Highlights of Amended Clause 49 of Listing Agreement

Among the series of amendments made to Clause 49 of the Listing Agreement (“Clause 49″), SEBI issued yet another circular on 15th September, 2014 amending Clause 49 aligning it with the Companies Act, 2013 (“Act”). This circular came into effect from October 1, 2014.

Applicability of Clause 49 shall extend to all listed companies except (i) companies with equity share capital of less than Rs 10 crore, (ii) companies having net worth not exceeding of Rs 25 crore, and (iii) companies listed on SME and SME-ITP platforms of the stock exchanges. However, it has been clarified by SEBI that the exemption is “for the time being”, and in case applicability of Clause 49 is extended to the exempted categories in future, then such companies shall have 6 (six) months to comply with the provisions of Clause 49.

Further, SEBI has set 1st April, 2015 as the date by which the companies will have to comply with the requirement of appointment of a woman director on the board of directors.

In order to be in consonance with the Act, SEBI has aligned the term of the Independent Director to two consecutive terms of five years each. Reappointment of such independent director after the completion of aforementioned period of two terms could be made subject to a cooling off period of three years as mentioned in the Act. Clause 49 also states that the terms and conditions of appointment of the independent directors shall have to be placed on the website of the company as against the earlier norms that required firms to disclose the letter of appointment along with the detailed profile of the director.

Present amendment also provides that the shareholding of any company in any of its material subsidiary can be reduced to less than 50%, or a company may cease to exercise control over the subsidiary by passing a special resolution in a general meeting. However, if such reduction is a result of disinvestment made under a scheme of arrangement duly approved by Court/Tribunal, then such company shall not be required to pass a special resolution approving such reduction or loss of control in the General Meeting.

SEBI also modified the concept of related party transactions by the present amendment and has amended the definition of “related party” to mean an entity related to the company, if such an entity is a related party (i) under section 2(76) of the Act; or (ii) under the applicable accounting standards.

The amended Clause 49 provides that a company shall formulate a policy on materiality of related party transactions, and dealing with related party transactions. Additionally, through this amendment SEBI has provided that the transaction shall be considered material if the transaction(s) either individually or taken together with previous transactions

during a financial year, exceeds 10% of the annual turnover as per the last audited financial statements of the company.

SEBI had previously provided that all related party transactions shall require prior approval of the audit committee. However, pursuant to these amendments an audit committee may also grant omnibus approval for related party transactions proposed to be entered into by the company subject to the conditions as prescribed thereunder. The audit committee can grant such approval only for a period of 1 year and the company shall apply for a fresh approval after the expiry of one year.

In addition SEBI has exempted the following related party transactions from obtaining approval from the audit committee:

  1. Transactions entered into between two government companies;
  2. Transactions entered into between a holding company and its wholly owned subsidiary.

Finally, another significant change is the requirement for creation of Risk Management Committee by a company. The Risk Management Committee shall be responsible for monitoring and reviewing of risk management plan and such other functions as may be deemed fit. This SEBI amendment provides that the Committee shall consist of members of Board of Directors, and may also include senior executives of the company. However, the Chairman of the Committee shall be a member of the Board of Directors.

Source – Mondaq

 

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