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SEBI proposed amendment in Clause 49 of Listing Agreement

Written By Admin on Sunday, 6 January 2013 | Sunday, January 06, 2013

  • In order to keep pace with fast changing business scenario , to align with the provisions of Companies Bill 2012 and to adopt international best practices relating to Corporate Governance , SEBI has come out with a consultative paper on Corporate Governance norms in India. The paper bring suggestion which will have far reaching effect and will completely change the landscape of Corporate Governance in case of listed companies.

  • It may be noted that the Companies Bill, 2012 is passed by Lok Sabha. Though SEBI suggested that SEBI may be given jurisdiction to prescribe matters relating to corporate governance for listed companies, it was decided by Ministry of Corporate Affairs that core governing principles of corporate governance may be provided in the bill itself. Thus, in the Companies Bill 2012, various new provisions have been included (which are not provided for in Companies Act, 1956) for better governance of the companies. Some of those new provisions are:
· Requirement to constitute Remuneration and nomination committee and Stakeholders
Grievances Committee
·  Granting of More powers to Audit Committee
·  Specific clause pertaining to duties of directors
·  Mode of appointment of Independent Directors and their tenure
·  Code of Conduct for Independent Directors
·  Rotation of Auditors and restriction on Auditor's for providing non-audit services
·  Enhancement of liability of Auditors
·  Disclosure and approval of RPTs
·  Mandatory Auditing Standards
· Enabling Shareholders Associations/Group of Shareholders for taking class action suits and reimbursement of the expenses out of Investor Education and Protection Fund
· Constitution of National Financial Reporting Authority, an independent body to take action against the Auditors in case of professional mis-conduct
· Requirement to spend on CSR activities
As per the concept note, the objective is to is to entice a wider debate on the governance requirement for the listed companies so as to adopt better global practices. While it needs to be ensured that the proposals suggested would not result in increasing the additional cost of compliances by huge margin and that the cost should not outweigh the benefit of listing, at the same time, it is necessary to bring back the confidence of the investors back to the capital market, for channelizing savings into investment, which is the need of the hour.


1. Appointment of independent directors by minority shareholders

There is a need to adopt a more professional, independent and transparent approach for appointing  independent  directors.  Presently, the  appointment/removal of  independent directors is done through election by majority. As such, they occupy their position at the pleasure of the controlling shareholders and may therefore be prone to act in accordance with the will of the major shareholders. This, in effect, may hinder their “independence” and  may  limit  their  efficacy, which  would  defeat  the  purpose  of  appointment  of independent directors.

Companies Bill, 2012 provides for the manner of selection of Independent Directors from a data bank maintained by anybody, institute or association notified by the Central Government. As per the Companies Bill, an independent director may be selected from a databank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors. Responsibility of exercising due diligence before selecting  a  person  from  the  data  bank  shall  lie  with  the  company making  such appointment.

Some jurisdictions, like Italy, have provisions for appointment of independent directors by minority shareholders. Similarly, in UK, FSA has proposed a dual voting structure whereby independent directors of premium listed companies with controlling shareholders must be approved both by the shareholders as a whole and the independent shareholders. However,  viability  of  this  proposal  in  Indian  context needs  to  be  examined.  The requirement  in  India  is  to  have one-third  or  half  of  the  member  of  the  Board  as Independent Directors. In such cases, if all the independent directors are to be appointed by “majority of minority”, it may result in “abuse by minority” (a large corporate firm can easily acquire majority holding among the non-promoter holders, who are normally dispersed and may appoint “its person” to destabilize its rival board).

Section 252 of the Companies Act, 1956 enables a public company having paid-up capital of five crore rupees or more or having one thousand or more small shareholders,  to elect a director elected by such small shareholders. Small shareholders” has been defined as a shareholder holding shares of nominal value of not more than Rs. 20,000 or such other sum as may be prescribed. Clause 151 of  the Companies Bill has similar provision enabling a listed company to elect such small shareholders in such manner and with such terms and conditions as may be prescribed. This provision may be workable in Indian context and it may be explored as to whether listed companies beyond a market cap need to be mandated to have at least one small shareholder director.

2. Cumulative voting for appointment of Independent Director:

There are suggestions that introduction of cumulative voting or proportionate voting, which is permitted in the Philippines and China, may provide alternatives to the director selection process and may foster stronger minority shareholder protection in India’s legal framework for corporate governance. Cumulative voting allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board. In contrast, in regular voting, shareholders cannot give more than one vote per share to any single nominee. With cumulative voting, one could choose to vote all available votes for one candidate, split his vote between two candidates, or otherwise divide his votes whichever way he wanted. However, there is no empirical evidence to state that cumulative voting has resulted in improving the governance practices. Presently, Companies Act, 1956 enables election of directors through cumulative voting. As per the provisions of the Companies Act, the articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a public company, according to the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise, the appointments being made once in every three years and interim casual vacancies being filled in accordance with the provisions. Hence, the said option is already provided in the Companies Act/bill and best left to the choice of the company.

