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A Project Report on

Critical Analysis of Clause 49 of Listing Agreement

Project submitted to:

Ms. Apoorvi Shrivastava

(Faculty of Corporate Regulation)

Project Submitted by:

Rohit Dongre

Semester VII, Section B

Roll no. 132

Submitted on:

26.09.2016

Hidayatullah National Law University, Naya Raipur Chhattisgarh.

Declaration
I hereby declare that the project work entitled Critical Analysis of Clause 49 of Listing
Agreement submitted to Hidayatullah National Law University, Raipur, is record of an
original work done by me under the able guidance of Ms. Apoorvi Shrivastava, Faculty of
Corporate Regulation, HNLU, Raipur.

Rohit Dongre

Semester- VII

Section B

Roll no-132

2
Acknowledgements
I feel highly elated to work on the topic Critical Analysis of Clause 49 of Listing
Agreement The practical realization of this project has obligated the assistance of many
persons. I express my deepest regard and gratitude for Ms. Apoorvi Shrivastava, Faculty
of Corporate Regulation. Her consistent supervision, constant inspiration and invaluable
guidance has been of immense help in understanding and carrying out the nuances of the
project report.

I would like to thank my family and friends without whose support and encouragement,
this project would not have been a reality.

I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and through Internet.

Some printing errors might have crept in, which are deeply regretted. I would be grateful
to receive comments and suggestions to further improve this project report.

Rohit Dongre

Semester- VII

Section B

Roll no-132

3
Table of Contents
Declaration
Acknowledgements
Objectives
Scope of Study
Research Methodology
Sources of Data
Tools of data collection
Organization of study
PART-II Provisions of Clause 49
Clause 49(I) Principles:
Clause 49(II) Board of Directors:
Clause 49(III) Audit Committee:
Clause 49(IV) Nomination and Remuneration Committee:
Clause 49(V) Subsidiary Company:
Clause 49(VI) Risk Management
Clause 49(VII) Related Party Transactions
Clause 49(VIII) Disclosures
Clause 49(IX) CEO/CFO certification
Clause 49(X) Report on Corporate Governance:
Clause 49(XI) Compliance:
PART-III Comparison of Two Circulars amended Circulars of Clause 49
PART-IV Critical Analysis
Conclusion
References
Webliography

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Introduction

Corporate governance is concerned with holding the balance between economic and
social goals and between individual and communal goals. The governance framework is
there to encourage the efficient use of resources and equally to require accountability for
the stewardship of those resources. The aim is to align as nearly as possible the interests
of individuals, corporations and society. - -Sir Adrian Cadbury, UK, Commission
Report: Corporate Governance 1992

Corporate Governance as a concept aims to balance the interests of the various parties
involved. It may be referred to as the rules or the system through which the Company is
directed or controlled. By balancing the interests of all the stakeholders- management,
shareholders, consumers etc, it formulates ways to attain companys objectives.

Clause 49 of the Listing Agreement by Securities Exchange Board of India elaborates on


the issue of Corporate Governance and prescribes the norms under which the Companies
are mandated to operate. Subsequent to the enactment of the new Companies Act, 2013;
SEBI through an official circular has amended Clause 49 of the Listing Agreement to
bring it in conformity with the new Act.[1] The amended clause has been operative since
October, 2014.

The need was felt to amend the Listing Agreement in order to align the provisions of the
Listing Agreement with the new Companies Act. Also, to strengthen the Corporate
Governance framework for listed companies in India.

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Objectives
The Specific Objectives of the research work are-

To understand the Concept of Listing Agreement and What is Clause 49?


To study the provisons of Clause 49 of listing Agreement?
To understand Comparison of Two Circulars amended Circulars of Clause 49
To make a critical analysis of Clause 49 in comparison with Companies Act, 2013

Scope of Study
The Research work covers mainly the Concept of Listing Agreement and provisons of
Clause 49 of lisiting agreement to further make critical analysis.

Research Methodology
This Research Project is Descriptive in nature as it uses descriptive language for the
explanation of various topics and subjects discussed in this project.

Sources of Data
Secondary data has been mostly used in the making of this research project, which
includes Web sources, including reports and data analysis and studies carried out by
people in their field work in different states etc.

Tools of data collection


The data so used in the making of this Research work has been collected mainly from
web sources.
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Organization of study
The Research Work has been divided into Parts, which are further divided into Sub-parts.

What is Listing Agreement


The basic criterion on which the whole Listing Agreement based is Corporate
Governance. Currently there are 54 Clauses in the Listing Agreement and all of them
based on this very concept. Further, there is a clause which specifically deals with
Corporate Governance i.e. Clause 49.

Listing means admission of securities to dealings on a recognized stock exchange. The


securities may be of any public limited company, Central or State Government, quasi
governmental and other financial institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:


provide liquidity to securities;
mobilize savings for economic development;
protect interest of investors by ensuring full disclosures.

