CLAUSE 49 OF LISTING AGREEMENT OF SEBI

Submitted by
Group 6B
Akash 064| Aparna 197 | Priyanka 202 | Kruti 219 | Rupali 232

Corporate governance is a broad multifaceted concept which includes systems, mechanisms

to reflect the responsibilities and accountability in the structure of the company. Its basic
objective is to ensure better balancing of interests between all the shareholders and ensure
sustainability over long term for the company.

Need for Corporate governance

1. Rapidly changing ownership structure: Nowadays, public financial institutions, mutual
funds, etc. have become the single largest shareholder in most of the large companies
lending them effective control on the management of the companies. As their primary
objective is to get maximum returns for their investors over a long run, they force the
management to use corporate governance and in process become more efficient,
transparent, accountable, etc.
2. Social Responsibility: The Board of Directors have to protect the rights of the customers,
employees, shareholders, suppliers, local communities, etc. And all this is possible only if
they use corporate governance.
3. Consequence of the past scams : The scams, frauds and corrupt practices in corporate
world had deep impact on global economy in past and have caused regulators to wake up
and take notice
4. Indifference on the part of Shareholders: Basically in India shareholders like to be
passive, though they attend annual general meeting but still if we see the number of
dissenting votes then it stands out to be less than 1%. Most investors carry the attitude that
as long as any decision is not harming their interests immediately, theyd rather not upset
the company. And in case it turns for worse, they sell the share and flee. Further, proxies
are not allowed to speak in meetings, neither there are postal ballot are present in India, the
whole shareholders association is extremely weak allowing the promoters to bulldoze all
the resolutions.
5. Foreign Investments: In todays world of Globalisation, all the companies want to attract
foreign investors to expand faster. A company that has a better image and has proven
corporate governance attracts more investors and makes it easier for the company to source
at reasonable costs.
6. Takeovers and Mergers: With all the complex takeovers and mergers in the business
world, corporate governance is called for to protect the interest of all the parties during
takeovers
and
mergers.
Further, with the Inter-Corporate pyramid getting more and more multi-layered, families
and individuals at top of the cone have been catapulted to positions wielding enormous
control rights with comparatively little cash flow rights. Many of the subsidiaries and
affiliates are used for de-risking, tax evasion and currency management. Such inter-firm
relationships also allows for cheap loans , advances, deposits which are detrimental for the
subsidiary but may help the holding company to paint a rosy picture for their investors.

Main sections of the clause 49

I.

Board of directors
a. Composition of board: This gives the requirement for combination of executive and
non-executive directors, along with the requirement for independent directors,

depending on the Chairman of the Board. The sub-clauses also deal with definition
of promoter and independent director.
b. Non-executive directors compensation and disclosures: Fees/compensation paid to
the non-executive directors (including independent directors) and the limit for
maximum number of stock options granted to them requires approval of
shareholders.
c. Other provisions as to Board and Committees: These relate to the various aspects
like restriction on number of director positions a person can hold at a particular time,
minimum number of board meetings to be held and replacement of independent
director in case of resignation or removal.
d. Code of Conduct: The code of conduct has to be laid down for Board members and
senior management, and it has to be published on the website.
II. Audit Committee
a. Qualified and Independent Audit Committee: This gives qualifications required to be
a member or Chairman of Audit Committee. The Company Secretary acts as the
secretary of the committee.
b. Meeting of Audit Committee: The requirements for number of meetings to be held
and quorum are specified under this sub-clause.
c. Power of Audit Committee: The Audit Committee has powers to investigate any
activity, seek information from any employee, obtain legal advice and/or secure
attendance of experts, if required.
d. Role of Audit Committee: The roles and responsibilities of the Audit Committee
have been mentioned, the major roles being oversight of companys financial
reporting process, reviewing the financial statements, reviewing the functioning of
Whistle Blower mechanism (if any) and approval of appointment of CFO.
e. Review of information by Audit Committee: The Audit Committee has to
mandatorily review analysis of financial condition, significant related party
transactions, management letters issued by statutory auditors, internal audit reports
and the appointment, removal and terms of remuneration of the Chief internal
auditor.
III. Subsidiary Companies
The non-listed Indian subsidiary Board should have at least one director who is a
Board member of the listed holding company. The management of subsidiary is
required to inform the holding company periodically about all significant transactions.
IV. Disclosures
a. Basis of related party transactions: All the related party transactions have to be
placed before the Audit Committee.
b. Disclosure of Accounting Treatment: If alternate Accounting Standard is followed, it
has to be disclosed in the financial statements and management has to explain why
alternative treatment is true and fair view of the transactions.
c. Board Disclosures Risk management: The company has to inform Board members
about risk assessment and minimization procedures, which should be periodically
reviewed.

