Jurisdiction - India
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India – Amendments To Corporate Governance Norms.

23 June, 2014



On April 17, 2014, the Securities and Exchange Board of India (‘SEBI’) issued a circular amending Clause 35B and Clause 49 of the Equity Listing Agreement (the “Circular”). The amendments are aimed at aligning the Equity Listing Agreement with the provisions of the Companies Act, 2013, adopting best practices on corporate governance and making the corporate governance framework more effective.

Clause 35B

As per the revised Clause 35B of the Equity Listing Agreement, which is applicable with effect from April 17, 2014, every listed company is required to provide its shareholders with an e-voting facility in relation to all shareholders’ resolutions to be passed at general meetings or by way of postal ballot. The modalities in relation to such e-voting facility are governed by the Companies (Management and Administration) Rules, 2014, which have come into force with effect from April 1, 2014.

Clause 49

The revised Clause 49 of the Equity Listing Agreement is applicable to all listed companies with effect from October 1, 2014, except for, (1) the provisions with respect to mandatory constitution of a Risk Management Committee, which will be applicable to the top 100 listed companies by market capitalisation as at the end of the immediate previous financial year; and (2) the provisions with respect to related party transactions, which will be applicable to all prospective transactions – all existing material related party contracts or arrangements as on the date of the Circular, which are likely to continue beyond March 31, 2015, must be placed for approval of the shareholders at the first general meeting after October 1, 2014. Such contracts may be approved by the shareholders prior to October 1, 2014 .

It is also clarified that with respect to listed entities which are not companies, viz. bodies corporates, or listed entities which are subject to other statutes, viz. banks, financial institutions, insurance companies. etc., Clause 49 will apply to the extent that it does not violate the statutes, guidelines or directives issued by the relevant regulatory authorities. Further, Clause 49 is not applicable to mutual fund.

The revised Clause 49 of the Equity Listing Agreement is required to be implemented to achieve the objectives enshrined in the principles stated in the Circular. In case of any ambiguity, the provisions of the Equity Listing Agreement are to be interpreted and applied in accordance with thes principles, which are aimed at :


1. At least 50% of the Board should comprise of non-executive directors;
2. At least one woman should be a director on the Board of a listed company;
3. equitable treatment of all shareholders, including minority and foreign shareholders;
4. recognition of the rights of stakeholders and encouraging co-operation between the company and its stakeholders;
5. timely and accurate disclosure of all material matters including the financial situation, performance, ownership, and governance of the company; and
6. disclosure of information to the board of directors of a company (“Board”) and stipulating key functions and responsibilities of the Board.


Board If Directors 


1. protecting and facilitating the exercise of shareholders rights;
2. providing adequate and timely information to shareholders;
3. In the event the chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors, and in the event the company does not have a “regular non-executive chairman”, at least one-half of the Board should comprise of independent directors. The term “regular non-executive chairman” has not been defined, and it is not clear whether the term is intended to cover the attendance and involvement of a non-executive chairman in the affairs of a company. Furthermore, in the event that the regular non-executive chairman is a promoter of the company or is related to any promoteror person occupying management positions at the Board level or at one level below the Board, at least half the Board must consist of independent directors.



A director must not be a member in more than 10 committees, i.e., audit committee and stakeholders’ relationship committee, of public limited companies (whether listed or not) or act as a chairman of more than five committees, i.e., audit committee and stakeholders’ relationship committee, across all public limited companies (whether listed or not) in which he is director.

Meetings Of The Board

The Board must meet at least four times a year, with a maximum time gap of 120 days between any two meetings.

Compensation To Non-Executive Directors Including Independent Directors

Fees / compensation to be paid to non-executive directors, including independent directors, must be fixed by the Board and will require prior approval of the shareholders at a general meeting. Such resolution must specify the limits for the maximum number of stock options that can be granted to non-executive directors, in any financial year and in aggregate. However, such a resolution will not be required for payment of sitting fees to non-executive directors within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government. Further, independent directors will not be entitled to any stock options.