A company, desirous of listing its securities on the Exchange, shall be required to file an
application, in the prescribed form, with the Exchange before issue of Prospectus by the
company, where the securities are issued by way of a prospectus or before issue of 'Offer
for Sale', where the securities are issued by way of an offer for sale.

The basic criterion on which the whole Listing Agreement based is Corporate
Governance. Currently there are 54 Clauses in the Listing Agreement and all of them
based on this very concept. Further, there is a clause which specifically deals with
Corporate Governance i.e. Clause 49. By way of Listing Agreement inter alia, Stock
Exchange ensures on behalf of SEBI that the Companies are following good Corporate
Governance Practice.

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Corporate Governance view by Committees

The first major initiative for Corporate Governance was undertaken by the Confederation
of Indian Industry (CII), Indias largest industry and business association, which came up
with the first voluntary code of corporate governance in 1998. More than a year before
the onset of the East Asian crisis, the CII had set up a committee to examine corporate
governance issues, and to recommend a voluntary code of best practices.
Drawing heavily from the Anglo-Saxon Model of Corporate Governance, CII drew up a
voluntary Corporate Governance Code. The first draft of the code was prepared by April
1997, and the final document titled Desirable Corporate Governance: A Code,2 was
publicly released in April 1998. The code was voluntary, contained detailed provisions
and focused on listed companies.

Although the CII Code was welcomed with much fanfare and even adopted by a few
progressive companies, it was felt that under Indian conditions a statutory rather than a
voluntary code would be far more purposive and meaningful, at least in respect of
essential features of corporate governance1. Consequently, the second major corporate
governance initiative in the country was undertaken by SEBI. In early 1999, it set up a
committee under Kumar Mangalam Birla to promote and raise the standards of good
corporate governance.

1 From the preface to the Report of the Committee Appointed by the SEBI on Corporate Governanceunder
the Chairmanship of Shri Kumar Mangalam Birla (Birla Committee Report); Available at:
<http://www.sebi.gov.in/commreport/corpgovhtml>.

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The Birla Committee specifically placed emphasis on independent directors in discussing
board recommendations and made specific recommendations regarding board
representation and independence. The Committee also recognized the importance of
audit committees and made many specific recommendations regarding the function and
constitution of board audit committees. In early 2000, the SEBI board accepted and
ratified the key recommendations of the Birla Committee, which were incorporated into
Clause 49 of the Listing Agreement of the Stock Exchanges.

The Naresh Chandra committee2 was appointed in August 2002 by the Department of
Company Affairs (DCA) under the Ministry of Finance and Company Affairs, to examine
various corporate governance issues. The Committee submitted its report in December
2002. It made recommendations in terms of two key aspects of corporate governance:
financial and non-financial disclosures, and independent auditing and board oversight of
management.
It also made a series of recommendations regarding, among other matters, the grounds for
disqualifying auditors from assignments, the type of non-audit services that auditors
should be prohibited from performing, and the need for compulsory rotation of audit
partners.
The fourth initiative on corporate governance in India is in the form of the
recommendations of the Narayana Murthy Committee.3 This committee was set up by
SEBI under the chairmanship of Mr. N.R. Narayana Murthy, in order to review Clause
49, and to suggest measures to improve corporate governance standards. Some of the
major recommendations of the committee primarily related to audit committees, audit
reports, independent directors, related party transactions, risk management, directorships
and director compensation, codes of conduct and financial disclosures.

2 <http://www.nfcgindia.org/executive_summary.htm>.

3 Securities and Exchange Board of India, Report of the SEBI Committee on Corporate
Governance(February 2003), Available at: http://www.sebi.gov.in/commreport/corpgov.pdf

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The Murthy Committee, like the Birla Committee, pointed that international
developments constituted a factor that motivated reform and highlighted the need for
further reform in view of the recent failures of corporate governance, particularly in the
United States, combined with the observations of Indias stock exchanges that
compliance with Clause 49 had up to that point been uneven. Like the Birla Committee,
the Murthy Committee examined a range of corporate governance issues relating to
corporate boards and audit committees, as well as disclosure to shareholders and, in its
report, focused heavily on the role and structure of corporate boards, while strengthening
the definition of director independence in the then-existing Clause 49, particularly to
address the role of insiders on Indian boards.

In its present form, Clause 494, called Corporate Governance, contains eight sections
dealing with the Board of Directors, Audit Committee, Remuneration of Directors, Board
Procedure, Management, Shareholders, Report on Corporate Governance, and
Compliance, respectively. Firms that do not comply with Clause 49 can be de-listed and
charged with financial penalties.

What is Clause 49 of the Listing Agreement?

Applicable to Listed Companies.


Not Mandatory for time being for following class of companies:

Small companies whose equity share capital does not exceed Rs 10 crore and net worth
Rs 25 crore as on the last day of the previous financial year, have been excluded from
complying with the new provisions of Clause 49.

