ROLE OF SEBI IN CORPORATE GOVERNANCE (LEGAL FRAMEWORK)

Clause 49 of the Listing Agreement

Clause 49 of the listing agreement to be entered into by the listed companies with the Stock Exchanges refers to
certain conditions under the heading “Corporate Governance”.
The said clause 49 mandates various conditions to be complied with by the Companies under the head “Corporate
Governance”.
Thus, it is specific to the Listed Public Companies though the word “Corporate Governance” is used in general and
as a synonymous to “Good Governance”.
The Listing agreement was first introduced by Bombay Stock Exchange and later followed by other stock
exchanges.
SEBI, through its circular dated February 21, 2000, specified principles of corporate governance and introduced a
new clause 49 in the Listing agreement of the Stock Exchanges.
Clause 49 was amended a number of times following the recommendations of subsequent Committees.
Clause 49 was last revised w.e.f. October 1, 2014.
It was revised to:
• bring the Corporate Governance norms in line with Companies Act, 2013
• impose more stringent conditions to the listed companies through listing agreement considering the need to
have better governance practices in the listed companies
• adopt leading industry practices on Corporate Governance
• make framework of CG more effective
• ensure disclosure and transparency on all material matters.
Revised Clause 49 is applicable to all listed companies
Provisions relating to constitution of Risk Management Committee to be applicable to top 100 listed companies by
market capitalisation as at the end of the immediate previous financial year
Other listed entities which are not companies, but body corporate or are subject to regulations under other statutes
(e.g. banks, financial institutions, insurance companies etc.). Clause 49 will apply to the extent that it does not
violate their respective statutes and guidelines or directives issued by the relevant regulatory authorities.

Principles
1) Rights of Shareholders: The company should seek to protect and facilitate the exercise of shareholders’ rights,
viz.,
• 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 be informed of the rules, including voting procedures that govern 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 exercise of ownership rights by all shareholders, including institutional investors, 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

2) Information Sharing with Shareholders:

• Shareholders should be furnished with sufficient and timely information concerning the date, location and
agenda of
 • general meetings, as well as full and timely information regarding the issues to be discussed at the meeting.
• Capital structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to
• their equity ownership should be disclosed.
• All investors should be able to obtain information about the rights attached to all series and classes of
shares before they
• purchase.

3) Equitable Treatment of all Shareholders:

• All shareholders of the same series of a class should be treated equally.
• Effective shareholder participation in key Corporate Governance decisions, such as the nomination and
election of
• board members, should be facilitated.
• Exercise of voting rights by foreign shareholders should be facilitated.
• The company should devise a framework to avoid Insider trading and abusive self-dealing.
• Processes and procedures for general shareholder meetings should allow for equitable treatment of all
shareholders.
• Company procedures should not make it unduly difficult or expensive to cast votes.

4) Role of Stakeholders in Corporate Governance The company should recognise the rights of stakeholders and
encourage co-operation between company and the stakeholders.
• The rights of stakeholders that are established by law or through mutual agreements are to be respected.
• Stakeholders should have the opportunity to obtain effective redress for violation of their rights.
• Company should encourage mechanisms for employee participation.
• Stakeholders should have access to relevant, sufficient and reliable information on a timely and regular
basis to enable them to participate in Corporate Governance process.
• 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.

5) 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.
• Information should be prepared and disclosed in accordance with the prescribed standards of accounting,
financial and non-financial disclosure.
• Channels for disseminating information should provide for equal, timely and cost efficient access to
relevant information by users.
• 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 and should also ensure that the
annual audit is conducted by an independent, competent and qualified auditor.

6) Responsibilities of the Board

(i) 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.
• The Board and top management should conduct themselves so as to meet the expectations of operational
transparency to stakeholders while at the same time maintaining confidentiality of information in order to
foster a culture for good decision-making.

(ii) Key Functions of the Board

 • Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business
plans; setting performance objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and divestments.
• Monitoring the effectiveness of the company’s governance practices and making changes as needed.
• Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing
succession planning.
• 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.
• Overseeing the process of disclosure and communications.
• Monitoring and reviewing Board Evaluation framework.

(iii) Other Responsibilities:

• The Board should provide the strategic guidance to the company, ensure effective monitoring of the
management and should be accountable to the company and the shareholders.
• The Board should set a corporate culture and the values by which executives throughout a group will
behave.
• Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the
best interest of the company and the shareholders.
• 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.
• The Board should apply high ethical standards while taking into account the interests of stakeholders.
• The Board should be able to exercise objective independent judgement on corporate affairs.
• 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.
• When committees of the board are established, their mandate, composition and working procedures should
be well defined and disclosed by the board.
• Board members should be able to commit themselves effectively to their responsibilities.
• In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely
information.
• 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.