3. Formal letter of appointment:

As per voluntary Guidelines issued by MCA, Companies should issue formal letters of appointment to Non- Executive Directors (NEDs) and Independent Directors - as is done by them while appointing employees and Executive Directors. The letter should specify:

-  The term of the appointment;

- The expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;

- The fiduciary duties that come with such an appointment along with accompanying liabilities;

- Provision for Directors and Officers (D&O) insurance, if any;

- The Code of Business Ethics that the company expects its directors and employee to follow;

- The list of actions that a director should not do while functioning as such in the company; and

- The remunerations, including sitting fees and stock options etc, if any.     

Such formal letter should form part of the disclosure to shareholders at the time of the ratification of his/her appointment or re-appointment to the Board. This letter should also be placed by the company on its website, if any, and in case the company is a listed company, also on the website of the stock exchange where the securities of the company are listed.

The aforesaid provision is also inserted in the Companies Bill, 2012. It is proposed to align the requirements of clause 49 with aforesaid provision.

4. Certification course and training for independent directors

SEBI has established National Institute of Securities Markets (NISM), a public trust, to add to market quality through educational initiatives. School for Corporate Governance, NISM, jointly works with the Global Corporate Governance Forum of International Finance Corporation in conducting workshops on various aspects of corporate governance. Apart from that NISM is conducting  certified  course  for  various  market participants.  A  separate  course  for independent directors may be devised by NISM for independent directors covering their role, liabilities, expectations from various stake holders, internal controls, risk management systems, business models and independent directors may be  mandated to  clear such courses, before their appointment. Apart from conducting induction courses, NISM may also conduct training/ review courses for independent directors.

As per the Guiding principles of Corporate Governance, the companies should ensure that directors are inducted through a suitable familiarization process covering, inter-alia, their roles, responsibilities and liabilities. Efforts should be made to ensure that every director has the ability to understand basic financial statements and related documents/papers. There should be a statement to this effect by the Board in the Annual Report. Besides this, the Board should also adopt suitable methods to enrich the skills of directors from time to time.

As part of good governance it is important that the people heading the organisation are up to date with the latest trends in their field. In order to ensure that they are kept up to date, regular training session can be conducted. The training requirements of the independent directors inducted by the listed companies would vary depending upon their qualifications, background, familiarity with business models followed by the company, its size, industry, organizational perspective etc.

OECD recommends that efforts by private-sector institutes, organisations and associations to train directors should be encouraged. Such training should focus on both discharge of fiduciary duties and value-enhancing board activities. International technical-assistance organizations should facilitate these efforts as appropriate.

There is a non-mandatory provision in Clause 49 of the listing agreement, regarding training of Board members stating that the listed company may train its Board members in the business model as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

While the requirement may be retained as non-mandatory, it is proposed to require disclosure of the methodology/details of training imparted to Independent Directors in the Boards Report.

5. Treatment of nominee director as Non-Independent Director:

Presently, explanation to Clause 49 (I) (A) (iii) provides that the nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors. However, it is clarified in the explanatory note that “institution” for the above purpose means only a public financial institution as defined in Section 4A of the Companies Act, 1956 or a corresponding new bank” as defined in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. Accordingly, the exemption given to ‘nominee directors’ shall be applicable only to the nominee directors appointed by the above institutions and other nominee directors will not be considered 'independent' for the purpose of Clause 49 of the Listing Agreement.

It may be stated that the requirement of Independent director has been incorporated in Clause 49 of the Listing Agreement so as to bring in an independent judgment on the deliberations of the board of the company, especially on issues of strategy, performance, management of conflicts and standards of conduct. Independent Directors are supposed to serve the interest of the other minority shareholders as well and to act in the paramount interest of the company as a whole. But this principle, may  be compromised if the director is appointed, under an agreement by a institution or body or by a lender, as precedence may be given to the interest of the nominating body over the paramount interest of the company and the expected independence of judgment of the nominee director may be lost..

With regard to nominee directors, even Narayana Murthy Committee Report, on the basis of which revised clause 49 has been amended, felt that institution of nominee directors may create conflict of interest as they may be answerable only to the institutions/organisations they represent  and generally, may take no responsibility for the company’s management or fiduciary responsibility to other shareholders. It is necessary that all directors, whether representing institutions or otherwise, should have the same responsibilities and liabilities.

The Companies Bill, 2012 defines Independent director as a non-executive director of the company, other than a nominee director. Further, the Bill defines “nominee director” as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.

Thus, it is proposed to exclude the nominee directors from the category of independent directors to align the provisions of Clause 49 with the bill.

6. Mandate minimum and maximum age for Independent Directors

There are no existing norms for independent directors in terms of age. While clause 49 of listing agreement fixes the minimum age for the ID to be 21 years, the Bill does not prescribes so.