4 Clause 49 of the Listing Agreement contains the guidelines on Corporate Governance for all Listed
Companies and applies to all Listed Companies (or those that are seeking listing), except for very small
companies (that is, those that have a paid-up capital of less than Rs. 30 million and a net worth of less than
Rs. 250 million throughout their history). While several requirements of Clause 49 are mandatory in nature,
there are certain requirements (such as the setting up of a remuneration committee, training of board
members and whistleblower policy) that are merely recommendatory in nature. See Securities and
Exchange Board of India circular no. SEBI/CFD/DIL/CG/1/2004/12/10 dated 29 October 2004, Available
at: < http://www.sebi.gov.in/circulars/2004/cfdcir0104.pdf>.

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Also, those listed on the SME (small and medium enterprise) stock exchange have been
exempted from the requirements.

Why was there need to amend Clause 49 of Listing Agreement?

To align the provisions of the listing agreement with the provisions of the newly enacted
Companies Act, 2013.
To provide additional requirements to strengthen the Corporate Governance framework
for the listed companies in India.

What happens when the companies dont comply with clause 49 of the listing
agreement?

Non-compliance with the provisions of corporate governance in clause 49 would invite


penalties such as suspension of trading and delisting from the stock exchange.

While SEBI can delist a company for non-compliance, even individual stock exchanges
have been empowered to suspend the trading of shares of defaulting companies.

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PART-II Provisions of Clause 49

Clause 49 of the Listing Agreement is applicable to all the listed companies through the
official circular with effect from 1st October, 2014. Other entities which are not Company
per se but fall under the head of body corporate and are guided or regulated by some
other Statute, the clause shall apply on them till it is conformity with their statute. In case,
any of the provision of the clause violates the concerned statute, the Listing Agreement
would cease to apply. This clause is not applicable to mutual funds.

Clause 49(I) Principles:


Rights of Shareholders: 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 shareholders
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

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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 equitable treatment of all
shareholders.

Role of Stakeholders in Corporate Governance: This section provides for the need of
recognition of the rights of stakeholder and encourage cooperation between stakeholders
and company. The stakeholders must be effectively recognised and respected. A
mechanism must be created to protect their rights from abuse or violation. Further, they
must be timely and adequately informed about every process relating to Corporate
Governance.

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.

Duties/ Responsibilities of the Board: One of the key responsibilities of the Board is to
observe transparency and disclose every material fact or report which is required to be
disclosed. Other key functions include monitoring the effectiveness of the Companys
governance practice, setting performance objectives, aligning board remuneration and
other key executive with the interests of the Company and shareholders etc.

Clause 49(II) Board of Directors:


Composition: This part requires that the Company must have an optimum combination
of Executive and non executive directors i.e. the Board must necessarily have 50% non-
executive directors. Also, it is mandated that there must be at least one woman director.
In case, the Chairman of the company is a non executive director, one-third of the Board
must comprise of independent directors. However, if the Chairman is an executive
director, half the Board must comprise of Independent directors.

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Independent Directors: The amended agreement excludes nominee director to fall under
the meaning of independent director. Independent director is any non executive director
who possess relevant expertise and integrity and in no way is related to the Company.

According to the clause, no person can be an independent director of more than seven
listed companies. If any person is serving as a whole time director in any listed company,
then he/she shall not be the independent director of more than three listed companies.

The tenure of the Independent director has been amended to be in accordance with the
Companies Act, 2013 and the relevant rules released by Ministry of Corporate Affairs
from time to time. Under the Companies Act, 2013 the tenure of independent directors
has been given of five years. However, an independent director cannot be an independent
director of a company consecutively. There has been prescribed a cooling period of three
years in between.

The appointment of the independent director has to be made through a formal letter of
appointment as prescribed in the Companies Act, 2013.5

The evaluation of the performance of the independent directors must be made as per the
criteria laid down by the Nomination Committee which must be disclosed in the annual
report. The evaluation of the director would be done by the entire board except the
director evaluated or concerned. Based on this evaluation, the Directors tenure would be
extended or not.

The independent directors of a company shall hold a meeting where only independent
directors are present and no other member or director. The objective behind such meeting
is to analyse the performance of the other directors and to assess the quality and quantity
of information flow between the Company and the Board for the effective functioning.

Instead of the training programme for the independent directors, the familiarisation
programme for the independent director has been introduced whereby the directors would

5http://corporatelawreporter.com/?s=CLAUSE+49+OF+LISTING+AGREEMENT

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be familiarised with their role, functions in the Company. Also, the details of the business
functioning would be elaborated through programmes. The details of this programme
have to be disclosed in the website of the Company along with a link attached to the
Companys annual report.

Non Executive Directors Compensation and Disclosures: Under this, the payment
scheme as fixed by the Board of all the non- executive directors must be approved by the
shareholders in a general meeting. The shareholders would decide the number of Stock
option that would be granted to the non executive directors in a financial year. Further, it
has been provided that the independent directors are not entitled to stock options. This
rule regarding the prior approval of shareholders shall not apply in case of the payment of
sitting fees to the non executive directors.

