Clause 49 – Listing

Agreement
Scams …

o Chain Roop Bhansali (1996-97)– CRB Capital Markets etc.

o Dinesh Dalmia (2001)- DSQ software
Corporate Governance - Definition

 A set of systems, processes and principles which ensure that a company is

governed in the best interest of all stakeholders.

 FAIRNESS – TRANSPARENCY –ACCOUNTABILITY

Listing Agreement - Meaning

 Listing Agreement is the basic document which is executed between

companies and the Stock Exchange when companies are listed on the stock
exchange.
 The main purposes of the listing agreement are to ensure that companies are
following good corporate governance.
 The Listing Agreement comprises of clauses stating corporate governance,
which listed companies have to follow, failing which companies have to face
disciplinary actions, suspension, and delisting of securities. The companies
also have to make certain disclosures and act by the clauses of the
agreement.
SEBI and Clause 49

 SEBI asked Indian firms above a certain size to implement Clause 49, a
regulation that strengthens the role of independent directors serving on
corporate boards.
 On August 26, 2003, SEBI announced an amended Clause 49 of the listing
agreement which every public company listed on an Indian stock exchange is
required to sign. The amended clauses come into immediate effect for
companies seeking a new listing.
Clause 49

 Deals with Corporate Governance Norms.

 On 17th April, 2014 SEBI amended the Corporate Governance norms for listed
companies in India which will be effective from 1st October, 2014 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.
Applicability

 All listed companies.

 Provisions relating to constitution of Risk Management Committee shall 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.).
 The 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.
Objectives

 Alignment with Companies Act, 2013

 Adoption of leading Industry Practices on Corporate Governance
 Making framework of CG more effective
 Disclosure and transparency on all material matters
 Responsibilities of the Board more stringent
Principles of corporate governance

Basic principles of corporate governance are -

 (i) Transparency (ii) Accountability and (iii) Independence:
 These are then translated into more specific principles as stated below –
1. Rights and equitable treatment of shareholders: Organizations should respect
the rights of shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by openly and effectively
communicating information and by encouraging shareholders to participate in
general meetings.
2. Interests of other stakeholders: Organizations should recognize that they have
legal, contractual, social, and market driven obligations to non-shareholder
stakeholders, including employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
Principles of corporate governance

3. Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs
adequate size and appropriate levels of independence and commitment.
4. Integrity and ethical behavior: Integrity should be a fundamental requirement in
choosing corporate officers and board members. Organizations should develop a
code of conduct for their directors and executives that promotes ethical and
responsible decision making.
5. Disclosure and transparency: Organizations should clarify and make publicly known
the roles and responsibilities of board and management to provide stakeholders
with a level of accountability. They should also implement procedures to
independently verify and safeguard the integrity of the company's financial
reporting. Disclosure of material matters concerning the organization should be
timely and balanced to ensure that all investors have access to clear, factual
information.
Composition of the Board

 At-least half of the Board should be IDs

 If Chairman is an ED
 If Chairman is a Promoter or related to a Promoter.
 If Chairman is related to anyone occupying management position
 If the Board doesn’t have a regular non-executive Chairman
 At-least one-third of the Board should be IDs
 If the Chairman is an NED
 The Board should have at-least one woman director.
 Independent director shall mean “a non-executive director, other than a
nominee director of the Company who fulfils the criteria of independence as laid
down in the LA” which is similar to the Companies Act.
An Independent director is -

 Is not a Nominee Director

 Is/was not a promoter / relative of the promoter of the Company
 Has/had no pecuniary relationship with the Company, its holding, subsidiary,
associate company or the promoters or directors during two immediately
preceding financial years.
 Whose relatives do not have/had any pecuniary relationship with the
Company its holding, subsidiary, associate company or the promoters or
directors, amounting to 2% or more of its total income or Rs. 50 lakh during
the two immediately preceding financial years.
 Who is/was not an employee of the Company its holding, subsidiary, associate
company in the any of the three immediately preceding financial years.
 Is/has not been an employee/proprietor/partner of an audit /legal
/consulting/any other firm which has transaction with the Company its
holding, subsidiary, associate company, amounting to 10% or more of gross
turnover of that firm, in any of three preceding financial years.
 Is not a CEO/Director of a non-profit firm that receives 25% or more of its
receipts from the Company its holding, subsidiary, associate company,
promoters or its directors, or holds 2% or more voting power of the Company.
 Is not a material supplier, service provider or customer or a lessor or lessee of
the company.
 Is not less than 21 years of age.
Disclosures in relation to IDs

