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NEWSFLASH

16 September 2014

The Securities and Exchange Board of India (SEBI) has issued a Circular on 15
September 2014 (Amendment Circular) amending Clause 49 of the Listing
Agreement, which deals with corporate governance of listed companies.

Background

On 17 April 2014, SEBI had amended certain provisions of the Listing Agreement,
including Clause 49. This revised Clause 49 was to be made applicable to all listed
companies from 1 October 2014. After the Companies Act, 2013 (Act) came into
force on 1 April 2014, the Ministry of Corporate Affairs had also issued certain
circulars on matters related to corporate governance which clarified certain
provisions of the Act.

The provisions of Clause 49 were more stringent in effect and imposed greater
obligations on listed companies than those imposed by the Act. In view of the
discrepancy between the Act and the SEBI regulated Clause 49, SEBI had received
representations from various stakeholders such as companies, industry associations
and professional bodies, inter alia highlighting the practical difficulties in complying
with the revised Clause 49. These issues were examined by SEBI and in order to
address the concerns of the stakeholders, to align the Listing Agreement with the
provisions of the Act and to ensure compliance with the provisions of the revised
Clause 49, SEBI issued the Amendment Circular.

The key changes to the Listing Agreement that the Amendment Circular makes, are:

Applicability of Clause 49 of Listing Agreement

Compliance of Clause 49 will not be mandatory for the following class of companies:

i. Companies having paid up equity share capital of up to INR 10 crore and net
worth up to INR 25 crore as on the last day of the previous financial year. If
the provisions of Clause 49 become applicable to a company at a later date,
such company will have to comply with the requirements of Clause 49 within
6 months from the date on which the provisions became applicable to the
company.

ii. Companies whose equity shares are listed exclusively on the SME (small and
medium enterprises) and SME-ITP (institutional trading platforms).

Appointment of a woman director

Clause 49 of the Listing Agreement requires at least 1 (one) woman director to be
appointed on the board of directors of a listed company on or prior to 1 October
2014. This requirement will now only become applicable from 1 April 2015, in line with
the provisions of the Act.


CLAUSE 49 OF SEBI LISTING AGREEMENT AMENDED
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CLAUSE 49 OF SEBI LISTING AGREEMENT AMENDED

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Definition of independent director

The criteria for determining an independent director have been amended.
Previously, one of the criterions was that apart from receiving director's
remuneration, such person should not have or have had a pecuniary relationship
with the company, its holding, subsidiary or associate company, or their promoters,
or directors, during the two immediately preceding financial years or during the
current financial year. The Amendment Circular has added the term material before
the words pecuniary relationship, restricting the ambit of the criterion to only
material pecuniary relationships.

Maximum tenure of independent directors

The Amendment Circular states that the maximum tenure of an independent director
will be in accordance with the provisions of the Act. As per the Act, an independent
director shall hold office for a term up to 5 (five) consecutive years on the board of
directors of a company and no independent director can hold office for more than 2
(two) consecutive terms. However, an independent director is eligible for
appointment after the expiry of 3 (three) years of ceasing to be an independent
director on the board of the relevant company.

Nomination and remuneration committee

The Amendment Circular has added a proviso to the sub-clause relating to
constitution of the nomination and remuneration committee, which states that the
Chairperson of the company (irrespective of whether he is executive or non-
executive) may be appointed as the member of the nomination and remuneration
committee. However, such a Chairperson of the company is not allowed to chair the
nomination and remuneration committee.

Related party transactions

The Amendment Circular has removed the previously broad criteria for determining
whether two parties are related or not. Now, an entity is considered to be related to
company only if:

i. Such entity is a related party as defined in the Act; or

ii. Such entity is a related party under the applicable accounting standards.

The subjectivity of the definition of related party and the consequent vagueness
has now been removed by the Amendment Circular.

Materiality of related party transactions

Previously, a transaction with a related party was considered material if the
transaction(s) to be entered into individually or taken together with previous
transactions during a financial year:

i. Exceeded 5% of the annual turnover of the company; or

ii. Exceeded 20% of the net worth of the company, whichever was higher.

The Amendment Circular has changed these materiality thresholds. Now, a related
party transaction will be considered material if the transaction(s) to be entered into
individually or taken together with previous transactions during a financial year,
exceeds 10% of the annual consolidated turnover of the company as per the last
audited financial statements of the company.

Audit Committee approval for related party transactions

Previously, all related party transactions required prior approval of the Audit
Committee of the company. As per the amendments brought in by the Amendment
Circular, the Audit Committee may now grant an omnibus approval for related party
transactions proposed to be entered into by the company subject to certain
conditions. These conditions include:

i. The Audit Committee has to satisfy itself that such an omnibus approval is in
the interest of the company;

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CLAUSE 49 OF SEBI LISTING AGREEMENT AMENDED


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ii. If the related party transactions cannot be foreseen and details are not
available that time, omnibus approval may be granted for such transactions
subject to their value not exceeding INR 1 crore per transaction; and

iii. Such omnibus approvals will be valid for a period not exceeding 1 (one) year
and will require fresh approvals after expiry of 1 (one) year.

Shareholders approval for related party transactions

Previously, under the Listing Agreement, all material related party transactions
required an approval of the shareholders through special resolution and the related
parties were required to abstain from voting on such resolutions.

The Amendment Circular has exempted the following cases from the requirements of
audit committee approval and shareholders approval:

i. Transactions entered into between two government companies; and

ii. Transactions entered into between a holding company and its wholly owned
subsidiary, whose accounts are consolidated with such holding company and
placed before the shareholders at the general meeting for approval.

Further, the Amendment Circular provides that all entities falling under the definition
of related parties have to abstain from voting, irrespective of whether such entity is
a party to the particular transaction or not. There is, therefore, disconnect between
the provisions of the Act (as subsequently clarified by the Ministry of corporate
Affairs) and the amendments brought in by the Amendment Circular. As per the
provisions of the Act, only the entity which is a related party in context of the
particular transaction is disallowed to vote on such a transaction. All entities which
are not related parties in the context of the particular transaction are allowed to
vote in the special resolution.

Additionally, unlike the Act, the Amendment Circular does not make any exception
for transactions entered into by the company in the ordinary course of business on
an arms length basis.

Disclosure requirements

The provisions relating to disclosure of resignation of directors, formal letter of
appointment and disclosures in annual report have been deleted by the Amendment
Circular.

E-voting norms

The e-voting norms prescribed under Clause 35B of the Listing Agreement have not
been modified by the Amendment Circular and are still applicable to listed
companies.

Khaitan Comments

There was considerable confusion among the stakeholders due to the discrepancies
between Clause 49 of the Listing Agreement and Companies Act, 2013. The
amendments brought about by SEBI are a welcome change and will go a long way in
improving compliance with Clause 49 of the Listing Agreement.

For any queries please contact: editors@khaitanco.com