Code of Conduct: The Board of Directors are responsible to lay down a code of conduct
for all the Board members and senior management of the company which shall be posted
on the website of the Company. A strict compliance of this code must be witnessed on an
annual basis and the CEO would sign a declaration annexed with the annual report
conforming such compliance. The duties of independent directors must be in accordance
with those laid down in the Companies Act, 2013. An independent director must be held
responsible for only those acts of omission or commission which had occurred with his
knowledge.

Other Provisions: Clause 49 (II)(D) talk about the other provisions which are to be
complied with in respect of Boards and Committees. The foremost being the meeting of
the Board, four times in a year. The gap prescribed between two meetings is a maximum
of hundred and a twenty days. The second provision in this part is regarding Committee
membership. A cap has been placed with regard to the committees a director can be a
member of. A director cannot be a member of more than 10 Committees or act as a
Chairman of more than 5 Committees in all the companies where he is designated as a
director. The Board is responsible to review all the compliance reports of every law
applicable to the Company and rectify instances of non compliances.

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Whistle Blower Policy: Last but the most important provision is regarding the Whistle
Blower Policy. Previously being one of the non mandatory provision of the Agreement, it
has now been amended and made a mandatory provision. Under this, the Company is
required to establish a vigil mechanism to report unethical behaviour or any sort of
violation of the companys code of conduct, any actual or suspected fraud.This
mechanism should also provide for adequate safeguards against victimisation of
individuals who utilise such mechanism to report any concerns. The website of the
Company along with the Board report must disclose the establishment of such
mechanism. The mechanism should provide for safeguards against victimization of the
personnel availing it.

Clause 49(III) Audit Committee:


Composition: The Board must have minimum three members out of which at least
two/third must be independent directors. Further, all the members must be financially
literate and one member must be an expert in accounting or related financial
management. The Chairman of the Audit Committee must be an Independent Directors,
who must be present at the Annual General Meeting to answer shareholders query.

The Audit Committee must meet four times in a year with a gap of not more than four
months in between two meetings. The quorum must be two members or one third of the
total members whichever is greater, but minimum two independent directors must be
present.

Powers of Audit Committee: The powers of the Committee extend to investigate any
activity within its reference, seek information from employee, obtaining outside
professional advice and secure attendance of expert outsiders in the relevant area.

Role of Audit Committee: Under the Listing Agreement, the Audit Committee has been
empowered with several duties or roles. Some of which are recommendation on the
appointment, remuneration of auditors, approving the payment to statutory auditors,
review annual financial statement of the Company along with the Auditors report, review

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quarterly financial statements before submission to the Board for approval, review the
independence and performance of the auditors.

Review of Information by Audit Committee: The Committee is mandatorily


authorised to review the following items: Management discussion and analysis of
financial condition and results of operation, statement of significant related party
transactions, management letters issued by statutory auditors, the appointment, removal
or terms of remuneration of Chief Internal Auditor.6

Clause 49(IV) Nomination and Remuneration Committee:


This committee must consist of at least three members, all of whom are non executive
directors with at least half of them being independent directors. The Chairman of the
Committee must necessarily be an independent director. Chairperson of the Company
may become a member of the Committee irrespective of him/her being executive or non
executive director, however, they cannot Chair the committee. Role of the Committee
includes formulation of criteria to evaluate Independent directors, policy devising on
Board diversity, identifying prospective directors and senior management in accordance
with the criteria laid down, recommendation to the Board policies relating to
remuneration of directors and other employees including key managerial personnel.

Clause 49(V) Subsidiary Company:


At least One Independent Director of the holding Company would be the on the Board of
the material non-listed Indian subsidiary company. The Audit Committee of the holding
listed company shall review the financial statements of the unlisted subsidiary company
with special reference to the investments made. The management should regularly bring
to the notice of the Board of the listed holding company, a statement containing all
significant transactions entered into by the unlisted subsidiary.

The Company must disclose the policy formulated to determine material subsidiaries in
the website of the Company with a link to its annual report. The company would be
considered a material subsidiary, if the investment of the company exceeds 20% of its
6 Article on Strengthening Corporate Governance by Grant Thornton
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consolidated net worth as per the audited balance sheet of previous financial year or if the
company has generated consolidated income exceeding 20% in the previous financial
year. Disposing of shares in the subsidiary( material) which would reduce its
shareholding to less than 50% or the exercise of control would cease without passing a
special resolution is not allowed. Further, Selling, disposing and leasing of assets which
would amount to more than twenty percent of the assets of the subsidiary shall require
prior approval of the shareholders through special resolution unless duly approved by a
Court/ Tribunal.

Clause 49(VI) Risk Management


This is applicable only to the top 100 Companies by market capitalization as at the
closing of immediate previous financial year. Under this head, the Board must be
informed through procedures about risk assessment and minimization procedures. The
Board will constitute a Risk Management Committee. The Board shall determine its role
and functions and delegate powers as it may deem fit. The Committee members must in
majority consist of Board members. Senior Executives may become the member of the
Committee but the Chairman of this Committee shall be a member of Board of Directors.