 Disclosure of all pecuniary relationships of non-executive directors with the

company.
 Disclosure of detailed information on remuneration to directors.
 Disclosure of criteria of making payments to non-executive directors.
 Disclosure of shares/other instruments held by non-executive directors.
TERM OF ID

 Up to Five consecutive years

 Eligible for reappointment on passing of a special resolution by the Company
 Not more than two consecutive terms
 Eligible for appointment after three years cooling period
 Performance evaluation report shall be the basis to determine whether to
extend or continue the term of ID.
 The Nomination Committee shall lay down the performance evaluation
criteria and the Company to disclose the same in its Annual Report.
Limit on number of IDs

A. Person to be independent director in not more than seven listed companies.

B. Further, any person who is serving as a whole time director in any Listed
Company shall serve as an independent director in not more than three listed
companies.
SEPARATE MEETINGS OF INDEPENDENT
DIRECTORS
o The IDs to hold at least one meeting in a year to:
o Review the performance of non IDs and Board as a whole;
o Review the performance of the chairperson of the Company;
o Assess the quality and timeliness of flow of information between management and the
Board
SUBSIDIARY COMPANIES

o At least one ID of holding company to be on the Board of material non-listed

Indian subsidiary company
o Audit Committee of listed holding co. to review financial statements of
unlisted subsidiary
o Board Minutes of unlisted subsidiary to be placed before the Board of listed
holding co. Significant transactions and arrangements to be reported
o No company can dispose of shares in the material subsidiary, reducing its
shareholding below 50%, without passing a special resolution in its general
meeting.
o Selling, disposing or leasing of more than 20% of assets of the material
subsidiary will require approval of shareholders by way of special resolution.
AUDIT COMMITTEES

o At-least three members, two-thirds of which shall be IDs

o All the members must be financially literate and one member must be an
expert in accounting or related financial management
o The Chairman of the Audit Committee must be an Independent Director Meeting
o At-least four times a year and not more than four months gaps between
meetings Roles
o Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct,
sufficient and credible.
o Approval of payment to external auditors for any other services rendered by the
external auditors.
o Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the external auditor and the fixation of audit fees.
o Reviewing, with the management, the annual financial statements before submission to the
board for approval
o Reviewing, with the management, the quarterly financial statements before submission to the
board for approval
o Reviewing, with the management, external and internal auditors, adequacy of the internal
control systems.
o Reviewing the company’s financial and risk management policies.
o To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non payment of declared dividends) and creditors.
o The Chairman of the audit committee must be present in the AGM to answer questions
o Review of information by Audit Committee
o Management discussion and analysis of financial condition and results of
operations
o Statement of significant related party transactions (as defined by the audit
committee), submitted by management
o Management letters / letters of internal control weaknesses issued by the
external auditors
o Internal audit reports relating to internal control weaknesses
o The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee
Audit committee meetings

o The Audit Committee should meet at least 4 times in a year and not more
than four months shall elapse between two meetings.
o The quorum shall be either 2 members or 1/3rd of the members of the audit
committee whichever is greater, but there should be a minimum of 2
independent members present.
NOMINATION AND
REMUNERATION COMMITTEE
o The Company shall set up a Nomination and Remuneration Committee which
shall comprise -
o at least 3 directors, all of whom shall be non-executive directors and
o at least 1/2 shall be independent.
o Chairman of the committee shall be an independent director.
STAKEHOLDERS’ RELATIONSHIP
COMMITTEE
o The Company to constitute “Stakeholders’ Relationship Committee” to
redress the grievances of Shareholders, Debenture holders and other Security
Holders

