SEBI’s Clause 49 that lays down governance requirements for listed companies was amended in April this year. The changes were brought in to align the governance norms with those laid out in the Companies Act, 2013 – but in some cases SEBI went beyond and laid down higher thresholds for listed companies. Today SEBI eased some of those thresholds by way of an amendment to its April Circular. CNBC-TV18’s Payaswini Upadhyay reports on the highlights.
First the not so-good news. Since the time SEBI had put out this Circular in April, industry was lobbying hard to have the effective date deferred. That hasn’t happened- Clause 49 will become effective in 15 days from today i.e. October 1st.
SEBI Amends Clause 49!
New Clause 49 to be effective October 1st, 2014No delay in implementation date
But by all means, this is a much diluted version and industry should find it easier to comply with.
The key changes lie in two buckets- Independent Directors and Related Party Transactions.
Let’s first go over the changes related to Independent Directors. SEBI April Circular said an Independent Director who has already served on a company’s board for 5 years can serve only one more term of 5 years. SEBI has eased this requirement and brought it in line with the Companies Act that gives independent directors 2 terms of 5 years each.
SEBI Amends Clause 49!Independent Directors: Tenure
Cos Act, 2013: 5years + 5 years + 3 years cooling offApril Circular, SEBI: One more term of 5 years if 5 yrs already servedAmended Circular, SEBI: In line with Cos Act
The second change relates to who can be considered Independent. The April Circular gave a wide meaning to it to say that a person who has or had a pecuniary relationship with the company, its subsidiary, associate, promoters, directors etc will not be considered as independent. SEBI has amended this to say that there should not be any material pecuniary relationship. Curiously, the Companies Act still doesn’t talk about materiality- so the MCA may need to clarify that for companies to benefit from the dilution under amended Clause 49.
SEBI Amends Clause 49!Who Is An Independent Director?
April Circular, SEBI: No pecuniary relationship with company. Subsidiary, promoter etcAmended Circular, SEBI: No material pecuniary relationship…Cos Act, 2013: No concept of materiality
The third independent director related change is with regards to women directors. Listed companies have now been given time until April 2015 to induct at least one woman director on their Boards
SEBI Amends Clause 49!Woman Director
April Circular: All listed companies to have 1 Woman Dir effective Oct 1st, 2014Amended Circular: All listed companies to have 1 Woman Dir effective Apr 1st, 2015
Let’s come to thechanges on the related party transactions or RPT front.
First is on the definition of RPT- The Companies Act defines related party transactions mostly in connection to directors, relatives and KMP. SEBI extended the definition in its April Circular to include those in control or joint control or having significant influence. That created a lot of confusion among companies who said the concept of control in itself is vague and this would just lead to interpretational issues. SEBI has paid heed to it and has aligned its RPT definition to that under Companies Act and Accounting Standards.
SEBI Amends Clause 49!RPT: Definition
Cos Act, 2013: Defined in connection to directors, relatives, KMPApril Circular, SEBI: Extended to those in control/ joint control/having significant influenceAmended Circular: Cos Act + Accounting Standards definition
Two, SEBI has diluted its materiality thresholds for shareholder approval. In its April Circular, SEBI defined material to include transaction exceeding 5% of annual turnover or 25% of networth. SEBI has removed the networth requirement and increased the turnover to 10%. This translates into lesser number of RPTs going to shareholders for approval.
SEBI Amends Clause 49!‘Material’ RPTs
April Circular, SEBI: Exceeding 5% of annual turnover OR 25% of networthAmended Circular: Exceeding 10% of annual turnover
Last RPT related change is with regards to transactions between two government companies or transactions between a holding company and its subsidiary- both have been exempted from the requirement of prior audit committee approval and special shareholder resolution. Here again, the Companies Act is silent on exemption to government companies…so MCA may issue a clarification to this effect soon. SEBI Amends Clause 49!Exempted RPTs
No Audit Committee approval or special resolution for
- Transactions between 2 government companies
- Transaction between Holding Co & its Wholly-owned subsidiary
Click here to read SEBI’s circular on Clause 49 & watch a detailed coverage on The Firm This Week.
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