Clause 49(VII) Related Party Transactions


The definition or the interpretation of the term related party has been brought in
conformity with the Companies Act, 2013[2] along with the applicable accounting
standards. The company must formulate a policy on the materiality and dealings with
Related party transactions. A transaction with related party would be considered material
if the transaction/transaction entered into exceeds 10% of the annual consolidated
turnover of the Company. All such transaction require prior approval of the Audit
Committee. An omnibus approval may be granted by Audit Committee subject to the
fulfillment of the following conditions: Such approvals must be in respect of repetitive
natured transactions, the Committee must be satisfied that such approval is in the interest
of the Company. Such approval shall specify the name of the party, nature, period,
maximum amount of transaction that can be entered into. The proviso to this provision
lays down that the Audit Committee may grant omnibus approval for transactions where

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it cannot be foreseen or the details are not available, however, with the limit that the value
must not exceed Rs. 1 Crore per transaction. Such approvals would be valid only for one
year and fresh approval shall be required after the expiry of one year. All material related
party transactions shall require the approval of the shareholders through special
resolution.

Clause 49(VIII) Disclosures


Related Party Transactions: Details of all material related party transactions must be
disclosed along with compliance report on Corporate Governance. This disclosure must
be made quarterly. The company must disclose the policy regarding Related party
Transactions on its website and a web link should be provided in the Annual Report

Disclosure of Accounting Treatment: If any different accounting standard or treatment


is being used while preparing the financial statement, then the same must be disclosed.

Remuneration of Directors: All pecuniary transactions or relationship of the non


executive directors with the Company must be disclosed in the annual report. Apart from
the necessary disclosures as required under Companies Act, 2013 certain other
disclosures are to be made in the corporate governance section i.e. all elements of
remuneration package of directors categorized under groups, details of performance
linked incentives along with performance criteria, service contracts, notice period,
severance fees, stock option detail if any, disclosure of convertible shares or instruments
held by non executive directors, publish criteria regarding payment making procedure of
non executive directors in its annual report.

Management: Management Discussion and Analysis report should form a part of the
Annual report of shareholders containing discussion on the industry structure and
developments, opportunities and threats, product wise performance, outlook, risk and
concerns etc. Senior Management must disclose every financial or commercial
transaction where they have a personal interest which might conflict with the interest of
the company.

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Shareholders: On the appointment or re appointment of a director the shareholders must
be provided with certain information regarding the same like resume of the directors,
nature of his expertise, name of companies where the person holds directorship and
membership of Committees of the Board. Further, inter director relationships must be
disclosed in the Annual report, prospectus, letter of offer for issuances or any related
filing. A committee named Stakeholders Relationship Committee must be constituted
which would consider and resolve the security holders grievances.

Lastly, proceeds from public issue, rights issue, preferential issues must be disclosed. If it
is done on a quarterly basis, then on the quarterly declaration of financial results to the
Audit Committee. On an yearly basis, a statement of funds utilized for purposes other
than those states in the offer document must be placed before the audit Committee. This
statement shall e certified by the statutory auditors of the company.

Clause 49(IX) CEO/CFO certification


The CEO or the Managing Director or in their absence a whole time director and the CFO
must certify that they have reviewed the financial statements and the cash flow
statements to the best of their knowledge. Further, they certify that the Company to the
best of their knowledge hasnt entered into any transaction which is violative of
Companys Code of Conduct, illegal or fraudulent. They should further indicate to the
auditors and the Audit Committee any significant changes made in internal control over
financial reporting, changes in accounting policies which have been disclosed in the
financial statement, instances of significant fraud that they have come across.

Clause 49(X) Report on Corporate Governance:


A separate section in the Annual report on Corporate Governance must be made along
with the detailed compliance report on Corporate governance. Any non compliance of
any mandatory requirement must be highlighted. Company must submit a quarterly
compliance report to the stock exchanges within 15 days from the close of quarter and
such report must be signed by the Compliance Officer or the CEO.

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Clause 49(XI) Compliance:
The Company is required to obtain a certificate regarding compliance of Corporate
governance as enumerated in this clause and annex this certificate with the directors
report sent annually to the shareholders of the Company. The same certificate is to be sent
to the stock exchanges along with the annual report. The auditors or practicing company
secretaries shall give the certificate.

PART-III Comparison of Two Circulars amended Circulars of


Clause 49
While researching on Clause 49, there were two amendments done to Clause 49 of the
Listing Agreement by circulars dated 17 April 2014 and 15 September 2014, respectively.
For better understanding both have been compared below.

