experience and expertise,
    • Independent from Management of the company or its holding, subsidiary or associate company (“Group Companies”),
    • Independent  from  Promoter  Group  of  the  company  and  its  Group Companies,
    • Apart from  receiving  Director’s  remuneration,  no  material  pecuniary relationship exists with the company, its subsidiary, holding or associate, promoter   group   or   management   during   2 immediately   preceding financial years or during the current year
      • Of the Independent Director,
      • Of his relatives, amounting to 2% or more of its gross turnover or Rs 50 lakhs, w.e. is lower,
    • Neither he, nor his relatives
      • hold Key Managerial position or is/ has been an employee of the company,  or   its   Group   Companies   during   3   immediately preceding financial years,
      • is or  has  been  an  employee,  partner  or  proprietor,  during  3 immediately preceding financial years,
        • of the firm of CA, CS or Cost Accountants of the Company or its Group Companies,
        • Legal or consulting firm that has had a transaction, with the Company, its subsidiary, holding or associate, amounting to 10% or more of the gross turnover of such firm,
    • Hold, together with his relative 2% or more of the total voting power of the company,
    • Is Chief executive or director of any Non Profit Organization that receives 25% or more of its receipts from company, its Group Companies, promoter group or management or that holds 2% or more of the total voting power of the company,
    • Is a material supplier, service provider, customer, lessor or lessee of the company
  • Limit on number of Directorships:
    • A person cannot serve as an Independent Director in more than 7 listed companies.
    • If a person is serving as a whole-time director in any listed company, he shall not serve as an Independent Directors in more than 3 listed companies.
  • Tenure:
    • First term: 5 years.
    • Re-appointment for  another  term  of  5  years  on  passing  a  special resolution.
    • Reappointment (after 2 terms) will be only after completion of a cool off period of 3 years.
    • During the cool off period, he/ she should not be associated with the company in any other capacity, directly or indirectly.
  • Formal letter of appointment shall be issued by the Company to its Independent Directors, which shall be disclosed on the website of the company.
  • Performance evaluation
    • The Nomination Committee shall lay down the evaluation criteria for performance  evaluation   of   independent   directors.   Such   evaluation criteria shall be disclosed by the company in its annual report
    • The performance  of  independent  directors  shall  be  evaluated  by  the entire Board excluding the director being evaluated.
  • Separate meetings of the Independent Directors – The Independent Directors have to hold atleast 1 meeting in a year, without the attendance of non-Independent Directors and members of management, where they shall review the performance of the non-Independent Directors, Board as a whole, Chairman and assess the quality, quantity and timeliness of flow of information between the management and Board.
  • Familiarisation programme for Independent Directors – The  company shall familiarise the independent directors  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., through various  programmes.  The details of such  familiarisation programme  shall be disclosed on the Company’s website, a link to which will be provided in the Annual Report

• Non-executive Directors’ compensation and disclosures:
  • All  fees,  except  sitting  fees  (if  made  within  the  limits  prescribed  under  the Companies Act 2013), to Independent Directors shall be fixed by Board and shall require prior approval of shareholders.
  • The shareholders’ resolution shall specify the maximum number of stock options that can be granted to non-executive directors, in any financial year and in aggregate.
  • Independent directors shall not be entitled to any stock option.

• Other provisions as regards Board and Committees:
  • The Board shall meet at least 4 times a year, with a maximum time gap of 120.
  • A director shall not be a member in more than 10 committees or act as Chairman of more than 5 committees across all companies in which he is a director. For the purpose of reckoning the limit, Chairmanship / membership of the Audit Committee and the Stakeholders’ Relationship Committee alone shall be considered.
  • Every  director  shall  inform  the  company  about  the  committee  positions  he occupies in other companies and notify changes as and when they take place.
  • The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.
  • An  independent  director  who  resigns  or  is  removed  from  the  Board  of  the Company shall be replaced by a new independent director at the earliest but not later than the immediate next Board meeting or 3 months from the date of such vacancy, whichever is later.
  • The Board of the company shall satisfy itself that plans are in place for orderly succession for appointments to the Board and to senior management.

• Code of Conduct:
  • The Board shall lay down a code of conduct for all Board members and senior management of the company, which shall also be posted on the website of the company. It shall incorporate the duties of Independent Directors as laid down in the Companies Act, 2013.
  • 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.

• Whistle Blower Policy:
  • The 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. The details of such policy shall be disclosed by the company on its website and its Board Report.
  • It shall 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.

 Audit Committee:

•  Qualified and Independent Audit Committee:
  • Composition – minimum 3 directors as members, 2/3rd of the members shall be independent directors.
  • Qualification: All  members  of  audit  committee  shall  be  financially  literate and     at     least     one  member  shall  have  accounting  or  related  financial management expertise.
  • Chairman shall be an Independent Director and shall be present at the AGMs to answer shareholders’ queries.
  • The Company Secretary shall act secretary to the committee.

• Meeting of Audit Committee:
  • The Audit Committee should meet at least 4 times in a year and not more than 4 months shall elapse between two meetings.
  • The quorum shall be either 2 members or 1/3rd of the members of the audit committee   whichever   is   greater,   but   there   should   be   a   minimum   of   2 independent members present.