As per Schedule XIII of Companies Act, 1956, a managing director or whole time director should have completed the age of 25 years and should not have attained the age of 70 years. Where he has not completed the age of 25 years, but has attained the age of majority or he has attained the age of 70 years, his appointment need to be approved by a special resolution passed by the company in general meeting. Otherwise, approval of the Central Government is required. The requirement of special resolution/Central Government approval is expected  to  address  any  concern  in  this  regard.  A  similar provision is also incorporated in the Companies Bill.

It would be difficult to stipulate maximum age for an independent director since it would differ from company to company based on the line of activities it is engaged in. The Bill prescribes maximum age limit for key managerial personnel to retire at age of 70, however for IDs, no retiring age is stipulated.

The proposal to have minimum and maximum age for the independent director may be examined in light of the above.

7. Mandating maximum tenure for independent director:

Presently, as per clause 49, Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company. However, this is only a non-mandatory requirement. Over a period of time, an independent director may develop a friendly relationship with the company and the board and may develop a casual approach, which may affect his envisaged role.

As per voluntary guidelines issued by MCA, an Individual may not remain as an Independent Director in a company for more than six years. A period of three years should elapse before such an individual is inducted in the same company in any capacity. No individual may be allowed to have more than three terms as Independent Director.

As per the Companies Bill, Independent Directors shall hold office for a term up to 5 consecutive years on the Board of a company, but shall be eligible for re- appointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report. He shall hold office for not more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director; During the said period of three years, he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.

It is proposed to align the requirements with the provisions of Companies Bill.

8. Requiring Independent directors to disclose reasons of their resignation:

As per clause 49, an independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director within a period of not more than 180 days from the day of such resignation or removal, as the case may be. However, there is no provision to disclose the reason of their resignation.

Often directors resign from the board, without quoting any reasons. Resignation of non- executive directors might be due to their disagreement with the management in certain matters. It has been suggested that the reason for the resignation of the independent director should be submitted to the Board of the company which in turn should circulate the same to the shareholders and inform the stock exchange in this regard.

It may be noted that the Combined Code on Corporate Governance, UK (June 2008) states that On resignation, a non-executive director should provide a written statement to the chairman, for circulation to the board, if they have any concerns.” But the Combined Code is not mandated, as the “Comply or Explain” principle prevails in UK. However, on the flip side, the proposal to disclose reasons of resignation to the shareholders & stock exchanges would attract speculative media coverage and affect sentiments of the stakeholders. Hence, non-executive directors may be required to submit the reasons for resignation thereof in writing. Letter of resignation may be tabled at the ensuing Board meeting and reasons thereof read out. Details of deliberations at the meeting may be recorded in  the  minutes and  appropriate disclosures may be  made in  the  Directors’ Report.

As per Companies Bill, a director may resign from his office by giving a notice in writing to the company and the Board shall, on receipt of such notice take note of the same and the company shall intimate the Registrar and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. Director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation.

It is proposed to align the requirements with the provisions of Companies Bill.

It may not avoid some directors quoting "personal reasons", however, atleast there would be requirement to ensure recording of such statement before the board. But anyone who uses the ‘personal reasons’ excuse may, if have other listed directorships, be required to explain in the same announcement why these ‘personal reasons’ do not make it necessary to resign from those positions, too.

9. Clarity on liabilities and on remuneration of independent directors:

There is need to bring in risk-return parity to the post of “independent directors” to attract quality people into the Board. Presently, there is no clarity on the liability of independent directors. The remuneration paid to independent directors (only sitting fees in most cases) is found to be inadequate considering the risk and responsibility associated with the post. Though the Companies Bill states that an independent director shall not be entitled to any stock option, it allows payment of sitting fees, reimbursement of expenses and profit related commissions.

Since most of the responsibilities for governance are placed on the independent directors, to attract competent persons to the board (to improve their participation in the Board and committee meetings), it is reasonable to provide for some minimum monetary compensation. On one hand the quantum of compensation should not be affect their independence and at the same time, it should attract competent persons to occupy the position in the board. Presently, as per clause 49 independent directors are entitled to get directors remuneration (may be a commission on the percentage of net profit, but not monthly remuneration as it may affect their independence and role) apart from the sitting fees. But, it is important to have a balance of fixed and variable pay and introduce an objective process of board evaluation facilitated by external experts.

As per clause 49 of corporate governance, All fees/compensation, if any paid to non- executive  directors,  including  independent  directors,  shall  be  fixed  by  the  Board  of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate.

As per the proposed Companies Bill, independent directors shall not be entitled to any remuneration, other than sitting fees, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. It is proposed to align the requirements of Clause 49 with the provisions of Companies Bill.

The Companies Bill 2012 also makes independent director liable, only in respect of such acts of omission or commission which had occurred with his knowledge, attributable through Board processes and with his consent or connivance or where he had not acted diligently.

