SEBI, through its circular dated 17 April, 2014, revisited Clauses 49 and 35B of the Listing Agreement with a view to align it with the Companies Act, 2013, thereby adopting the best practices on corporate governance to increase its efficacy. The changes, along the lines of the "Consultative Paper on Corporate Governance norms in India" (4 January, 2013), are set to take effect from 1 October, 2014, requiring the stock exchanges to amend their listing agreements. While a number of these norms have already been incorporated within the Companies Act, 2013, SEBI has chosen to lay down more stringent norms in certain respects.

Responsibilities of Board

      • Disclosure by directors regarding material interests in any transactions.
      • Key functions of board include reviewing corporate strategy, ensuring transparency of board nomination process, managing potential conflicts of interest, ensuring integrity of accounting and financial reporting.
      • Other responsibilities include encouragement of high ethical standards and continuing director's training.

Board of Directors in General

The second part of the revised Clause 49 discusses issues relating to board of directors including aspects such as composition of the board, remuneration, independent directors, and code of conduct. While succession planning was a hot topic of discussion in the consultation paper, the revised clause merely obligates the board to satisfy itself that a succession plan is in place. Neither the proposed requirement to disclose the plan or the requirement to disclose the existence of a plan has been retained in the revised clause.

A whistle-blower policy wherein directors and employees may report unethical behaviour, actual or suspected fraud or any violation of the company's code of conduct, has been mandated. While the revised Clause does not provide any specifics regarding the nature of the policy, it stipulates provision of adequate safeguards against victimization.

Independent Directors

SEBI has taken steps for ensuring independence and effectiveness of independent directors. While qualifications specified in the Companies Act, 2013, which are applicable to independent directors, including the new provision that excludes nominee directors from the list of independent directors within a company remain the same, some key additions are:

Evaluation - The entire board, apart from the director being evaluated, will conduct the performance evaluation of every independent director and this may act as a basis for determining whether the said director deserves to continue in his position.

Separate Meetings – To ensure that impartial judgement of independent directors is not over-run by dominant board members, separate meetings in the absence of non-independent directors have been mandated. In these meetings, performance evaluation of the remaining directors, of the board can be carried out.

No ESOPS for IDs - The revised clause does away with the provision that allowed granting of ESOPs to independent directors. This is with a view to restrict any conflict of interest that may arise due to their shareholding in the company. SEBI's wisdom behind such a move may be questionable, given the permissive nature of the Companies Act in this regard.

No. of Directorships - No person can hold more than 7 independent directorships and no more than 3 if he also is a whole-time director in any company.

Tenure - An independent director can occupy such a position for a maximum of two terms of 5 consecutive years. The second term requires shareholder approval by special resolution.

Liability of Independent Directors - Within the provision requiring the creation of a code of conduct for board members, the extent of liability of independent directors has been outlined. In relation to any violation of any provision within the listing agreement by a company, an independent director of the company can be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.

Related Party Transactions (RPT)

The revised clause deals extensively with related party transactions. The scope of transactions falling within this has been expanded by giving a wide definition to the term 'related party'. It is stated that parties are considered related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. The creation of a deeming provision provides greater clarity regarding which transactions constitute RPTs and is especially important considering how RPTs now require approval from the audit committee. If these transactions can be categorised as material RPTs, they will also require the approval of shareholders through a special resolution. The materiality of the transaction in question depends on an RPT Policy that every company is expected to frame. While the move is certainly well-intentioned, the provisions may create roadblocks to some legitimate RPTs.

Divestment of material subsidiaries

While every company is required to formulate a policy to aid in determining which subsidiaries would be considered material, the revised Clause provides a minimum standard to determine materiality by stating that "a subsidiary shall be considered as material if the investment of the company in the subsidiary exceeds twenty per cent of its consolidated net worth as per the audited balance sheet of the previous financial year or if the subsidiary has generated twenty per cent of the consolidated income of the company during the previous financial year." Special restrictions will be attracted when the holding company attempts to divest shares or assets of such a material subsidiary. A special resolution in a general meeting of shareholders is mandated where a company intends to reduce its shareholding in a material subsidiary to less than 50% or cease exercise of control over it and in circumstances where the company intends to sell, dispose or lease assets exceeding 25% of the material subsidiary's assets.