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C o r p o r at e a n d A l l i e d L aw s

Issues Calling for Clarification in Clause 49
The revised Clause 49 has come in force with effect from 1st January 2006. Now, the
consequence of non-compliance of Clause 49 is ‘de-listing’. But there are certain issues
in Clause 49 that require clarification, as they are open to interpretation. This article
highlights the issues where a harmonious and holistic view is called for.

T
he process of filing of the compliance executive and non-executive directors with
reports and certificates on corporate not less than 50% of the Board of Directors
governance with the respective stock comprising non-executive directors.
Exchanges, as per the new requirements under (ii) Where the Chairman of the Board is a non-
Clause 49, is still on. The new set of reports and executive director, at least one-third of
certificates are an eye-opener to the regulatory the Board should comprise independent
agencies, particularly when it comes to scrutiny directors and in case he is an executive
as to how far corporates have complied director, at least half of the Board should
with various aspects of new requirements. comprise independent directors.
These requirements include composition of
independent directors, powers, role and review The questions that arise out of this clause
of information by the audit committee, variety are:
of financial transparency and disclosures, and l What is the ‘optimum’ combination of
the qualitativeness of compliance reports executive and non-executive directors?
and certification by the Board, CEO/CFO and
statutory auditors. l Who are executive and non-executive
directors?
The revised Clause 49 finally came into force
w.e.f 1st January 2006 and now the ultimate l Who shall decide whether a particular
consequence of non-compliance of Clause 49 director is an independent director?
is ‘de-listing’. However, there are certain issues The word ‘optimum’ literally means ideal. The
in Clause 49, which require clarification, as they ideality of the situation depends upon whether
are open to interpretation. There are similar the Chairman of the Board is a non-executive
subject matters in the Clause 49 as well as in director or is an executive director. The terms
the Companies Act, 1956 where the companies ‘executive’ and ‘non-executive’ directors have
and professionals should harmonise to facilitate not been defined and it has to be understood in
easy understanding and compliance. The issues the normal sense i.e. directors who are looking
on which harmonious and holistic views are after day-to-day affairs are executive directors.
called for are as follows: Besides, in arriving at the above optimum
number, as the case may be, it should be clarified
Independent Directors in Board – Clause whether the fraction contained, if any, should
49 I (A) (i) & (ii) be rounded off. Reference may be drawn to a
(i) The Board of Directors of the company similar situation contained in the Companies
shall have an optimum combination of Act, 1956 where under section 256, it is stated:
“…if the number is not three or a multiple of
three, then the number nearest to one-third
— Dr. P.T. Giridharan shall retire from office." Similar wordings can be
(The author is Joint Director, ICAI. He can be
inserted in Clause 49.
reached at giridharan@icai.org)
The ICAI Guidance Note provides that since the

716 The Chartered Accountant November 2006

of non-compliance. 1956 on matters relating occupying management positions at to audit committee. have been provided in the Companies Act. roles. 1956 as well as under as well as steps taken by the company to Clause 49. The scope of auditor in such a situation would be much Definition of the Term ‘Promoter’ focused as compared to the Board’s responsibility (iii) For the purpose of the sub-clause (ii). The clause for determining independent Therefore. if any. states that there should be a duly qualified and independent audit committee. Also the term ‘promoter’ has not been defined in the Companies Act. 1956. 1956. This is a huge area and in is that the recommendations of the audit a mega-sized company. Also the term decision. the board. rules/regulations framed by the SEBI. The clause states that the Board shall review compliance reports of all laws applicable to the One important aspect provided under company and take steps to rectify instances Section 292A of the Companies Act. One presumes that these distinctions rectify instances of non-compliances. the fraction if any should be rounded off. almost all laws would committee are binding on the Board and if the fall within the purview of the company and the Board does not accept the recommendations Board should exercise utmost care and caution then they shall disclose reasons for the same. the into consideration AAS 21 which deals with scope of Clause 49 is much larger compared to November 2006 The Chartered Accountant 717 . responsibilities and the task of review Note provides that the auditor would take of information by the audit committee. Audit of Financial Statements. One has to use his objective judgement does not provide any explanation in the context of Clause 49 and arrive at a of the said term. One has to use his objective Compliance Reports of All Laws – Clause judgement in the context of Clause 49 I (C) (iii) 49 and arrive at a decision. The requirements on the subject distinctively under clause does not provide any explanation of the said term. However. its composition. The clause SEBI. C o r p o r at e a n d A l l i e d L aw s words used in the clause is ‘not less than’ and ‘at Consideration of Laws and Regulations in an least’. If one looks at On the auditor’s part. which would determine as defined differently in the different to who is an independent director. powers. listed companies have to fulfil the director refers to the term ‘promoters’. etc. The ICAI Guidance Note provides that it is the term ‘promoter’ has been ultimately the Board. expression ‘independent director’ shall mean a non-executive director of the Audit Committee – Clause 49 II company who: There are differences between Clause 49 and (b) is not related to promoters or persons the Companies Act. Certain aspects relating the board level or at one level below to audit committee. 1956 but not in Clause 49 and vice-versa. to review and rectify situations where there are The Clause 49 is silent on this aspect though it non-compliances. The clause for determining the term ‘promoter’ has been defined differently independent director refers to in the different rules/regulations framed by the the term ‘promoters’. prepared by the company the Companies Act. 1956. However. (iii) The Board shall periodically review compliance reports of all laws applicable to the company. the for compliance of all laws. are suitably addressed in the new Bill on the Company Law. ‘promoter’ has not been defined in the Companies Act. the ICAI Guidance the role.