10. Performance evaluation of independent director:

Presently, Clause 49 requires that the performance evaluation of non-executive directors be done by a peer group comprising the entire Board of Directors, excluding the director being  evaluated; and  Peer Group  evaluation could  be  the  mechanism to  determine whether to extend / continue the terms of appointment of non-executive directors. But this is a non-mandatory requirement.

The Companies Bill mentions that performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated. On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

It is proposed to mandate the requirement of performance evaluation for Directors and to require such evaluation report of  the independent director should also based on his attendance and contribution to the board/committee meetings and such appraisal shall be placed before the nomination committee for taking a decisions for reappointment.

11. Lead Independent Director

The OECD Principles of Corporate Governance (Principle VI (E)) envisages the post of lead-independent director to chair the meetings of outside directors. The UK Corporate Governance Code provides for the post of Senior Independent Director whose name shall be disclosed in the Annual Report. The code also provides that the senior independent director should be available to shareholders if they have concerns which contact through

the normal channels of chairman, chief executive or other executive directors has failed to resolve or for which such contact is inappropriate. The 17 guiding principles of Corporate governance also provides for a Lead Independent Director. These principles envisage the lead director as an independent chief among all board members who assists in co- ordinating the activities and decisions of the other non-executive and/or independent directors and chairs the meetings of Independent Directors. In case the company has an Independent Chairman, he shall act as the Lead Independent Director. On a flip side, such proposal may lead to creation of power centre among independent directors, whereas independent directors are collectively expected to function in tandem in the interest of all the stakeholders.  To avoid the same, the post may be rotated among the independent directors every three years. This proposal may be examined in light of the above.

12. Separate meetings of Independent Directors

Meetings of independent directors in the absence of management/executive directors provide an opportunity for the Independent Directors to express their views freely and without hesitation and are expected to improve the level of corporate governance to a higher level. Pursuant to passing of the Sarbanes Oxley Act, the stock exchanges in US amended their listing rules to provide for a compulsory meeting of Independent/Non- management/outside  directors separately in the absence of the executive directors. In the United States, NASDAQ Listing Rules (Rule 5605 (2)) requires independent directors to have regularly scheduled meetings at which only independent directors are present, at least twice a year. Rule 303.A.03 of the NYSE Listing Rules also contains similar requirement. UK Corporate Governance Code also provides for meetings of the non- executive directors led by the senior independent director at least annually to appraise chairman’s performance and on such other occasions as are deemed appropriate. The Companies Bill 2012 also provides for separate meetings of Independent Directors at least once a year. In these meetings, Independent Directors would be expected to examine internal controls and general governance practices prevailing in the company and bring out any inefficiency to the attention of shareholders and their report in this regard may form part of the annual report. Further, such meetings may also review the performance of the Chairman, non-independent directors and the Board as a whole. It is proposed to amend clause 49 to align it with the requirements of Bill.

 13. Restriction on the number of independent directorships

It has been suggested that there should be a cap on the number of independent directorships a person can serve, so that he can have necessary time to analyse the agendas of the committee meetings and the board meetings of the company in which he is acting as Independent director and to make effective contributions in this regard.

Presently, though there is no restriction on the number of independent directorship. But it is  pertinent to  note  that  Section 275  of  the Companies Act  restricts the  number of directorship of a person to fifteen public companies whereas the Companies Bill proposes to restrict the number of directorships of a person to ten public companies.

Though the Companies Act puts a ceiling of 15 directorships of public companies, among public companies, listed ones demand a much greater degree of commitment from an Independent Director, including attending at least four board meetings and several meetings of one or more of the many committees during a year.

As  per  the  Voluntary  Guidelines  issued  by  MCA,  the  maximum number  of  public companies in  which  an  individual may  serve  as an  Independent Director should  be restricted to seven. It needs to be examined as to whether to restrict number of independent directorships.

14. Separating the position of Chairman and that of the Managing Director / CEO

There are suggestions that the position of Chairman and that of the Managing Director / CEO   should  be   segregated  to   avoid   one  person  having  unfettered  powers  of management. It might be noted that requirement to segregate the role of Chairman and CEO is common among the most of the developed jurisdiction like US, UK France etc.

As per Voluntary Guidelines issued by MCA, to prevent unfettered decision making power with  a  single  individual,  there  should  be  a clear  demarcation  of  the  roles  and responsibilities of the Chairman of the Board and that of the Managing Director/Chief Executive  Officer (CEO).  The  roles  and  offices  of  Chairman  and  CEO  should  be separated, as far as possible, to promote balance of power.

As per, OECD report on "Corporate Governance and the Financial Crisis - Conclusions and emerging good practices to enhance implementation of the Principles", when the roles of CEO and the Chairman are not separated, it is important in larger, complex companies to explain the measures that have been taken to avoid conflicts of interest and to ensure the integrity of the chairman function.

As per Companies Bill, 2012, an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time unless,

(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesess 


As per Clause 49, where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.

It is proposed to align the requirements of clause 49 with the Bill.

