Clause 49 of the Listing Agreement requires that the Board of a listed company should consist of at least 50% non-executive directors. Further, if the Chairman is an Executive Director, at least 50% of the Board members should be Independent Directors and one-third otherwise.
To this basic provision, SEBI required, by circular dated April 8, 2008, that if the Chairman is a promoter or related to any promoter, or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors.
Now, by circular dated October 23, 2008, SEBI has required that the clause be further amended to include a clarification in relation to the words “related to any promoter”. The circular requires the following Explanation be inserted in the relevant sub-clause:-
Explanation-For the purpose of the expression “related to any promoter” referred to in sub-clause (ii):
a. If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it;
b. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.
The clarification was necessary since the word “related” would be difficult to apply in respect of non-individuals, as “related” would normally be understood as being a “relative” to and thus can apply only to individuals.
The implication of the amendment thus is that directors (other than independent directors where the entity is listed), employees and nominees of the promoter “entity” would be deemed to be “related to the promoter”. Thus, if the non-executive Chairman is one of such persons, then the Board would need to consist of at least 50% Independent Directors.
The Explanation applies only to “entities” which is a vague word but, as stated earlier, I think it is intended to mean persons other than individuals. Thus, as far as individuals are concerned, the concept of “related to any promoter” remains unchanged. Thus, the clause would apply if the Chairman is a relative of such individual promoters though this is not clarified, nor, for that matter, the term “relative” defined. The term “relative” is also defined differently at different places. This lack of clarity, though, is likely to be faced only in marginal cases.
Thus, this new Explanation actually enlarges the definition of “related” and many persons who were otherwise not so “related” would now be deemed to be related and if such a person is a non-executive Chairman, then the Board would need to have at least 50% Independent Directors. This may particularly of concern to those companies who may have, following the circular of April 8, 2008, appointed such a person as Chairman, thus escaping the requirement of having at least 50% Independent Directors. Now, such companies will have to change the Chairman or have at least 50% Independent Directors.
Which brings us to the question – when is this amendment effective from? The circular says that the amendment has to be “implemented” before March 31, 2009 by existing listed companies.
A comment – perhaps wishful thinking – is whether the time given till March 31, 2009 is for the latest amendment or does it apply to even the earlier requirement of April 8, 2008 too, as duly amended. In simpler words, does this mean that listed companies now have time upto March 31, 2009 to either have a non-“related” Chairman or have at least 50% Independent Directors? This concern is important since the circular of April 8, 2008 did not give any time for making such changes and the strict legal view could be that it would be effective immediately. Making such a significant change is not easy and one would have expected some time. It is of interest also that the reports by stock exchanges of compliances also have to be given by March 31, 2009. It is also curious that why such a long time of six months is given for implementing such an amendment when no such time was given for the original amendment. All this makes me wonder whether the extended period is for all the amendments. To put it simply, do all affected listed companies now have time upto March 31, 2009 to get an “unrelated” Chairman or to upgrade to a Board having at least 50% Independent Directors? Despite some ambiguities, a strict reading of the clauses and circular does not allow such a view. If SEBI has intended otherwise, a clarification would help.
It is provided that all the employees of the “entity” would be deemed to be so related. This is strange as the entity may have thousands of employees and all such employees would thus become “related”.
In parting, see how a simple requirement, easy to grasp in its spirit, is made elaborately complex ad nauseam by provisos, explanations and exceptions.
© Jayant Thakur, CA