Thursday, September 18, 2014

SEBI’s Revisions to Corporate Governance Norms

In April this year, SEBI had announced a revamped clause 49 of the listing agreement specifying the revised corporate governance norms to come into effect from October 1, 2014. This was to bring the SEBI norms in line with the Companies Act, 2013 (2013 Act). However, in certain material respects, the new clause 49 differed from the provisions of the 2013 Act, in that clause 49 imposed a more onerous regime to companies than the 2013 Act. This became a source of concern to industry. That apart, it was expected that industry would seek additional time to obtain preparedness to comply with these extensive provisions. In fact, when additional governance measures were introduced by SEBI way back in 2004, their implementation was delayed nearly 18 months until January 1, 2006 due to pressure from the industry. SEBI was therefore concerned with the issues of discrepancies as well as industry-preparedness while considering the implementation of the new clause 49.

On September 15, 2014, SEBI therefore announced some amendments to clause 49. Beginning with preparedness, SEBI did not relent on this occasion and is going ahead with implementation of the new norms from October 1, 2014, except for the provision on women directors. This is indicative of its steadfastness in implementing the revised governance norms. Interestingly however, this was not SEBI’s unilateral decision, but the result of a study of preparedness of the top 500 listed companies in compliance with the new regime.

As for discrepancies, SEBI has sought to address several of them in the new amendments. For example, the definition and position of independent directors in clause 49 were inconsistent with those in the 2013 Act. Under the earlier version, an independent director in clause 49 excluded anyone with a pecuniary relationship with the company or other related parties. This has now been altered to exclude only those with a “material” pecuniary relationship. Similarly, the tenure provisions for independent directors have been streamlined. Other changes include the fact that the actual letter of appointment of independent directors need not be disclosed on the website of the company, but rather only the terms and conditions of appointment. A somewhat minor but optical change is the use of the terminology of “familiarisation” rather than “training” for independent directors.

Another major area of discrepancy addressed pertains to related party transactions (RPTs). This was essential given that clause 49 was much more stringent than the 2013 Act. The amendments seek to bring about consistency between clause 49 and the 2013 Act so as to make it less onerous for companies. The previous version of clause 49 had an in-built definition of a “related party”, which was much wider than that in the 2013 Act. For example, clause 49 encompassed joint ventures and other entities which had a “control” relationship. The revised clause 49 defines a “related party” with reference to section 2(76) of the 2013 Act and also captures entities that may be related parties under applicable accounting standards. Similarly, the turnover and net worth criteria for determining the materiality of RPTs have been streamlined such that RPTs shall be considered material if they exceed in the aggregate in any financial year 10% of the annual consolidated turnover of the company in accordance with its last audited financial statements. A facility has also been provided for the audit committee to grant omnibus approvals for RPTs subject to certain conditions. A relaxation has also been made for transactions between two government companies and also for those between a holding company and its wholly owned subsidiary. These changes to the RPT regime will make it more palatable for companies, considering that the legal provisions in this area of the law have swung from mere disclosure of RPTs to now a very stringent approval mechanism to take into account the interests of the independent/ minority shareholders.

As mentioned earlier, the only deferment of the new norms relates to the requirement of appointing a woman director, which will come into force on April 1, 2015.

Overall, the revised position appears to seek an appropriate balance. On the one hand, the intention of the regulator to progress along the path of a more robust set of governance norms is clear. On the other hand, it has also shown willingness to consider the practical difficulties in cases where the SEBI norms have gone far beyond company law, and hence attempted to streamline the position so as to make it more acceptable to industry and garner greater compliance.

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