shall be a director on the Board of Directors of a material non-listed Indian subsidiary apply to the listed subsidiary insofar as its company. be. turnover or net worth (i. a statement of all significant transaction or arrangement’. individual transaction or arrangement that Some of the other issues that arise in the exceeds or is likely to exceed 10% of the total context of conduct of the audit committee are: revenues or total expenses or total assets l Whether an internal auditor is required to or total liabilities.e. for determining ‘significant company. apart from the four Explanation 3: Where a listed holding powers mentioned in Clause 49 II (C). 1956 and transaction or arrangement” shall mean any the Clause 49. the above provisions shall committee? There are differences between l Whether the auditor would be reviewing Clause 49 and the Companies the internal control system only with regard Act.e. 1956. the test of four transactions and arrangements entered parameters. holding company and its subsidiaries in the Audit committee is an important aspect of immediately preceding accounting year. made by the unlisted subsidiary company. paid-up capital and free reserves) exceeds 20% of the consolidated l Again in Explanation 2. which is itself delegate any other power to the audit a holding company. 1956 on matters relating to to financial aspects or would cover the audit committee. Subsidiary Companies – Clause 49 III etc have been provided in the (i) At least one independent director on the Companies Act. in particular. the investments to be covered in sub-clause (ii) as above. l Whether the Board. 1956 but not in Board of Directors of the holding company Clause 49. corporate governance where harmonisation is Explanation 2: The term “significant required between the Companies Act. the word (iii) The minutes of the Board meetings of ‘material’ has been used before the words the unlisted subsidiary company shall be ‘unlisted subsidiary company’ whereas sub- placed at the Board meeting of the listed clause (i) refers to material non-listed Indian holding company. the usage of the turnover or net worth respectively. of the attend the meetings of audit committee material unlisted subsidiary for the immediately only on notice duly given to him? preceding accounting year. The management should subsidiary company. C o r p o r at e a n d A l l i e d L aw s the Section 292A in the Companies Act. subsidiaries are concerned. and vice-versa. l In the same sub-clause ii (ii). Certain aspects entire internal control systems? relating to audit committee. powers. (ii) The Audit Committee of the listed holding The issues that arise in this context are: company shall also review the financial l Whether foreign subsidiary company is also statements. of the listed word ‘likely’ before the words ‘to exceed 718 The Chartered Accountant November 2006 . whose be taken into account. as the case may Explanation 1: The term “material non. as the case may be. roles. total revenues or total expenses or total assets or total liabilities. its composition. periodically bring to the attention of the Board of Directors of the listed holding l In Explanation 2. has been given i. It should be clarified whether it is the listed Indian subsidiary” shall mean an unlisted highest of the four parameters that should subsidiary. incorporated in India. can company has a listed subsidiary. 10% of the into by the unlisted subsidiary company.

etc) on a quarterly but apparently an Indian SOX. rights issues. basis as part of the company’s quarterly l Similarly. which are not but apparently an Indian SOX. on is appearing before the words ‘unlisted an annual basis. marketing. 2002 of US When money is raised through an issue (SOX). SOX in US is rigorous. r November 2006 The Chartered Accountant 719 . To that extent.). (public issues.. Further. in Explanation 2. major category (capital expenditure. shall be placed before the audit committee. etc. tions with related parties. The compliance of (i) A statement in summary form of trans. Rights Issues. (iii) Details of material individual transac- the issue has been fully spent. shall be certified by the statutory auditors of which are not on an arm’s length basis. 2002 of (A) Basis of related party transactions US (SOX). in sub-clause (ii) than those stated in the offer document/ of paragraph III. whether clause (ii) till such time that the full money raised through and Explanation 2 should be read separately or in conjunction. should be placed before the audit com. The audit committee shall make mittee. Such disclosure shall be made only company’. Conclusion (D) Proceeds from Public Issues. take up steps in this matter. robust actions with related parties in the ordi. the company shall prepare a subsidiary for the immediately preceding statement of funds utilised for purposes other accounting year’. as prescribed in Sarbanes Oxley Act. the word ‘material’ is not prospectus/notice and place it before the audit used before the words ’unlisted subsidiary committee. the responsibilities that it has tee. The issue is. Clause 49 is based on similar Disclosures – Clause 49 IV requirements as prescribed in Sarbanes Oxley Act. Clause 49 is based on similar requirements Preferential Issues. working capital. and still being debated upon in nary course of business shall be placed view of its wider coverage and periodically before the audit commit. used before the period? words ‘which are not on arm’s length basis’. C o r p o r at e a n d A l l i e d L aw s 10% of. (ii) Details of material individual transac. together with Management’s appropriate recommendations to the Board to justification for the same. The compliance of SOX in US is rigorous. cast on the corporates and the professionals. the company. preferential issues.. sales and To that extent. in the normal course of business. it is not clear which parties are to be covered companies having longer gestation under the word ‘others’. the word‘material’ declaration of financial results. The questions that arise are: The questions that arise in this connection are: l What is meant by ‘ordinary’ and ‘normal’ l What is the time limit by which the course of business as stated above in the said Clause? disclosures have to be made? l What shall be the position in case of l In sub-clause (iii) of the paragraph above.’ needs to be clarified. the audit committee has to be informed its wider coverage and the responsibilities that it about the uses / applications of funds by has cast on the corporates and the professionals. whereas. This statement tions with related parties or others. robust and still being debated upon in view of etc. Clause 49 is not real SOX as in US. Clause 49 is not real SOX as in US.