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S. Revised Cl.49 SEBIs Circular dt. Amended Cl.49 SEBIs Circular
N 17th Apr 2014 dt: 15th Sep 2014
o

1 Applicability:

The revised Clause 49 would be The Clause 49 of the Listing Agreement


applicable to all listed companies w.ef. shall be applicable to all companies whose
October 01 ,2014. equity shares are listed on a recognized
stock exchange

Exemptions:

Companies having paid up equity share


capital not exceeding 10 crore and Net
Worth not exceeding Rs.25 crore, as on the
last day of the previous financial year;

Companies whose equity share capital is


listed exclusively on the SME and SME-
ITP Platforms

2 Appointment of Women Director:

Cl.49(II)(A)(1)The Board of Directors of The provisions regarding appointment of


the company shall least one woman woman director shall be applicable with
director before 1st Oct 2014. effect from April 01, 2015.

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3 Independent Directors:

Apart from receiving directors Apart from receiving directors


remuneration, has or had no pecuniary remuneration, has or had no material
relationship with the company, its holding, pecuniary relationship with the company,
subsidiary or associate company, or their its holding, subsidiary or associate
promoters, or directors, during the two company, or their promoters, or directors,
immediately preceding financial years or during the two immediately preceding
during the current financial year financial years or during the current
financial year

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4. Maximum Tenure of IDs:

An ID shall hold office for a term up to 5 The maximum tenure of Independent


consecutive years on the Board of a Directors shall be in accordance with the
company and shall be eligible for Companies Act, 2013 and clarifications/
reappointment for another term of up to circulars issued by the Ministry of
five consecutive years on passing of a Corporate Affairs, in this regard, from time
special resolution by the company. to time.

A person who has already served as an ID


for 5 years or more in a company as on
October 1, 2014 shall be eligible for
appointment, on completion of his present
term, for one more term of up to 5 years
only.

An ID, who completes his above


mentioned term shall be eligible for
appointment as ID in the company only
after the expiration of 3 years of ceasing to
be an ID in the company.

5 Formal letter of Appointment of IDs:

The letter of appointment along with the The terms and conditions of appointment
detailed profile of ID shall be disclosed on shall be disclosed on the website of the
the websites of the company and the Stock company
Exchanges not later than one working day
from the date of such appointment

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6 Training of IDs:

The company shall provide suitable The company shall familiarise the
training to independent directors to independent directors with the company,
familiarize them with the company, their their roles, rights, responsibilities in the
roles, rights, responsibilities in the company, nature of the industry in which
company, nature of the industry in which the company operates, business model of
the company operates, business model of the company, etc., through various
the company, etc. The details of such programmes
training imparted shall be disclosed in the
Annual Report
The details of such familiarisation
programmes shall be disclosed on the
companys website and a web link thereto
shall also be given in the Annual Report.

7 Nomination and Remuneration


Committee:

The company through its Board of


The company shall set up a nomination Directors shall constitute the nomination
&remuneration committee which shall & remuneration committee which shall
comprise at least three directors, all of comprise at least three directors, all of
whom shall be NEDs and at least half whom shall be NEDs and at least half shall
shall be independent. Chairman of the be independent. Chairman of the
committee shall be an ID. committee shall be an ID.The chairperson
of the company (whether executive or
nonexecutive) may be appointed as a
member of the Nomination &remuneration
Committee but shall not chair such
Committee.

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8 Subsidiary Companies:

The company shall formulate a policy for The company shall formulate a policy for
determining material subsidiaries and determining material subsidiaries and
such policy shall be disclosed to Stock such policy shall be disclosed on the
Exchanges and in the Annual Report companys website and a web link thereto
shall be provided in the Annual Report.

9 Risk management:

The company shall also constitute a Risk The company through its Board of
Management Committee. The Board shall Directors shall constitute a Risk
define the roles and responsibilities of the Management Committee. The Board shall
Risk Management Committee and may define the roles and responsibilities of the
delegate monitoring and reviewing of the Risk Management Committee and may
risk management plan to the committee delegate monitoring and reviewing of the
and such other functions as it may deem risk management plan to the committee
fit 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.

26
10 Related Party Transactions A related party transaction is a transfer of
resources, services or obligations between
a company and a related party, regardless
A related party transaction is a transfer of of whether a price is charged.
resources, services or obligations between
a company and a related party, regardless
of whether a price is charged. A transaction with a related party shall
be construed to include single transaction
or a group of transactions in a contract

11 Related Party Transactions an entity shall be considered as related to


the company if:(i) such entity is a related
party under Section 2(76) of the
An entity is related to a company if any of Companies Act,2013; or
the following conditions applies:a. The
entity is a related party under Section
2(76) of the Companies Act, 2013; orb. (ii) such entity is a related party under the
The entity and the company are members applicable accounting standards.
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; or

e. One entity is a joint venture of a third


entity and the other entity is an associate

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of the third entity; or

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 identified in (1).

h. A person identified in (1)(b) has


significant influence over the entity (or of
a parent of the entity); or

12 Related Party Transactions

The company shall formulate a policy on The company shall formulate a policy on
materiality of RPTs and also on dealing materiality of RPTs and also on dealing
with RPTs. Provided that a transaction with RPTs. Provided that a transaction
with a related party shall be considered with a related party shall be considered
material if the transaction / transactions to material if the transaction / transactions to
be entered into individually or taken be entered into individually or taken
together with previous transactions during together with previous transactions during
a financial year, exceeds 5% of the annual a financial year, exceeds 10% of the
turnover or 20% of the net worth of the annual consolidated turnover of the
company as per the last audited financial company as per the last audited financial
statements of the company, whichever is statements of the company.
higher