15. Board diversity

Report  of  the  Committee  constituted  by  MCA  to  formulate  a  Policy  Document  on Corporate Governance mentions the necessity of having more diversified board, which contributes to better performance, since in such cases decisions would be based on evaluating more alternatives compared to homogenous boards. Diversity, in all its aspects, serves an important purpose for board effectiveness. It can widen perspectives while making decisions, avoid similarity of attitude and help companies better understand and connect with their stakeholders. The handful number of woman directors in the board of Indian listed companies may explain the need for bringing gender diversity in the board. The Companies Bill, 2012 has taken some positive steps in this regard by providing the Central Government with the power to prescribe rules for providing minimal women’s representation on corporate boards in certain classes of companies.

Presently, Clause 49 states that the company may ensure that the person who is being appointed as an independent director has the requisite qualifications and experience which would be of use to the company and which, in the opinion of the company, would enable him/her to contribute effectively to the company in his capacity as an independent director. Further, it may be examined whether to make the nomination committee responsible for ensuring that persons from divergent background and gender are nominated for maintaining board diversity.

16. Succession Planning

Principle VI (D) (3) of the OECD Principles of Corporate Governance ‘Responsibilities of the Board’, requires the Board to oversee succession planning. Globally, the standards on succession planning differ in various jurisdictions. In the United States, though succession planning is not mandated, shareholders can require companies to disclose and even put to vote the succession plan of the listed companies. The UK Corporate Governance Code recommends that ‘the board should satisfy itself that plans are in place for the orderly succession for  appointments to  the board  and  to  senior  management. The  Guiding Principles of Corporate Governance also lists Succession Planning as one of the guiding principles of corporate governance. The best way to ensure  that a company  does not suffer due to a sudden unplanned  for gap in leadership is to develop an action plan for a successful succession transition. Hence, Board of a listed company may be required to ensure that plans are in place for the orderly succession for appointments to the board and senior management. Further, the viability of mandatory disclosure of Succession Planning to Board/Shareholders at periodic intervals may also be examined.

17. Risk Management

Clause 49(IV)(C) of the Listing Agreement requires the company to lay down procedures to inform Board members about the risk assessment and minimization procedures and to review them periodically to ensure risk control. OECD Report on "Corporate Governance and the Financial crisis - Conclusions and emerging good practices" mentions the need to have an effective risk management as one of the four major findings of the crisis. The 17 guiding principles of Corporate governance enlists Risk Management and Crisis management as two of the corporate governance principles. The Companies Bill requires companies to disclose the development and implementation of risk management policy in the Board’s Report. Further, Clause 177 of the Bill enlists evaluation of risk management system  as  one  of  the  functions  of  the  Audit  Committee.  In  this  regard,  it  may  be deliberated on whether the risk management be made the ultimate responsibility of the Board or the responsibility can be delegated to the Risk Management Committee or to the Audit Committee. The feasibility of appointment of Chief Risk Officer/Risk Manager for large listed companies may also require consideration. Further, it has to be examined as to whether more specific parameters/requirements such as framing a risk management plan, its compulsory monitoring and reviewing by a Board/Board Committee and the disclosure thereof to the shareholders at periodic intervals (preferably on annual basis) be laid down in the Listing Agreement.

18. Reporting of the internal auditor

Audit Committee has been assigned a significant role in the Companies Act, 1956 and in the listing agreement. Audit Committee is expected to oversee the company’s financial reporting process, review periodical and annual financial statements (including Related Party transactions) and adequacy of the internal control systems and to review the findings by the internal auditors and also the oversight of the company’s risk management policies and programs.

Appropriate reporting relationships are absolutely critical if internal auditing is to achieve the independence, objectivity, and organizational stature necessary to fulfil its obligations and mandate to effectively assess internal controls, risk management, and governance. To achieve necessary independence, best practices suggest that the internal auditor should report directly to the audit committee or its equivalent. For day to day administrative purposes, the internal auditor should co-ordinate with the senior most executives (i.e. CEO/CFO) of the organization. This suggestion needs to be deliberated upon.

19. Mandatory rotation of audit partners

The quality of financials reported by companies and the true and fair view of the financial statements submitted by listed entities to the stock exchanges have, of late, come into sharp focus, after the Satyam episode. SEBI has recently taken various steps in this regard to repose the faith in the audit done by listed companies

·    by mandating compliance with accounting standards,

·    by doing peer review audit of Sensex and Nifty Companies,

·    by mandating the appointment of peer reviewed auditor for listed companies and companies proposing to list,

·    by constituting a Forensic Accounting Cell,

·    by mandating re-statement of accounts, by taking action against auditors etc.

In this context, it was felt relevant to discuss the need for independence of the statutory auditors with respect to the listed entity. A longer association between a particular audit firm and a listed entity may lead to developing friendly relationship between the two and defeat the true sense of independence of the auditors. Mandatory rotation of statutory auditors could break such a continued long-term association of an audit firm with the management of the listed entity.