d. Proceeds from public issues, rights issues, preferential issues, etc.: When money is
raised through an issue, the uses/applications of funds have to be disclosed to the
Audit Committee on quarterly and annual basis.
e. Remuneration of Directors: All the details of pecuniary relationship or transactions
of the non-executive directors have to be disclosed in the Annual Report. The
company has to publish the criteria of making payments, either in annual report or
alternatively on company website (reference has to mentioned in the annual report).
f. Management: Annual Report should include Management Discussion and Analysis,
based on the matters like industry developments, opportunities and threats, segmentor product-wise performance, outlooks, risks and concerns etc. Senior management
is required to disclose to the board all material financial and commercial
transactions.
g. Shareholders: The shareholders must be provided with the details of the director in
case on new or re-appointment. Shareholders/Investors Grievance Committee to be
formed to look into the complaints like transfer of shares, non-receipt of declared
dividends etc.
V. CEO/CFO Certification
CEO and CFO have to certify to the board that they have reviewed the financial and
cash flow statements and they contain no misleading information; that no transactions
are fraudulent, illegal of violative of companys code of conduct; that they accept the
responsibility for establishing and maintaining internal controls for financial
reporting; and that they have indicated all the significant changes to the auditors and
the Audit Committee.
VI. Report on Corporate Governance
Annual report should contain separate section for Corporate Governance and any
form of non-compliance to this clause has to be specifically highlighted. Quarterly
Report signed by Compliance Officer or CEO has to be submitted to stock exchanges
within 15 days from the close of the quarter.
VII. Compliance
Compliance Certificate obtained from either the auditors or practicing company
secretaries has to be annexed to the Directors report and also sent to the Stock
Exchanges annually. The non-mandatory requirements may be implemented as per
the discretion of the company.

Amendment in Clause 49 of Listing Agreement

Through circular dated April 17th 2014, the amendments to clause 49 update and align the
Listing Agreement with corporate governance changes done in the Companies Act, 2013.
There are also certain changes which are stricter than that mandated in the new Companies
Act, 2013.
Some of the important amendments are as follows:

1.

Provision
Change in new listing agreement
Composition of the Mandates companies to have at least one woman director on the

2.

3.

4
5
6

Board- Independent Board

Directors
Definition
of The changes proposed are:
Independent Director ID should, in the opinion of the board, be a person of integrity and
(ID)
possess relevant experience and expertise.
The scope for being ineligible to be considered an ID has been
expanded:
o Being related to promoters or directors of the company has been
extended to holding, subsidiary or associate company
o A director will not be treated as independent if he was /is a
promoter of the company or its holding, subsidiary or associate
company
Scope of a directors pecuniary relationship or transaction extended
to immediately preceding financial years or during the current
financial year in not just the company but its holding, subsidiary or
associate company. In the existing definition pecuniary was
qualified by material resulting in interpretation of convenience,
now that scope has been removed.
In the existing provisions the eligibility/ineligibility criteria applied
only to the director. In the proposed change, besides the director,
his relative will be included and scope has been extended to
holding, subsidiary or associate company for ineligibility on
account of employment with the company employment with
auditors, legal or consulting firms (only if it exceeds 10% of gross
turnover of the firm).
Being a CEO or director of Non-profit organisation subject to its
receipts from the company exceeding the prescribed amount.
Relatives pecuniary relationship or transactions with the company,
holding, subsidiary or associate company should not exceed 2% of
turnover in the preceding 2 financial years nomine director will not
be treated as Independent
Code for ID
Guidelines of professional conduct, Role and functions, Duties,
Manner of appointment, Reappointment, Resignation or removal,
Separate meetings, Evaluation mechanism
Remuneration of ID
Cap on granting stock options to independent directors
Term of ID
IDs whose tenure exceeds five years as on October 1st 2014, will be
eligible for appointment for one more term of five years only
Separation of offices Incorporated as a non-mandatory requirement
of Chairman & Chief
Executive Officer
Number of
The cap on directorships of Ids has been lowered to 7 listed
Directorships
companies.
Whole-time Directors are also barred from serving as IDs in more

8
9

Training of Directors

Constitution of Audit
Committee
10 Performance
Evaluation of ID
11 Role/functions of the
Audit Committee

12

13

14

15

16

17

18

19

than 3 listed companies.