• The  powers  and the  role  of  the  Audit Committee  have  been  described  in detail. Among  other  things,  the  Audit  Committee  shall  mandatorily  review  the  following information:
  • Management  discussion  and  analysis  of  financial  condition  and  results  of operations;
  • Statement  of  significant  related  party  transactions  (as  defined  by  the  Audit Committee), submitted by management;
  • Management  letters  /  letters  of  internal  control  weaknesses  issued  by  the statutory auditors;
  • Internal audit reports relating to internal control weaknesses; and
  • The  appointment,  removal  and  terms  of  remuneration  of  the  Chief  internal auditor shall be subject to review by the Audit Committee.

 Nomination and Remuneration Committee:

•  The company  shall  set  up  a  nomination  and  remuneration  committee  which  shall comprise of
  • at least 3 directors,
  • all of whom shall be non-executive directors.
  • at least 1/2 shall be independent director.
• Chairman of the committee shall be an independent director.
• The chairperson  of  the  company  (whether  executive  or  non-  executive)  may  be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.
• The role of the committee has been laid down in this Clause.
• The Chairman  of  this  committee  could  be  present  at  the  AGM,  to  answer  the shareholders’ queries. However, it would be up to the Chairman to decide who should answer the queries.

 Subsidiary Companies:

• A subsidiary shall be considered as material if the investment of the company in the subsidiary > 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.
• At least 1 independent director on the Board of the holding company shall be a director on the Board of a material non-listed Indian subsidiary company.
• The Audit  Committee  of  the  listed  holding  company  shall  also  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.
• The management should periodically bring to the attention of the Board of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.
• The 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.
• A special resolution in the General Meeting will be required for a company to dispose of its 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, except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal.
• When a material subsidiary wants to sell, dispose off or lease its assets which are of a value greater than 20% of its total assets during a financial year, it shall require prior approval of shareholders of its holding company by way of special resolution, unless the  sale/disposal/lease   is   made   under   a   scheme   of arrangement duly approved by a Court/Tribunal.
• Where a  listed  holding  company  has  a  listed  subsidiary  which  is  itself  a  holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned.

 Risk Management:

• The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures.
• The  Board  shall  be  responsible  for  framing,  implementing  and  monitoring  the  risk management plan for the company.
• The company through it Board shall also constitute a Risk Management Committee. Its roles and responsibilities shall be defined by the Board. Such Committee may delegated the monitoring and reviewing of the risk management plan and such other functions as it may deem fit.
• The majority of Committee shall consist of members of the Board of Directors.
• Senior  executives  of  the  company  may  be  members  of  the  said  Committee  but  the Chairman of the Committee shall be a member of the Board of Directors.

 Related Party Transactions:

•  An entity shall be considered related to the company if –
  • Such entity is a related party as per companies act, 2013, or,
  • Such entity is a related party under the applicable accounting standards.
• A transaction with a related party shall be considered as material if the transaction to be entered into (individually  or  taken  together  with  previous  transactions)  during  a financial year > 10% of the annual consolidated turnover of a company as per the last audited financial statements of the company.
• The company shall formulate a policy on materiality of related party transactions and also on dealing with Related Party Transactions.
• All related party transactions shall require prior approval of the Audit Committee.
• Audit Committee may grant omnibus approval for proposed Related Party Transactions subject to following conditions:
  • Audit Committee shall lay down criteria for granting omnibus approval,
  • Such approval will be applicable for repetitive transactions,
  • Such omnibus approval should be in interest of the company,
  • The omnibus approval shall specify
    • Name of related party,
    • Nature of transaction,
    • Period of transaction,
    • Maximum amount of transaction that can be entered into,
    • Indicative base price/ current contracted price,
    • Formula for variation in price.
  • Where the need or aforesaid details of Related Party Transactions cannot be foreseen, Audit Committee may grant an omnibus approval provided their value<= Rs 1 Crore per transaction.
  • Quarterly  review  by  the  Audit  Committee  of  the  details  of  Related  Party Transactions entered into pursuant to the omnibus approval.
  • Validity period of omnibus approvals = 1 year.
• Shareholder’s   approval   through   special   resolution   for   Material   Related   Party Transactions.
• The above approvals of Audit Committee or by Shareholders of the company will not be necessary for Related Party Transactions entered into between two government companies or between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company.

Disclosures:

Various disclosure requirements are specified for the listed companies in Clause 49(VIII) for the following

• Related Party Transactions,
• Disclosure of Accounting Treatment,
• Remuneration of Directors,
• Management,
• Shareholders,
• Proceeds from public issues, rights issue, preferential issues, etc.

 CEO/CFO certification:

 A list of certifications with regards to financial statements, cashflow statement, transactions, internal controls, etc. has been given in Clause 49(IX) of the Equity Listing Agreement, which shall be provided by the CEO or the Managing Director or manager or in their absence, a Whole Time Director appointed in terms of Companies Act, 2013 and the CFO  to the Board of the Company.

 Report on Corporate Governance:

•  There shall be a separate section on Corporate Governance in the Annual Reports of company, with a detailed compliance report on Corporate Governance.
• Non- compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted.
• The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the given format. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.

 Compliance

•  The  company  shall  obtain  a  certificate  from  either  the  auditors  or  practicing  CS regarding compliance of conditions of corporate governance as stipulated in this clause 49 of the Equity Listing Agreement.
• This certificate will be annexed with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company.
• The non-mandatory requirements given in the annexure to the Listing Agreement may be implemented as per the discretion of the company.
• The disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.