Auditors may become stale and view the audit as a simple repetition of earlier engagements.  Mandatory rotation may increase the possibility that the new auditors may detect any oversight, thereby adding to the pressure for the auditor to take a tough stand on any contentious issues. Companies Bill 2012 requires rotation of auditors and states that no listed company shall appoint or re-appoint— (a) an individual as auditor for more than one term of five consecutive years; and (b) an audit firm as auditor for more than two terms  of  five  consecutive years.  It  further  states  that  an  individual auditor  who  has completed  his  term  shall  not  be  eligible  for  re-appointment as  auditor  in  the  same company for five years from the completion of  his term. It  is  proposed to  align the requirement of listing agreement with the Bill.

20. Making Whistle Blower Mechanism a compulsory requirement:

Presently,  as  per  clause  49,  the  listed  company  may  establish  a  mechanism  for employees to report to the management, their concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization. However this requirement is non-mandatory.

It may be noted that MCA Voluntary Guidelines also has a similar requirement.

The companies should ensure the institution of a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct or  ethics policy. The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Chairperson of the Audit Committee in exceptional cases.”

Further, the guiding principles of corporate governance enlisted by MCA stresses the need to  have  well  laid  out  Whistle-Blower  Policy mechanism.  The  need  for  an  effective legislation is essential in India with the growing number of scams related to corrupt practices in corporate India. There are global legislations in place, which protect whistle blowers such as The Public Interest Disclosure Act, 1998, in the UK (which protects whistle blowers from victimization and dismissal) and the Sarbanes Oxley Act, 2002 (which provides for the protection of whistle blowers and is applicable even to employees in public listed companies).

The Companies Bill 2012 has mentioned the concept in respect of higher accountability standards to be maintained by companies. Further, Clause 177 (9) of the Bill requires that every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. The vigil mechanism shall provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases.

Within the legal framework specified above, companies should look to formulate and implement their own whistleblower policies. Several large organisations have already implemented the same. A committee set up to look into the alerts raised by whistleblowers should investigate such disclosures. A non-executive director could act as an ombudsman and take charge of such an investigation. The whistle blower policy of the company should be under the ambit of the Audit Committee. The identity of the whistleblower and any other employee investigating the matter should be protected. If the disclosures are found to be true, suitable action should be taken and efforts should be made to protect the whistleblower. The action that it takes should be adequate and should act as a deterrent against such offences in the future. The policy should be such that it encourages such disclosures to be made but ensures that frivolous accusations do not become a means to harass senior management.

It is propose to align the requirements of clause 49 with the provisions of the Companies


21. Making the Remuneration committee a mandatory one and expanding its scope:

Constitution of a Remuneration Committee is a non-mandatory requirement under Clause 49.  Further,  the  clause  states  that  to avoid  conflicts  of  interest,  the  remuneration committee, which would determine the remuneration packages of the executive directors may comprise of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director.

It may be noted that certain well-developed jurisdictions, including US and UK, have the concept of “Nomination committee” which consist of Independent directors, the role of which, inter-alia includes, suggesting to the Board the name of the qualified persons for appointment as independent directors. The suggestion of the nomination committee can be carried forward to the General meeting and this will ensure that there is an objective criteria for appointing the Independent directors and help in reducing the influence of the Promoters/major stakeholders in appointing the independent directors. Further, this committee may also review the remuneration packages to the executive directors and Key

Managerial Persons regularly. The committee shall disclose the remuneration policies in the Board’s report.

As per Companies Bill, 2012, Board of Directors of every listed company shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors  out  of  which  not  less  than one  half  shall  be  independent  directors.  Such committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down and recommend to  the  Board  their  appointment and  removal  and  shall  carry  out  evaluation of  every director’s performance. Such committee shall also formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. It shall ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successful,  relationship of  remuneration to  performance is clear  and  meets appropriate performance benchmarks; and remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long term performance objectives appropriate to the working of the company and its goals:

It is proposed to align the requirement of clause 49 with the provisions of Companies Bill.

22. Enhanced disclosure of remuneration policies:

It  may  be  noted  that,  on  average, the  remuneration paid  to CEOs  in  certain Indian Companies are far higher than the remuneration received by their foreign counterparts and there is no justification available to that effect.  Presently, Companies Act, 1956 specifies the limit on managerial remuneration and provides for central government approval (approval for the remuneration beyond the specified limit). Similar requirements are also incorporated in the Companies Bill.

In this regard, it may also be noted that the Companies Bill requires the listed companies to constitute Nomination and  Remuneration Committee”, which  shall  recommend to  the Board a remuneration policy for the directors, key managerial personnel and other employees. While  formulating the  policy, it  should inter-alia ensure that  it  involves a balance between fixed  and  incentive pay  reflecting short and  long term performance objectives appropriate to the working of the company and its goals. Further,  as per the Companies Bill,  listed companies need to disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed. The above provisions may be incorporated in the Listing Agreement.