Independent Directors


The term ‘independent director’ has been revised to mean a non-executive director, other than a nominee director of the company:

1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;


2. who is or was not a promoter of the company or its holding, subsidiary or associatecompany;


3. who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

4. apart from receiving director’s remuneration, has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

5. none of whose relativeshas or had a pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or Rs.5,000,000 or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;


6. who, neither himself (nor any of his relative(s), to the extent applicable):

(a) holds or has held the position of a key managerial personnelor is or has been an employee of the company or its holding, subsidiary or associate company  in any of the three financial years immediately preceding the financial year in  which he is proposed to be appointed;

(b) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of:


  • a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
  • any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;

(c) holds, together with his relatives, 2% or more of the total voting power of the company;

(d) is a chief executive or director, by whatever name called, of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or

(e) is a material supplier, service provider or customer or a lessor or lessee of the company; and


7. who is not less than 21 years of age.

Limit on number of directorships: A person will not serve as an independent director in more than seven listed companies. Further, any person serving as a whole time director in any listed company can serve as an independent director in up to 3 listed companies.

Tenure: Up to 5 consecutive years and eligible for re-appointment for another term of up to 5 consecutive years, subject to a special resolution approving such reappointment. If an independent director has already served as an independent director for a period of five years or more, as on October 1, 2014, he will be eligible for reappointment for one more term of up to five consecutive years only. An independent director who completes the aforesaid terms will be eligible for appointment as an independent director in the company only after the expiry of 3 years of ceasing to be an independent director.

Miscellaneous: In addition to the above, Clause 49 of the Equity Listing Agreement also provides for the following:

1. Formal letter of appointment to be issued to independent directors as per the provisions of the Companies Act, 2013. The letter of appointment along with a detailed profile is to be disclosed on the websites of the company and the stock exchanges no later than one working day from the date of appointment;

2. Performance evaluation of independent directors including prescription and disclosure of evaluation criteria;

3. Separate meetings of independent directors at least once a year;

4. Training of independent directors; and

5. An independent director who resigns or is removed from the Board will be replaced by a new independent director on or prior to the later of the immediate Board meeting or 3 months from the date of such vacancy


Code Of Conduct

The Board is required to lay down a code of conduct for its members and senior managementof the company, which must be posted on the company’s website. Compliance with this code of conduct is required to be affirmed by its members and senior management on an annual basis and the annual report of the company must contain a declaration to this effect signed by the CEO.

The code of conduct must suitably incorporate the duties of independent directors as laid down in the Companies Act, 2013. However, it is expressly provided that an independent director will be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through processes of the Board, and with his consent or connivance; or where he had not acted diligently with respect to the Equity Listing Agreement.

Whistle Blower Policy 

The company is required to establish a vigil mechanism for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy, which should, amongst other things, provide for adequate safeguards against victimization of directors and employees who avail of the mechanism and also provide for direct access to the chairman of the audit committee in exceptional cases. The details of establishment of such mechanism must be disclosed by the company on its website and in the report of the Board.

Audit Committee

The provisions of Clause 49 in relation to constitution, composition and meetings of an audit committee remain unchanged. However, certain additional obligations have been included within the role of an audit committee, which include, (1) reviewing and monitoring an auditor’s independence and performance, and effectiveness of the audit process; (2) approval of transactions of the company with related parties; (3) scrutiny of inter-corporate loans and investments; (4) valuation of undertakings or assets of the company; and (5) evaluation of internal financial controls and risk management systems.

Nomination And Remuneration Committee

The requirement for constitution of a nomination and remuneration committee has now been made mandatory for all listed companies. The composition of the nomination and remuneration committee remains unchanged, i.e., at least 3 non-executive directors of which the chairman should be an independent director.

The role of the nomination and remuneration committee has now been specifically prescribed and broadened to include, (1) formulation of the criteria for determining qualifications, positive attributes and independence of a director, recommending to the Board a policy relating to the remuneration of the directors, key managerial personnel and other employees; (2) formulation of a criteria for evaluation of independent directors and the Board; (3) devising a policy on Board diversity; and (4) identifying persons who are qualified to become directors and who may be appointed as senior management in accordance with the criteria laid down, and recommending to the Board their appointment or removal.


The provisions of Clause 49 in relation to subsidiaries of a listed company remain unchanged. However, a listed company is now required to formulate a policy for determining ‘material’subsidiaries, which policy must be disclosed to the stock exchanges and in such company’s annual report. Further, no company can, without passing a special resolution in its general meeting, (1) dispose of its shares in such material subsidiary which would reduce its shareholding (either on its own or together with other subsidiaries) to less than 50%, or cease the exercise of control over the subsidiary without passing a special resolution in its general meeting; or (2) sell, dispose
and lease assets amounting to more than 20% of the assets of such material subsidiary.


