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Amendments to the Listing Agreement - Clause 49.
BACKGROUND:
SEBI vide its circular no. SEBI/CFD/DIL/2004/12/10 dated October 29, 2004 has directed amendment to Clause 49 of the Listing Agreement. (Copy enclosed) The entire clause has been replaced. The Salient features of the same are:
A. Applicability:
The revised clause 49 shall apply to all the listed companies, in accordance with the schedule of implementation given in the revised clause 49. However for other listed entities, which are not companies, but body corporates (e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the revised clause will apply to the extent that it does not violate their respective statutes, and guidelines or directives issued by the relevant regulatory authorities. The revised clause is not applicable to the Mutual Fund Schemes. Also the Stock Exchange shall ensure that a company seeking listing complies with Clause 49 before seeking in-principle approval for listing. The requirements of the revised Clause 49 shall be first applicable from the quarter ending June 2005.
B. Schedule of Implementation:
a) For entities seeking listing for the first time, at the time of seeking in-principle approval for such listing.
b) For existing listed entities which were required to comply with Clause 49 which is being revised i.e. those having a paid up share capital of Rs. 3 crores and above or net worth of Rs. 25 crores or more at any time in the history of the company by April 1, 2005.
C. Compliance in the Intervening Period:
Companies complying with the provisions of the existing Clause 49 at present shall continue to do so till the revised Clause 49 of the Listing Agreement is complied with or till March 31, 2005, whichever is earlier.
D. Change in the definition of Independent Directors:
For the purpose of this clause, the expression 'independent director' shall mean non-executive director of the company who
a. apart from receiving director's remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;
b. is not related to promoters or management at the board level or at one level below the board;
c. has not been an executive of the company in the immediately preceding three financial years;
d. is not a partner or an executive or was not partner or an executive during the preceeding three years, of any of the following:
a) statutory audit firm or the internal audit firm that is associated with the company, and
b) the legal firm(s) and consulting firm(s) that have a material association with the company.
e. is not a material supplier, service provider or customer or lessor or lessee of the company which may affect independence of the director; and
f. is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.
E. Non-Executive director's compensation and disclosures:
All fees/compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders' resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including
independent directors, in any financial year and in aggregate.
F. Other provisions as to Board and Committees:
(i) The board shall meet at least four times a year, with a maximum time gap of three
months between any two meetings.
(ii) A director shall not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director. For the purpose of reckoning the limit under this sub-clause, Chairmanship/ membership of the Audit Committee and the Shareholders' Grievance Committee alone shall be considered.
G. Code of Conduct :
(i) The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company.
(ii) All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.
H. Composition of Audit Committee:
A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following:
(i) The audit committee shall have minimum three directors as members. Two-thirds of the members of audit committee shall be independent directors.
(ii) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
I. Meeting of Audit Committee:
The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present.
J. Subsidary Companies:
i. At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary
company.
ii. The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company.
iii. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.
K. Disclosures:
Following disclosures are required as per the amended clause:
1. Basis of related party transactions
2. Disclosures of Accounting Treatment
3. Board Disclosures - Risk Management
4. Proceeds from public issues, rights issues, preferential issues etc.
5. Remuneration of Directors
6. Management Discussion and Analysis
L. CEO/CFO Certification:
The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act,
1956 and the CFO i.e. the whole-time Finance Director or any other person heading the
finance function discharging that function shall certify to the Board that:
(a) They have reviewed financial statements and the cash flow statement for the year and
that to the best of their knowledge and belief :
(i) these statements do not contain any materially untrue statement or omit any material
fact or contain statements that might be misleading;
(ii) these statements together present a true and fair view of the company's affairs and
are in compliance with existing accounting standards, applicable laws and regulations.
(b) There are, to the best of their knowledge and belief, no transactions entered into by the
company during the year which are fraudulent, illegal or violative of the company's code
of conduct.
(c) They accept responsibility for establishing and maintaining internal controls and that they
have evaluated the effectiveness of the internal control systems of the company and they
have disclosed to the auditors and the Audit Committee, deficiencies in the design or
operation of internal controls, if any, of which they are aware and the steps they have
taken or propose to take to rectify these deficiencies.
(d) They have indicated to the auditors and the Audit committee
(i) significant changes in internal control during the year;
(ii) significant changes in accounting policies during the year and that the same have
been disclosed in the notes to the financial statements; and
(iii) instances of significant fraud of which they have become aware and the involvement
therein, if any, of the management or an employee having a significant role in the
company's internal control system.
M. Report on Corporate Governance:
(i) There shall be a separate section on Corporate Governance in the Annual Reports of company, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted.
(ii) The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format specified. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.
N. Compliance:
(1) The company shall obtain a certificate from either the Auditors or practicing Company
Secretaries regarding compliance of conditions of corporate governance as stipulated in
this clause and annex the certificate with the directors' report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company.
(2) The non-mandatory requirements may be implemented as per the discretion of the company.
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