23. Stakeholders Relationship Committee:

Presently,    Clause    49    requires    constitution    of    ‘Shareholders/Investors    Grievance Committee’, under the chairmanship of a non-executive director for specifically looking into the redressal of investors' complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc.

Clause 178 of the Companies Bill, 2012 mandates constitution of a Stakeholders Relationship Committee which shall be chaired by a non-executive director for companies which consists of more than 1000 shareholders,debenture-holders, deposit-holders and any  other security  holders  at  any  time  during  a  financial year.  This  committee shall consider and resolve the grievances of security holders of the company.

It is proposed to amend the listing agreement, so as to make it in line with the provisions of Companies Bill by expanding the scope of Shareholders/Investors Grievance Committee.

 24. Mandating e-voting for all resolutions of a listed company:

To ensure good governance, Section 192A was inserted in the Companies Act, 1956 through Companies (Amendment) Act, 2000. The said section, read with Companies (Passing of the resolution by postal ballot) Rules, 2011, requires listed companies to conduct certain businesses only by way of postal ballot, instead of transacting it in general meeting of the company. Further, it encourages the companies to transact any other business through postal ballot. Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 specifies nine businesses which should be transacted only through postal ballot. In addition, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Delisting of Equity Shares) Regulations, 2009 requires listed companies to pass certain additional businesses through postal ballot. However, experience shows that the postal ballot forms returned are negligible. It may be because of the fact that in some cases, the ballot forms do not reach the shareholders on time. Further, Section 192A mentions that “postal ballot” also includes voting by electronic mode.

Considering the same and pursuant to the budget proposal for 2012 for providing opportunities for wider shareholder participation in important decisions of the companies through electronic voting facilities, SEBI has issued circular dated July 13, 2012 mandating the listed companies to provide e-voting facility also to their shareholders, in respect of those businesses which are transacted through postal ballot by the listed companies.  To begin with, this  requirement was  made applicable to top  500  listed entities. Though Companies Act, 1956 requires businesses relating to consideration of the annual report, declaration of a dividend, appointment of directors in the place of those retiring, and appointment and the fixing of remuneration of the auditors to be passed at Annual General Meeting, nothing prevents the companies from offering postal ballot /e-voting facilities to their shareholders. Further, the Companies Bill also specifically recognises voting by electronic means.  Hence, the proposal to require listed companies to provide postal ballot/e-voting  facilities  for  all  the  resolutions  to  be  passed at  general  meetings  may  be explored, so as to enable wider participation of shareholders in the corporate democracy.

25. Abusive RPTs:

Abusive RPTs are real concerns as they can be used for personal aggrandisement of controlling shareholders, especially in  Asian  jurisdictions, which  are  characterised by concentrated  shareholdings.  This  would  dent  the  confidence  of  the  investors  and jeopardise the process of channelizing savings into capital market/investment. There are two modes for regulating RPTs - approval based controls which require approval by Board of Directors/ Shareholders and disclosure based controls required under AS-18. Focus should not be  on  making approval norms stringent but on  making disclosure norms effective

  Some of the proposals to curb such abusive RPTs are as follows:

  a)  Requiring approval by shareholders for divestment of major subsidiaries:

Divestment of major subsidiaries does not require shareholder’s approval as per the existing law. There have been instances where ownership of major subsidiaries was transferred to controlling shareholders, without taking the approval of other shareholders.

Section 292 of the Companies Act, 1956 mentions that the powers for investing funds of the company have to  be exercised by the board only in its meeting by means of resolutions passed at meeting (i.e. it cannot be passed through circulation). Section 293 (1) (a) of the Companies Act, 1956 requires shareholder’s approval for selling off whole or  substantial  part  of  an  undertaking.  However,  there  is no  specific  requirement regarding selling up of the shares in subsidiary (i.e. divesting) in the Companies Act. This has led to abuse by controlling shareholders by divesting the major subsidiaries without proper valuation to the companies indirectly owned by them.

This lacuna is left uncorrected in the Companies Bill. As SEBI have powers under SEBI Act,  1992  to  prescribe  listing  conditions,  which  may  be  in  addition  to  but  not  in derogation of the provisions of the Companies Act, we may require the listed companies to obtain shareholders approval, in case of divestment of shares in subsidiaries through inserting a provision in listing agreement.

  b) Immediate and continuous disclosures of material RPTs:

Presently, RPTs are disclosed to Stock Exchanges only annually. This limits the effectiveness of the disclosure as the information reaches the investors much after the transactions were carried out.