Risk Management


In addition to procedures to inform the Board about risk assessment and minimization, the Board is required to frame, implement and monitor the risk management plan for the company. Further, the top 100 listed companies by market capitalisation as at the end of the immediate previous financial year are required to constitute a Risk Management Committee to whom the Board may delegate monitoring and reviewing of the risk management plan and such other functions as it may deem fit.


Related Party Transactions

A related party transaction is defined as a transfer of resources, services or obligations between a company and a related party7, regardless of whether a price is charged. A company is required to formulate a policy on materiality of, and on dealing with, related party transactions. A transaction with a related party is to be considered as material if the transaction(s) to be entered into individually or taken together with all previous transactions during a financial year exceeds the higher of 5% of the annual turnover or 20% of the net worth of the company as per the last audited financial statements of the company.All related party transactions require the prior approval of the audit committee of a company and all material related party transactions require the prior approval of the shareholders of a company, by way of a special resolution.


Material Disclosures

1. Details of all material transactions with related parties on a quarterly basis along with the compliance report on corporate governance and details of the policy on related party transactions are to be disclosed on the company’s website and in its annual report;

2. Pecuniary transactions with non-executive directors: All such transactions are to be disclosed in the annual report;

3. Remuneration of directors: Details of the remuneration package of individual directors under heads such as salary, benefits, bonuses, etc., details of performance linked incentives, stock option details and service contracts, notice period and severances fees are to be specified in the annual report. Criteria for payment to non executive directors is to be specified either in the annual report or website of the company.

4. Management: Senior management is required to disclose to the Board, material financial and commercial transactions where they have personal interest that may have a conflict with the interest of the company at large;

5. Shareholders: In case of appointment / re-appointment of director, shareholders are to be provided with a brief resume, nature of expertise, other directorships of the person and shareholding of non-executive directors.

6. Appointment and resignation of directors: To be disclosed within one day on the company’s website;

7. Proceeds from public issues, rights issues and preferential issues, etc.: Report on utilization of funds to be made as a part of quarterly declaration of financial results to the audit committee. Further, on an annual basis, the company must prepare a statement of funds utilized for purposes other than those stated in the offer document /prospectus / notice and place it before the audit committee


End Notes:


1 If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees will be deemed to be related to it. If the promoter is an unlisted entity, its directors, its employees or its nominees will be deemed to be related to it.

2 “Associate” will mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by the Institute of Chartered Accountants of India.

3 “Relative” will mean “relative” as defined in section 2(77) of the Companies Act, 2013 and rules prescribed there under.


4 “Key Managerial Personnel” will mean (a) the Chief Executive Officer or the managing director or the manager; (b) the company secretary; (c) the whole-time director; (d) the Chief Financial Officer; and (e) such other officer as may be prescribed.


5 The term “senior management” will mean personnel of the company who are members of its core management team excluding the Board. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.


6 A subsidiary will be considered as material if the investment of the company in the subsidiary exceeds 20% of its consolidated net worth as per the audited balance sheet of the previous financial year or if the subsidiary has generated 20% of the consolidated income of the company during the previous financial year


7 A ‘related party’ is a person or entity that is related to the company. Parties are considered to be related if one party has the ability to control (which term will have the same meaning ascribed to it in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, as amended) the other party or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions and includes the following:

(1) A person or a close member of that person’s family is related to a company if that person (a) is a related party under Section 2(76) of the Companies Act, 2013; (b) has control or joint control or significant influence over the company; or (c) is a key management personnel of the company or of a parent of the company;

(2) An entity is related to a company if (a) the entity is a related party under Section 2(76) of the Companies Act, 2013; (b) the entity and the company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others); (c) one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member); (d) both entities are joint ventures of the same third party; (e) one entity is a joint venture of a third entity and the other entity is an associate of the third entity; (f) the entity is a post-employment benefit plan for the benefit of employees of either the company or an entity related to the company. If the company is itself such a plan, the sponsoring employers are also related to the company; or (g) the entity is controlled or jointly controlled by a person identified in (1); or a person identified in (1)(b) above has significant influence over the entity (or of a parent of the entity).




For further information, please contact:


Varoon Chandra, AZB & Partners

[email protected]


Anil Kasturi, AZB & Partners

[email protected]


Srinath Dasari, AZB & Partners

[email protected]

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