The methodology and details of training imparted to ID shall be
stated in the Boards report.
At least two-third of members of the Audit Committee are to be IDs

Evaluation criteria based on the IDs attendance and contribution to

the board/ committee meetings
Monitor the auditors independence, Approve related party
transactions, Evaluate risk management systems, Scrutinise intercorporate loans and investments. Where necessary, assess the
valuation of undertakings or assets of the company
Nomination and
The Nomination and Remuneration Committee is responsible for:
Remuneration
Formulating criteria for determining qualifications, positive attributes
Committee
and independence of a director. Forming and recommending to the
board a policy on remuneration of directors, key management
personnel and other employees which is reasonable, performance
driven and balanced.
Stakeholders
Address grievances of all security holders including shareholders,
Relationship
debenture holders, deposit-holders and any other security holders
Committee
provided they exceed 1000 in number
Risk Management
require the Board to disclose the development and implementation of
a risk management policy and for the Audit Committee to evaluate
internal financial controls and risk management systems
Whistle Blower
Vigil mechanism to allow directors to report genuine concerns. The
details of the vigil mechanism will need to be disclosed on the
companys website and in the Boards report
Formal letter of
Companies should issue a formal letter stating the term, expectations,
appointment to
fiduciary duties, remuneration, etc. and should be available for public
director
inspection and posted on the website.
Require
ID
to Need for ID to state detailed reason for resignation No comments on
disclose reasons of personal reasons
their resignation
Approval of major
any member who is a related party shall not vote in the case of a
RPTs by majority of related party transaction requiring approval by a special resolution of
the minority
the company
Pre-approval of RPTs The Companies Bill requires all RPTs to be approved or modified by
by Audit Committee
the Audit Committee and refers major RPTs to third party valuation.
and encouraging hem
to refer major RPTs
for
third
party
valuation

Implications
When SEBI came up with amendments in April, 2014 which were to be applicable from 1St
October 2014, SEBI sought feedback on level of preparedness of top 500 list companies
when it received various representations. SEBI then made further amends to the first note.
Small cap companies are not required to comply with rigorous corporate governance
provisions under Clause 49 of the listing agreement. However, Co Act requirements shall
continue to apply to such companies. Thus the exclusion isnt much of a use. Similarly
governments companies have been given exemption for prior approval of related party
transactions. In Indian scenario, this may not have been the right step. However, there is no
exemption in the Companies Act, thus the loss has not occurred.
The requirement of getting audit committee approval for related party transactions was a
much lengthy affair. The amendment has allowed omnibus approval with prior board /
shareholder approvals. Thus it is a welcome move which balances both business
requirements and governance mechanism.
The extension in deadline to appoint women directors has been extended by six months but
the experts are still in doubt if it will do any help.
The Amending Circular takes some steps forward in the direction of aligning the corporate
governance requirements with the Companies Act, and providing procedural relief in certain
cases. The increase in threshold for determining materiality of related party transactions of
10% of the annual consolidated turnover is also a positive change but relaxations as in case of
MCA have not been made in respect of all related party been restricted on any related party
transaction. Though good in sprit this may not serve the purpose as undue disadvantage may
be passed on to a party.
However, on certain aspects, the regulatory bodies still differ and hence companies would be
facing difficulties on this front. SEBI though has been open to consider market feedback, but
collaboration with MCA will bring the best results.

References
https://www.bcasonline.org/articles/artin.asp?416
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.pdf
http://www.applied-corporate-governance.com/importance-of-corporate-governance.html
http://www.businessworld.in/news/business/corporate/the-crusaders/911582/page-1.html
http://www.iimb.ernet.in/research/sites/default/files/WP%20No.%20419_0.pdf
http://www.ingovern.com/wp-content/uploads/2014/05/SEBI-Listing-AgreementAmendments.pdf