Background SEBI had notified in April 2014 a fully revised Clause 49 (“the Clause”). This was immediately after the coming into force of corresponding provisions in the Companies Act, 2013, from 1st April, 2014. However, this new Clause 49 was to come into force from 1st October 2014. SEBI had issued earlier a Concept Paper to discuss proposed amendments consequent to enactment of the Companies Act, 2013, and was awaiting the provisions of that Act to come into effect. After having amended Clause 49, it had sought feedback from top 500 listed companies on issues they faced in implementing it. It had also otherwise generally sought suggestions. Based on such feedback, it made, on 15th September 2014, certain amendments to the revised Clause 49. The amendments are well in time considering that all, except one, of the provisions come into effect from 1st October, 2014. The revised Clause 49 was already discussed in an earlier article in this column. This article discusses the important amendments now made.
Applicability
Clause 49 applies to companies whose equity shares are listed on a recognised stock exchange. However, for the time being, the Clause shall not apply to following companies:-
1) Companies whose equity share capital is less than Rs. 10 crore and whose net worth is less than Rs. 25 crore. This position is with reference to the end of the previous financial year. If any of the limits are subsequently crossed, then the Company shall comply with the provisions within six months.
2) Companies whose equity shares are listed exclusively on SME and SME-ITP Platforms.
Woman Director
It was earlier required that the Board of Directors should have at least one woman director. This requirement, like other requirements, was to come into force from 1st October, 2014. It appears that SEBI has taken into account ground realities considering that it would be quite difficult for many companies to appoint a woman director by 1st October, 2014. Hence, the requirement is now amended to come into force from 1st April, 2015.
Note that no further qualifications are required for such woman director. She can be part of the Promoter Group. She can be an executive director. In particular, she need not be an Independent Director.
Independent Director – condition regarding pecuniary relationship
The “independence” of a director is judged, inter alia, with the fact whether he has or had in the past, pecuniary relationship with the Company or its holding or subsidiary companies or their Promoters or directors. Pecuniary relationship is commonly understood to be having monetary/ financial relationship.
The existing Clause provided that a person who had a pecuniary relationship in the current or two preceding financial years would not be an Independent Director. This obviously caused concern if a person had a negligible relationship which could not possibly affect his independence. Hence, now it is provided that there needs to be a material pecuniary relationship during the specified period with the specified person for a director to be said to have lost his independence.
What would constitute material has not been defined. Indeed, what constitutes a relationship is also not defined.
It also does not matter whether the relationship is or was at arm’s length and this is fair enough. A material pecuniary relationship does cast a shadow on independence.
Tenure of an Independent Director
There was a mismatch between the tenure specified under the Act and under the Clause. In particular, there was mismatch over whether the future tenure of an Independent Director could be reduced by the tenure he had already served in the past. The mismatch would have automatically resulted in a lower tenure for listed companies since in case of two provisions applicable, the stricter would have applied.
SEBI has amended the Clause to align its requirements to the Act. It has simply stated that the maximum tenure will be as per the Act and clarifications/circulars issued thereunder from time to time.
Disclosure of Independent Director’s terms of appointment
The existing Clause requires the Company to issue a formal letter of appointment to the Independent Director in the manner required under the Act. Further, this letter alongwith the profile of the Independent Director should be disclosed on the website of the Company and the stock exchanges.
The Clause has been amended in two aspects. Instead of the whole letter of appointment and the profile, only the terms and conditions of the appointment need to be disclosed. Further, such disclosure shall be only on the website of the Company.
The profile of the Independent Director does not have to be disclosed. Further, the requirement of formal letter of appointment does not apply to non-executive directors.
Training of Independent Directors
The Clause required that the Company should provide training to the Independent Directors to familiarise them with regard to the Company, their role, rights, responsibilities and certain other matters. The details of such training was required to be disclosed in the Annual report. Now, in a slight tweak to the requirement, it is required that the Company shall familiarise the Independent Directors for the same matters. Further, perhaps to save on printed pages, the information of training is now required to be given only in the website of the Company. The annual report will now give only the link to such information on the website. It is possible that the word training could have implied formal training conducted in classroom manner and hence the requirement was made less rigorous.
