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.