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13 Related Party Transactions All RPTs shall require prior approval of
the Audit Committee. However, the Audit
Committee may grant omnibus approval
All RPTs shall require prior approval of for RPTs proposed to be entered into by
the Audit Committee. the company subject to the following
conditions:

a. The Audit Committee shall lay down the


criteria for granting the omnibus approval
in line with the policy on RPTs of the
company and such approval shall be
applicable in respect of transactions which
are repetitive in nature.

b. The Audit Committee shall satisfy itself


the need for such omnibus approval and
that such approval is in the interest of the
company;

c. Such omnibus approval shall specify (i)


the name/s of the related party, nature of
transaction, period of transaction,
maximum amount of transaction that can
be entered into, (ii) the indicative base
price / current contracted price and the
formula for variation in the price if any
and (iii) such other conditions as the Audit
Committee may deem fit;

Provided that where the need for RPT


cannot be foreseen and aforesaid details
are not available, Audit Committee may
grant omnibus approval for such
transactions subject to their value not

29
exceeding Rs.1 crore per transaction.

d. Audit Committee shall review, atleast on


a quarterly basis, the details of RPTs
entered into by the company pursuant to
each of the omnibus approval given.

e. Such omnibus approvals shall be valid


for a period not exceeding one year and
shall require fresh approvals after the
expiry of one year

Exemptions:

(i) transactions entered into between two


government companies;

(ii)transactions entered into between a


holding company and its WOS whose
accounts are consolidated with such
holding company and placed before the
shareholders at the general meeting for
approval.

14 Related Party Transactions7 All material RPTs shall require approval of


the shareholders through special resolution
and the related parties shall abstain from
All material RPTs shall require approval voting on such resolutions. Exemptions:
of the shareholders through special (i)transactions entered into between two
resolution and the related parties shall government companies;(ii)transactions
entered into between a holding company

7 http://taxguru.in/sebi/sebi-amendments-clause-49-equity-listing-agreement.html
30
abstain from voting on such resolutions. and its WOS whose accounts are
consolidated with such holding company
and placed before the shareholders at the
general meeting for approval.

Government company shall have the


same meaning as defined in Section 2(45)
of the Companies Act, 2013.

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.

31
PART-IV Critical Analysis
Now for Critical Analysis of Clause 49 of the Listing Agreement, I would like to compare
Clause 49 with Companies Act, 2013. Also the areas where SEBI has gone further MCA
in implementation of Corporate Governance

Area Clause 49 Revised Companies Act


2013
S
.
N
o

Overarching Inserts a new para (I) emphasising on four No similar


principles of Clause broad sets of principles of corporate provisions in the
1 498 governance on Rights of shareholders , Act.
Role of Stakeholders in corporate
governance , disclosure and
transparency and Responsibilities of the
Board

Composition of the Not less than 50% as non-executive At least one-third


Board- directors and one woman director. as independent
2 Independent Directors At least one-third of directors to be directors
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.

8http://www.ey.com/Publication/vwLUAssets/EY-sebi-clause-49-and-companies-act-13-a-comparison/
$FILE/EY-sebi-clause-49-and-companies-act-13-a-comparison.pdf

32
Training of IDs9 Clause 49(II)(B) The company shall The Companies
provide suitable training to independent Act 2013 did not
3
directors to familiarize them with the specify any
company, their roles, rights, training of IDs and
responsibilities in the company, nature of Board of
the industry in which the company Directors.
operates, business model of the company,
etc. The details of such training imparted
shall be disclosed in the Annual Report.

Most of the proposals approved by SEBIs Board - align SEBIs corporate governance
requirements to those in the Companies Act 2013 for instance

A separate meeting of independent directors


Prohibition of stock options to independent directors
Exclusion of nominee director from definition of independent director
Enhanced role of audit committee and their prior approval for all material rpts
At least one woman director on board; and the like
And then there are some proposals the SEBI Board approved that go beyond the
Companies Act, 2013

The firstly
The Companies Act, 2013 says a director can hold a maximum 10 public company board
positions SEBI has narrowed that to limit an independent director to 7 public listed
company board positions, and only 3 as Whole Time Director.

Under Clause 49
It has been decided that the maximum number of Boards an independent director can
serve on listed companies be restricted to 7 and 3 in case the person is serving as a whole
time director in a listed company

Under Section 165 of the Companies Act, 2013


A person can hold

9 http://taxguru.in/company-law/clause-49-companies-act-2013.html
33
Maximum number of directorships = 20
Maximum number of public company directorships = 10

The secondly
The Companies Act says an independent director can hold up to two 5 year terms after
which there needs to be a 3 year cooling off period. SEBI has maintained that. But the
Companies Act applies this prospectively that is, it doesnt count the time served
already. SEBI has decided that if a person has served as independent director on a board
for 5 years or more, starting October 1st he shall be eligible to only one term of 5 years.
In that one decision SEBI has forced the old boys club of independent directors to face
retirement in 5 years- which is good news for all governance activists.

