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SEBI’s New Clause 49!

Published on Mon, Apr 21,2014 | 10:26, Updated at Tue, Apr 22 at 12:47Source : 


IiAS believes the new Clause 49 and 35B will play a large role in strengthening the corporate governance landscape in India

Last year, SEBI began consultations with market participants in order to revise and overhaul the corporate governance norms for listed companies. With the recent notification of the relevant sections of the Act (which come into effect from 1 April 2014), SEBI today (April 17th) released the revised clauses 35B and 49 of the Listing Agreement.

SEBI’s new Clause 49 uses disclosure as an enforcement tool: publicly disseminating information will create comparability, thereby fostering an environment of competitive behaviour that serves shareholders and the corporate governance agenda. These guidelines require greater disclosures on the performance and review of the board of directors. Companies are now required to disclose, in their Annual Reports, granular details on director compensation (including ESOPs), directors’ performance evaluation metrics, directors’ training, the board’s code of conduct and compliance with it, a resume of directors to be appointed, and the directors’ resignation letters. IiAS believes that the enforced transparency in the operations of the board will compel it to be more mindful of its role. Simultaneously, reputation risks of greater disclosures will induce companies to follow more stringent norms while selecting members of the board, its ultimate oversight body.

SEBI has also used internal disclosure mechanisms effectively to curb promoters’ powers. The crux of strong internal controls lies in the independence and objectivity of the internal administrators. Therefore, SEBI has tightened the definition of independent directors and then provided them with stronger oversight. All related party transactions will be approved by the Audit Committee of which at least 2/3rd will comprise independent directors. The new guidelines require an independent director on the board of the listed company to also be on the board of its unlisted subsidiary. The Audit Committee of the listed company will review the financial statements of its unlisted subsidiaries, and the minutes of board meetings of material unlisted subsidiaries will now need to be presented to the board of the parent company. These measures reign in the hitherto unlimited powers that promoters enjoyed over unlisted subsidiaries.

The new guidelines aligns the provisions of the Listing Agreement with those of the Companies Act 2013 and at places, have gone beyond this.

While the new norms may appear onerous to companies, IiAS believes that these establish the much needed corporate governance framework in today’s context.

IiAS' comments on the new Clause 49 are attached here.

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Attachments : F1.0 SEBI CG norms_What gets measured gets done_April2014.pdf

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