In April 2014, SEBI had amended Clause 49 of the listing agreement imposing stricter corporate governance standards on all listed companies with effect from 1 October, 2014. However, it was found that not all the companies were prepared and they faced practical roadblocks in ensuring compliance with the amended provisions by the initial stipulated deadline. Therefore, as a breather to such companies, SEBI by its circular dated 15 September, 2014, has further amended Clause 49 with effect from 1 October, 2014 and diluted the stringent conditions imposed under the original rule.

For example, SEBI had originally imposed stringent norms regarding related party transactions, such as imposing ‘majority of minority’ approval for material RPTs. Earlier a transaction was material if the transaction together with previous transactions in a financial year, exceeded 5% of the annual turnover or 20% of the net worth of the company. The revised clause has relaxed the materiality threshold by setting the limit at 10% of the annual consolidated turnover, so as to provide more flexibility to companies. Further, the definition of ‘related party’ under the original rule was found to be very broad which imposed undue operational hardships on the companies. Under the amended rule, the definition of a ‘related party’ has now been made consistent in terms of the Companies Act, so that companies are required to follow uniform standards for disclosure of RPTs. Further, the Audit Committee has been empowered to grant omnibus approvals for RPTs which would make it less burdensome for the Committee and the companies. The amendments also revise the definition of independent directors. Unlike the earlier clause, the new definition refers to ‘materiality’ of pecuniary relationship.

While targeted measures may address problems specific to the Indian corporate governance model, excessive regulation will impose significant constraints on listed companies. Given that substantive regulation is merely as good as the effectiveness of its enforcement, well-intended but radical norms may affect effective implementation. Through these amendments SEBI has sought to offer the potential for more effective implementation of governance practices by making them more acceptable to companies. However, discrepancies remain in certain aspects which require further clarification for smooth compliance.

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Date:September 28, 2015