SEBI’s relaxation in Governance Norms proved to be a breather for listed entities

In a step towards addressing the practical concerns that the listed entities were facing in ensuring compliance with Corporate Governance norms, the Capital Market Regulator, SEBI has rolled out amendments in the revised Corporate Governance Norms that were proposed to be effective from October 1, 2014 with the basic premise of promoting interest of varied stakeholders on one hand and aligning the provisions of extant Clause 49 of the Listing Agreement with the Companies Act, 2013 on the other. 

Ms. Anjali Aggarwal
Vice President
The diluted version of the norms aims to intensify the corporate governance framework for listed companies in India and would simplify the practical concerns that are being faced by listed entities in adherence to the revised Corporate Governance norms that were floated on April 17, 2014. 

Key amendments are outlined as follows:
    1. Relaxation in the Applicability Criteria of Clause 49 
    SEBI vide circular dated April 17, 2014 has revised Governance norms as prescribed under Clause 49 that would be applicable on all listed companies with effect from October 01, 2014 except mutual funds and other listed entities that are being regulated under other statutes (e.g. banks, financial institutions, insurance companies etc.) provided they comply to the extent norms and are not in contradiction to their respective statutes and guidelines or directives issued by the relevant regulatory authorities. However, the instant Circular made the applicability as non-mandatory for following classes of companies:
    2. Women Director 
    SEBI vide its instant Circular relaxed the provision for appointment of atleast 1 Woman Director, and postponed its applicability to April 1, 2015. 
    3. Independent Directors
    SEBI, taking into consideration the varied aspects involved in the dynamic business environment and industry representations seeking clarifications,has suggested following amendments with regard to the Independent Director: 
      (a) One of the major change that have a direct bearing on optimum Board Structure of the listed entities is who can be considered Independent. As per April Circular, a person who has or had a pecuniary relationship with the Company, its holding, subsidiary or associate company, or their promoters, or directors will not be considered as Independent. SEBI has amended the said stipulation to include only material pecuniary relationships, thereby, on one hand simplifying the stringent ambit of Compliance and on the other hand leaving a room for ambiguity as well. 
      (b) Another amendment that will really prove to be a breather for the listed entities is the relaxation in the tenure of Independent Directors. As per SEBI’s April Circular, Independent Directors can be appointed only for one more term of 5 years if they have already served on the Company’s Board for a period of 5 years or more.Now, SEBI has eased the requirement and brought it in line with the Companies Act that gives altogether 2 fresh terms of 5 years each. 
      (c) With regard to disclosure of termsand conditions of appointment, on the Company’s website, SEBI has relaxed the timelines for disclosures in line with the provisions of the Companies Act, 2013; 
      (d) Certain other provisions relating to disclosure of appointment letters/ resignation etc have been deleted. 
      (e) A familiarisation programme for Independent Directors is needed to be held and there should be mandatory disclosure of the details of familiarisation programmes on the Company’s website and a web link thereto should be given in the Annual Report as well. 
    4. Nomination and Remuneration Committee
    With regard to Nomination and Remuneration Committee, a proviso has been inserted to Clause 49(IV)(A) thereby restraining Chairperson of the Company to chair the Committee. 
    5. Related Party Transaction 
    Another important aspect that has been given due weightage in the instant Circular is the interpretational issues as in what would tantamount to Related Party Transactions (RPTs). As per Companies Act, 2013, RPTs are mostly in connection to Directors, Relatives & KMPs whereas the ambit of RPTs was much broadened in the SEBI’s April Circular to include even transactions with those in control or joint control or having significant influence. The said inclusion created some chaos as the term control in itself is ambiguous. To avoid any distortion or ambiguity, SEBI has aligned the definition of RPTs to that under the Companies Act, 2013 and Accounting Standards. 
    Other material amendments in RPTs are: 
    • SEBI has relaxed the thresholds as to what would constitute material for seeking shareholders’ approval. In its April Circular, SEBI defined material to include transaction exceeding 5% of the Annual Turnover or 25% of Networth. However, as per instant Circular, the networth requirement is waived off and the turnover requirement stands enhanced to 10%of the annual consolidated turnover of the Company, thereby enhancing the scope of entering into RPTs without seeking shareholders’ approval. 
    • All RPTs shall be approved by Audit Committee, though the amendment provides relaxation in terms of approving the transactions. Now, as per the amendment an omnibus approval for RPTs proposed to be entered can be given by Audit Committee, in line with the RPT Policy of the Company and subject to certain conditions which will ease the procedure to enter into RPTs. Such omnibus approvals, once granted, shall be valid for a period not exceeding 1 year and shall require fresh approvals after the expiry of 1 year. 
    6. Other Amendments 
    • Earlier the company had to make disclosure to Stock Exchanges regarding the policy formed for material subsidiaries, but now as per the amendment it should be disclosed on Company’s website and a web link thereto shall be provided in Annual Report only and there is no specific requirement to disclose to Stock Exchanges. 
    • Earlier there was strict prohibition on Companies to reduce their shareholding in material subsidiary unless a special resolution has been passed in this context. But, now an exception has been added wherein such divestment shall be allowed if it is made through the scheme of arrangement which has been approved by Court/Tribunal.
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