SEBI’s Amendments to Corporate Governance Norms – Clause 49 vis-ŕ-vis Companies Act, 2013

Capital market regulator, Securities & Exchange Board of India (SEBI) issued a Circular yesterday to introduce certain amendments in clause 49 of listing agreement, to be effective from 1st October, 2014. It is interesting to note that clause 49 was recently revised and now SEBI amends the same within a short span of time, probably realizing the difficulties in implementation and aligning SEBI norms with Companies Act, 2013. SEBI Circular acknowledging this, states "SEBI has received representations from market participants including companies and industry associations, highlighting certain practical difficulties in ensuring compliance, seeking clarifications on interpretation of certain provisions and suggesting various options to ease the process of implementation."

Summary of amendments, brought by SEBI Circular is as below:-

Clause 49 shall not be applicable to companies having equity share capital upto INR 10 crores and Net worth upto INR 25 crores, as on the last day of the previous financial year. The provisions regarding appointment of women director shall be ef effective from 1 April 2015. From an estimate, more than half the companies listed on the National Stock Exchange (NSE) are yet to appoint any women directors.

The wide Definition of Related Party and Related Party Transaction (RPT) has been amended to bring the same at par with the Companies Act, 2013. [Section 2(76)] and applicable Accounting Standards [AS -18, 21,23,27, etc.] A transaction with the related party shall be construed to include single transaction or a group of transactions in a contract, and for "materiality" concept (A transaction to be considered material RPT), limit of 5% has been enhanced to 10%. 

Companies now can take omnibus approvals for RPTs, provided the transaction value doesn’t exceed Rs 1 crore and has a shelf life of not more than a year.

RPTs between two govt. companies, or between a holding and its wholly owned subsidiary, don’t require any approval of audit committee. These also may not require any approval of shareholders as against special resolution required earlier. 

There may still be a debate on the issue whether RPTs require minority shareholders’ approval in each case, since the SEBI circular is not explicit on the same. Further, there has to be a policy of dealing with related party transactions in a company and such policy shall be disclosed on the company's website as well as in Annual Report. 

Maximum tenure of independent directors shall be in accordance with Companies Act, 2013 as against the existing tenure of 5 years. This means those independent directors who have already served the maximum tenure of 10 years before the new norms, will get a tenure of another 10 years.

The Chairman of a company has been allowed to be a member of the nomination and remuneration committee (earlier he was not a part), but cannot chair these committees— the chairmanship would remain with an independent director. 

The disclosure on resignation of directors, formal letter of appointment, details of training imparted to Independent Directors, the remuneration policy and the evaluation criteria in its Annual report has been done away with. 

Earlier under listing agreement, certification of certain conditions such as - having reviewed financial statements and cash flow statement, maintaining internal controls etc. - was required by MD/Manager and Whole time Finance Director/CFO. Now, the same has been replaced as "CEO or MD or Manager….or in their absence, a Whole time Finance Director…..and the CFO".

It is expected that the new corporate governance norms would be a breather for listed entities, coming from SEBI who has been in recent past prescribing stricter norms than already tightened Companies Act, 2013.