Chairman of Nomination and Remuneration Committee
The changed requirements now provide that the Chairman of the Company may be appointed as a member of the Nomination and Remuneration Committee. However, he cannot be Chairman of this Committee.
It may be recalled that this Committee is intended to be the screening, nomination and evaluation Committee for the Board, key managerial personnel etc.
Sale of shares/assets of subsidiaries
The Clause earlier provided that any sale of shares of a material subsidiary leading to reduction of holding to less than 50% should require a prior special resolution. Further, a similar approval was required for sale, disposal or leasing of more than 20% of the total assets of a material subsidiary. Now, an amendment provides for an exception to divestments made under a Scheme of arrangement that is duly approved by the Court/Tribunal.
Amendments related to related party transactions
There are several amendments made relating to related party transactions.
The definition of related parties has been seemingly narrowed and simplified but this is not wholly true. Earlier, the definition appeared to be quite extensive and covered several types of entities generally and specifically. Generally, persons who can control the other or have significant influence over the other were included. Having given this broad definition, certain parties were specifically included such as related parties as defined under the Act.
The amended definition has only two categories. One covers those parties as defined under the Act. Other covers those persons who are considered as related parties under applicable accounting standards. The definition under the Accounting Standards is wider and general. Hence, the list of related parties will continue to be broad.
The definition of material related party transactions has undergone a change. Earlier, a transaction or group of transactions would be material if they exceeded the higher of 5% of the annual turnover or 20% of the networth of the Company. Now, there are two changes. Firstly, the consolidated figures are used. Secondly, now there is only one criteria – the transactions would be treated as material if they exceed 10% of the annual consolidated turnover.
The definition of material related party transactions is relevant as such transactions need approval of the shareholders by way of a special resolution.
As a rule, all related parties transactions require prior approval of the Audit Committee. However, considering the fact that certain transactions may be of a similar nature and continuing throughout the year or frequent, a concept of omnibus approval has been provided for. The Audit Committee can grant such omnibus approval and then such transactions can be carried out without any further prior or post approval. However, there are certain conditions.
Firstly, the Audit Committee needs to satisfy itself that such transactions are needed and are in the interest of the Company.
The approval shall specify the name and of the related parties, the nature of the transaction, the period during which they may be carried out, and the indicative base price/current contracted price and the formula for variation if any. They may impose further conditions.
However, if the need cannot be anticipated or the details required are not available, the Audit Committee may still grant approval of upto Rs. 1 crore per transaction.
The Audit Committee would have to make a quarterly re-view of such transactions carried out pursuant to omnibus approval. The omnibus approval would have validity of one year. Related party transactions between two government companies will now not require approval of Audit Committee or of the shareholders by way of special resolution. There is a similar provision for transactions between a Company and its wholly owned subsidiary provided that the accounts are consolidated and placed before shareholders for approval.
A query had arisen regarding who can vote at the special resolution for approval of material related party transactions. It was earlier provided that “the related parties shall abstain from voting on such resolutions”. The question was where all entities that are related parties were barred from voting or whether only those related parties the transactions with whom were the subject of the special resolution. Now it is specifically clarified that all related parties are barred from voting, whether they are parties to such transaction or not.
Conclusion
An attempt has been made to synchronise several of the requirements of Corporate Governance under the Act and under Clause 49. However, divergence remains in some areas. In case of listed companies to whom the Clause applies, such companies will have to comply with both. And in case of any overlap or contradiction, they will have to apply the narrower of the two provisions. Coupled with the requirements of e-voting which gives wider access to vot-ing to shareholders, the new requirements ensure much closer involvement of shareholders. Further, considering that (i) now a special resolution is required (ii) related parties are barred from voting, the shareholders have now an even greater say in case of related parties transactions. In these days of shareholder activism and vocal proxy advisory firms, related party transactions would particularly be under closer watch. All this augurs well for shareholder democracy in India and corporate discipline.