Under Clause 49!


To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if
a person who has already served as an Independent Director for 5 years or more in a
listed company as on the date on which the amendment to Listing Agreement becomes
effective, he shall be eligible for appointment for one more term of 5 years only.

Under Section 149 of the Companies Act, 2013


Independent Director Term
5yrs + 5yrs (special resolution approval)
+
3yrs Cooling Off

Thirdly
Definition of Independent Director

April Circular gave a wide meaning to it to say that a person who has or had a pecuniary
relationship with the company, its subsidiary, associate, promoters, directors etc will not
be considered as independent.
SEBI has amended this to say that there should not be any material pecuniary
relationship.
Curiously, the Companies Act still doesnt talk about materiality- so the MCA may need
to clarify that for companies to benefit from the dilution under amended Clause 49.

34
The proviso to Section 188 in the Act implies that no related party can vote on any related
party transaction, even if that particular related party is unconnected to that specific
transaction. MCA clarified this in July by saying only the concerned related party must
abstain from voting. But SEBI's amended Clause 49 has done the opposite - saying all
related parties must abstain from voting on all RPTs, even if the related party is
unconnected to that transaction. 10

Quoting the discussion of Menaka Doshi from CNBC11


Doshi: Can SEBI do this go above and beyond the Companies Act and in fact narrow a
provision that has been laid out in the Companies Act?

Cooper: SEBI is certainly entitled to impose more stringent conditions than the
Companies Act lays down and there is no embargo on SEBI to do so. The reality is that
one must look one, at the legality of the provision. The other is whether it is desirable and
third is whether it is practical.

On the legality of the provision, my view is that, yes SEBI has the power to do so. On the
desirability of the provision, it is to prevent cronyism creeping in and that is why SEBI
has made a good step. On the practicality aspect there is one question to consider -
whether the pool of independent directors is sufficiently large to keep generating good
qualified competent independent directors and that might pose a problem.

10 tp://thefirm.moneycontrol.com/story_page.php?autono=1184330

11 http://thefirm.moneycontrol.com/story_page.php?autono=1043960
35
Conclusion

The above amendments are a mixed bag of relaxations and clarifications to the clause 49
of the Equity Listing Agreement that were to become effective from 1 October 2014. It is
encouraging to note that SEBI, through its outreach to large corporates has gauged their
readiness and identified the areas with implementation challenges, and take into account
practicality of implementation as well. These changes to some extent align the
requirements of the clause 49 with those in the Companies Act, 2013, but in many other
areas, still retain the more stringent requirements, although the SEBI has provided some
clarifications, but in certain cases the provisions of Clause 49 are more stringent when
compared to Companies Act, 2013.
In particular the alignment of the definition of related parties and the extension of
timeline for appointment of a woman director are changes that corporates were looking
forward to. The increase in threshold for determining materiality of related party
transactions to 10 per cent of the annual consolidated turnover, and permitting omnibus
approvals are also welcome changes. On the other hand, the restriction on all related
parties voting on any related party transaction, whether they are a party or not, is an area
where SEBI has not provided relaxations like the MCA has done under the Companies
Act, 2013.

The amendments are a welcome step and are expected to help corporate India in a smooth
transition to the revised clause 49. However, considering some of the significant
differences between the Companies Act, 2013 and the revised clause 49, such as the

36
restriction on all related parties to vote on any related party transaction, whether they are
a party or not, it is expected to pose some hardship on the companies. In this light, we
believe that the SEBI and the MCA should undertake a thorough review of various
provisions of the Equity Listing Agreement and the Companies Act, 2013 to save
companies from the hardship of having to apply and comply with conflicting
requirements, and facilitate companies in adopting the revised norms smoothly.

References

Webliography

http://taxguru.in/company-law/clause-49-companies-act-2013.html
http://www.legalservicesindia.com/article/article/clause-49-of-the-listing-agreement-956-
1.html
http://corporatelawreporter.com/?s=CLAUSE+49+OF+LISTING+AGREEMENT

http://www.rna-cs.com/comparitive-analysis-of-clause-49-of-sebi-listing-agreement-with-
companies-act-2013/
http://thefirm.moneycontrol.com/story_page.php?autono=1043960
http://taxguru.in/sebi/sebi-amendments-clause-49-equity listing-agreement.html
http://www.slideshare.net/ananndkankni/revised-corporate-governance-norms-clause-49-
of-listing-agreement
http://thefirm.moneycontrol.com/story_page.php?autono=1184330
http://www.ey.com/Publication/vwLUAssets/EY-sebi-clause-49-and-companies-act-13-a-
comparison/$FILE/EY-sebi-clause-49-and-companies-act-13-a-comparison.pdf

37

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