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Is the new Clause 49 in force?
All
existing listed companies will have to comply with
the provisions of the new clause by April ’05.
However, it has already come into force for companies
that have been listed on the stock exchanges after
October 29, ’04.
What
are the differences in the key provisions of the original
clause and the new clause?
The
new Clause 49 lays down tighter qualification criteria
for independent directors. The new clause disqualifies
material suppliers and customers from being independent
directors.
It
disallows a shareholder with more than 2% stake in
the company from being an independent director as
well as a former executive who left the company less
than three years ago. Partners of current legal, audit,
and consulting firms, as well as partners of such
firms that had worked in the company in the preceding
three years, too, can’t be independent directors.
A
relative of a promoter, or an executive director or
a senior executive one level below an executive director,
too, cannot be an independent director.
Another
important difference is that while the original clause
gave the board the freedom to decide whether a materially
significant relationship between director and the
company affected his independence, the new clause
takes this discretionary power away from the board.
In
the original clause, the maximum time gap between
two board meetings could be four months. The new clause
has reduced this time gap to three months.
The
original clause had stipulated that the audit committee
must meet atleast three times a year and atleast once
every six months. The new clause makes it mandatory
for the audit committee to meet a minimum of four
times in a year with a maximum time gap of four months.
Morever,
unlike the original clause which was silent on the
qualifications of audit committee members, the new
clause states that all members should be financially
literate and atleast one should have financial or
accounting management expertise.
The
new clause also give a definition of “financially
literate” and “accounting or related financial
management expertise.” The new clause also strengthens
and widens the role and responsibility of audit committees.
Does
the new Clause 49 consider nominee directors to be
independent directors?
Yes.
Nominees of institutions that have invested in or lent
to the company shall be deemed independent directors.
What
are the new provisions that have been incorporated
in the new Clause 49 ?
The
major new provisions included in the new Clause 49 are:
| 1) |
The
board will lay down a code of conduct for all
board members and senior management of the company
to compulsorily follow. |
| 2) |
The
CEO and CFO will certify the financial statements
and cash flow statements of the company. |
| 3) |
At
least one independent director of the holding
company will be a member of the board of a material
non-listed subsidiary. |
| 4) |
The
audit committee of the listed company shall review
the financial statements of the unlisted subsidiary,
in particular its investments. |
| 5) |
If
while preparing financial statements, the company
follows a treatment that is different from that
prescribed in the accounting standards, it must
disclose this in the financial statements and
the management should also provide an explanation
for doing so in the corporate governance report
of the annual report. |
| 6) |
The
company will have to lay down procedures for informing
the board members about the risk management and
minimisation procedures. |
| 7) |
Where
money is raised through public issues, rights
issues etc., the company will have to disclose
the uses/applications of funds according to major
categories (capital expenditure, working capital,
marketing costs etc) as part of quarterly disclosure
of financial statements.
Further,
on an annual basis, the company will prepare a
statement of funds utilised for purposes other
than those specified in the offer document/prospectus
and place it before the audit committee.
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| 8) |
The
company will have to publish its criteria for
making its payments to non-executive directors
in its annual report. |
What
is Clause 49 of Sebi's listing agreement?
Sebi
monitors and regulates corporate governance of listed
companies in India through Clause 49. This clause
is incorporated in the listing agreement of stock
exchanges with companies and it is compulsory for
them to comply with its provisions.
The
new Clause 49 lays down tighter qualification criteria
for independent directors. The new clause disqualifies
material suppliers and customers from being independent
directors.
It disallows a shareholder with more than 2 per cent
stake in the company from being an independent director
as well as a former executive who left the company
less than three years ago. Partners of current legal,
audit and consulting firms, as well as partners of
such firms that had worked in the company in the preceding
three years, too, can't be independent directors.
A
relative of a promoter, or an executive director or
a senior executive one level below an executive director,
too, cannot be an independent director.
Another
important difference is that while the original clause
gave the board the freedom to decide whether a materially
significant relationship between director and the
company affected his independence, the new clause
takes this discretionary power away from the board.
In
the original clause, the maximum time gap between
two board meetings could be four months. The new clause
has reduced this time gap to three months.
The
original clause had stipulated that the audit committee
must meet at least three times a year and at least
once every six months. The new clause makes it mandatory
for the audit committee to meet a minimum of four
times in a year with a maximum time gap of four months.
Moreover,
unlike the original clause which was silent on the
qualifications of audit committee members, the new
clause states that all members should be financially
literate and at least one should have financial or
accounting management expertise.
The
new clause also gives a definition of "financially
literate" and "accounting or related financial
management expertise". The new clause also strengthens
and widens the role and responsibility of audit committees.
Who
is an independent director?
The
Indian definition of independent directors as given
in the recently amended clause 49 of listing agreement
is an inclusive definition, which says who could be
independent directors. Clause
49 of the listing agreements defines independent directors
as follows: "For the purpose of this clause the
expression 'independent directors' means directors who
apart from receiving director's remuneration, do not
have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its
subsidiaries, which in judgment of the board may affect
independence of judgment of the directors."
The
definition of the term 'independent directors' has been
amended to mean a non- executive director who:
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Does
not have a pecuniary relationship with the company,
its promoters, senior management or affiliate
companies. |
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Is
not related to promoters or the senior management. |
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Has
not been an executive with the company in the
immediately three preceding financial years. |
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Is
not a partner or executive of the auditors/lawyers/consultants
of the company; |
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Is
not a supplier, service provider or customer of
the company. |
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Does
not hold 2 per cent or more of the shares of the
company. |
Further,
there is certain minimum information that is required
to be made available to the members of the board prior
to the board meeting which ranges from annual operating
plans and budgets to labour problems. In addition,
a company is also required to lay down a code of conduct
for members of its board as well as the senior management.
The
British definition, interestingly, as given in the
Higgs report is an exclusive definition which provides
for who cannot be an independent director.
The
latter appears to be more appropriate as it provides
who is not acceptable as an independent director.
An inclusive definition for independent directors
is too restrictive. It is only human that the management
of company would choose an "acquiescent independent"
on board. The really independent may never be taken
on board the board.
It
is also a matter of open debate as to what would happen
to the decisions taken by the board, if subsequently
it is found that an independent director is not actually
independent.
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