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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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