o A Non-Executive Director shall be Chairman of the Committee with such other

members as may be decided by the Board.
CODE OF CONDUCT

o The Board shall lay down a code of conduct for all Board members and senior
management of the Company. The code to be posted on the website of the
Company.
o All Board members and senior management personnel to affirm compliance
with the code on annual basis.
o The Annual Report of the Company shall contain a declaration to this effect
signed by the CEO.
WHISTLE BLOWER POLICY &VIGIL
MECHANISM
o The Company to establish a vigil mechanism to report concerns about
o unethical behaviour, actual or suspected fraud or violation of the Company’s
code of conduct or ethics policy.
o The details of establishment of such mechanism shall be disclosed by the
Company on its website and in the Board’s 16 Report.
OTHER PROVISIONS AS TO BOARD AND
COMMITTEES
o The Board to meet at least 4 times a year, with a maximum time gap of 120 days
between two meetings.
o The Board to review compliance reports of all laws applicable to the Company
o A director shall not be:
o a member in more than 10 committees; or
o act as Chairman of more than 5 committees across all companies (only public limited
companies to be included)
o IDs who resign or are removed, are to be replaced with new IDs within 3 months or
immediate next Board meeting, whichever is earlier, in case the requirement of IDs is
not met.
o Board members have to affirm compliance with a ‘Code of Conduct’ on an annual basis.
o IDs to be held liable in acts of omission or commission, which occurs in their knowledge.
RELATED PARTY TRANSACTIONS

o RPTs to require prior approval of the audit committee.

o Material RPTs to require shareholder approval though special resolution and
concerned related parties to abstain from voting on such resolutions.
o Disclosure of all material RPTs on a quarterly basis with compliance report on
corporate governance.
o Disclosure of policies on dealing with RPTs, in website and Annual Report.
SHAREHOLDER RIGHTS

o Participate in and be sufficiently informed on decisions concerning

fundamental corporate changes.
o Vote in shareholder meetings.
o Ask questions to the Board and propose resolutions.
o Participate in nomination and election of Board members.
o Exercise their ownership rights.
o Put forward their grievances to the Company.
o Be protected from abusive actions in the interest of controlling shareholders.
Enhanced Disclosures

 Related Party Transactions

 Details of all material transactions with related parties shall be disclosed quarterly
along with the compliance report on corporate governance.
 The Company shall disclose the policy on dealing with Related Party Transactions on
its website and also in the Annual Report.
 Management
 As part of the Directors’ Report or as an addition thereto, a Management Discussion
and Analysis Report should form part of the Annual Report to the shareholders. This
management discussion & analysis should include discussion on the matters listed in
Sub –clause VIII(D).
 Senior management to make disclosures to the Board relating to all material financial
and commercial transactions (of personal interest) that may have a potential conflict
with the interest of the Company.
Enhanced Disclosures

 Shareholders
 In case of the appointment/re-appointment of a director, the shareholders must be provided with the
details of the director
 Disclosure of relationships between directors inter-se shall be made in the:
 Annual Report;
 Notice of appointment of a director;
 Prospectus and letter of offer for issuances; and
 Any related filings made to the stock exchanges
 Resignation of director
 The Company:
 to disclose director’s letter of resignation along with the detailed reasons on
its website; and
 to forward a copy of such letter to the stock exchanges not later than one working day from the date of receipt of
resignation
Enhanced Disclosures - Disclosures in
Annual Report
o There shall be a separate section on Corporate Governance in the Annual
Reports of Company, with a detailed compliance report on Corporate
Governance.
o Disclosure of the compliances of mandatory requirements and adoption/non-
adoption of the non-mandatory requirements to be made
o The Company to disclose use/ application of funds raised through
o Public Issue
o Rights Issue
o Preferential Issue etc. on a Quarterly/ Annual basis as a part of Financial Results.
o The Annual Disclosure Statement shall be certified by the Statutory Auditors.
Enhanced Disclosures –
CEO/CFO’S CERTIFICATION
o The CEO and the CFO or any other person heading the finance shall certify to
the Board that:
o They have reviewed financial statements and the cash flow statement for the year
and that these statements are true and are not misleading;
o These statements are in compliance with existing accounting standards, applicable
laws and regulations.
o There are no transactions which are fraudulent, illegal or violative of the
Company’s code of conduct.
o They accept responsibility for establishing and maintaining internal controls
for financial reporting
Compliance Certificate

o The Company shall obtain a certificate from either the Auditors or Practicing
Company Secretaries regarding compliance of conditions of corporate
governance as stipulated in this clause and annex the certificate with the
Directors’ Report, which is sent annually to all the shareholders of the
Company.
o The same certificate shall also be sent to the Stock Exchanges along with the
Annual Report filed by the Company.
SEBI Monitoring

o Monitoring Cell set up by SEBI to assess compliances by companies and report

non-compliances to SEBI within 60 days from the end of the quarter.
Morality can’t be legislated but behaviour can be regulated-
Martin Luther King