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Clause 49 Amendments: Mixed Bag!

Published on Tue, Sep 16,2014 | 14:43, Updated at Tue, Sep 16 at 14:43Source : 

By: Sai Venkateshwaran - Partner & Head, Accounting Advisory Services, KPMG in India

The SEBI amendment to Clause 49 of the listing agreement is a mixed bag of relaxations and clarifications to the new requirements that were to become effective from 1 October 2014.  It is encouraging to note that SEBI, through its outreach to large corporates had gauged their readiness and identified the areas with implementation challenges, which led to these amendments, which take into account practicality of implementation as well.  These changes to some extent align the requirements of Clause 49 with those in the Companies Act, but in many other areas, still retain the more stringent requirements, although they have provided some clarifications.  In particular the alignment of the definition of related parties and the extension of timeline for appointment of woman director are changes that corporates were looking forward to.  The increase in threshold for determining materiality of related party transactions to 10% of annual consolidated turnover and permitting omnibus approvals are also welcome changes.  On the other hand, the restriction on all related parties voting on any related party transaction, whether they are a party or not, is an area where SEBI hasn't provided relaxations like the MCA has done under the Companies Act 2013. 
SEBI vide circular dated 17 April 2014 had issued certain amendments to Clauses 35B and 49 of the Equity Listing Agreement. In order to address the concerns arising from representations received by SEBI from market participants including companies and industry associations and to facilitate the listed companies to ensure compliance with the provisions of the revised Clause 49, SEBI vide circular dated 15 September 2014 has made certain amendments to Clause 49 which, inter-alia, include the following:

• Applicability of Clause 49 - made non-mandatory for (a) Companies having paid up equity share capital not exceeding Rs.10 crore and Net Worth not exceeding Rs.25 crore, as on the last day of the previous financial year; and (b) Companies whose equity share capital is listed exclusively on the SME and SME-ITP Platforms.
• Term of independent directors- Maximum tenure to be as per the Companies Act, 2013 and related clarifications/ circulars

• Definition of independent directors revised to now refer to material pecuniary transactions

• Deletion of some of the requirements relating to resignation of directors and issuance of formal letter of appointment to independent directors

• Definition of related party revised to refer to entity related under the Companies Act, 2013 or a related party as per Accounting Standards

• Change in the monetary limit for considering material related party transactions; material defined as 10% of annual consolidated turnover of the previous year

• Prior approval of related party transactions by Audit Committee; Audit Committee may grant omnibus approval subject to certain specified conditions

• Changes in the composition of Nomination and Remuneration Committee

• Disposal of shares in material subsidiaries to below 50% not to require approval of shareholders if divestment is made under a scheme of arrangement duly approved by a Court/ Tribunal

• Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year not to require prior approval of shareholders if the sale/ disposal/ lease is made under a scheme of arrangement duly approved by a Court/ Tribunal

The amended Clause 49 is applicable with effect from 1 October 2014 except Clause 49(II)(A)(1) dealing with appointment of woman director, which is applicable with effect from 1 April 2015.


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