Many of the jurisdictions such as Singapore, Italy and Israel have provisions mandating immediate disclosure of the material RPTs. This would help in better scrutiny of the transactions by investors, public, regulators and the media thereby limiting scope for abusive RPTs. This requirement can be mandated by amending the reporting requirements specified under the Listing Agreement. Suitable threshold limits for the reporting requirements need to be analyzed.

c) Prohibiting/regulating grant of affirmative rights to certain investors:

Whenever a company seeks funds from a private equity investor or a financial institution, it  will enter into shareholders/share subscription or investment agreement. In these agreements, it is normal to find clauses pertaining to "drag along rights" and "tag-along rights". Apart from these rights, sometimes these agreements do grant certain superior rights  to  these  investors      like  access  rights  information  (right  to receive  selective information), right to appoint their nominee directors in the board, requirements that the presence of their nominee is necessary to constitute a quorum etc. These rights are subsequently incorporated into the articles of the company by amending the articles. Further, in the case of Messer Holdings Limited, Bombay High Court on September 1,

2010, has held that such consensual agreements between shareholders are legally valid.

Though these rights are intended to protect the institutions investing their funds in these companies, since these rights are not available to all the other shareholders, especially minority shareholders, it is debatable as to whether these superior rights may lead to oppression of minority. Apart from that, there are also concerns regarding selective sharing  of price  sensitive  information  to  these  investors. Though,  these may  be oppressive to  minority shareholders, it appears that presently there are no restrictions for a listed company to  enter into such an agreement, as such an amendment to articles may not, presently, be in violation of clauses of listing agreement or SEBI Regulations. The remedy can be obtained by minority holders through a petition made under Section

397/398 to the Company Law Board (against oppression and mis-management).

In this regard, it has to be examined whether listed company should be permitted to enter into such an agreement granting superior affirmative rights to selective investors

d)  Approval of major RPTs by ‘Majority of the minority

Many of the abusive RPTs are undertaken between company groups controlled by the controlling shareholders. As such, providing for shareholders approval of RPTs may not serve the intended purpose as the controlling shareholders intended to do an abusive RPT would have sufficient majority to obtain the shareholder approval easily. Hence, there is a requirement for mandating approval of such major RPTs by majority of the minority or disinterested shareholders. Such a requirement is in practice in some of the developed jurisdictions.

As suggested by SEBI, Clause-188 of the Companies Bill, 2012 contains a similar provision prohibiting interested shareholders from voting in Related Party Transaction approvals. Provisions of listing agreement need to be aligned with the Bill.

e)  Pre-approval of RPTs by Audit Committee and encouraging them to refer major RPTs for third party valuation.

Presently, the audit committee reviews RPTs on a periodic basis after such transactions have taken place. Such reviews are of limited use as the transaction could not be undone even if the Audit Committee expresses negative opinion on the transactions.

This handicap can be removed if the requirement of pre-approval by audit committee of major RPTs and major restructuring proposals could be mandated.

The  Companies Bill,  inter-alia, requires the  Audit  Committee to approve or  modify transactions with related parties, scrutinize inter-corporate loans and investments and value undertakings or assets of the company, wherever it is necessary. Further, Companies Bill gives Audit Committee the authority to investigate into any matter falling under its domain and the power to obtain professional advice from external sources and have full access to information contained in the records of the company. It is proposed to align the requirements of listing agreement with the Bill.

f)  Approval of Managerial Remuneration by disinterested shareholders

The remuneration paid to CEOs in certain Indian Companies is far higher than the remuneration received by their foreign counterparts and there is no justification given to that effect. Presently, Companies Act, 1956 specifies the limit on managerial remuneration and provides for central government approval for the remuneration beyond the specified limit. Similar requirements are also incorporated in the Companies Bill..

It is observed that most of the Indian companies are managed by promoters and this brings in the concern of excessive managerial remuneration to executives forming part of promoter/promoter group, which partakes the nature of an abusive related party transaction.

Clause 188 of the Companies Bill, 2012 contains a provision prohibiting interested shareholders from voting in Related Party Transaction approvals. In line with the above, it is proposed to consider mandating approval of disinterested/minority shareholders for managerial remuneration beyond a particular limit.

g)  Expanding the scope of Related Party Transactions

Presently, related party transactions, as defined in AS-18 is considered for the purpose of Listing Agreement.  The converged Accounting Standard   Ind    AS-24   which corresponds to IAS-24 and deals with RPTs contains a wider definition of related parties as well as Key Managerial Persons. Existing AS 18 covered key Managerial Personnel (KMPs) of the entity only, whereas, Ind AS 24 covers KMPs of the parent as well. There is extended coverage in case of joint ventures in Ind AS 24 whereas as per existing AS 18, co-ventures or co-associates are not related to each other. Ind AS 24 requires extended disclosures for compensation of KMPs under different categories, whereas the existing AS 18 does not contain a specific provision in this regard. Further, Ind AS 24 requires disclosure of the amount of the transactions” whereas existing AS 18 gives an option to  disclose  the  “Volume  of  the  transactions either  as  an  amount or as  an appropriate proportion.

Considering the wider coverage and more specificity of disclosure provided in Ind-AS 24, it is proposed to consider adoption of the definition and requirements in Ind-AS 24 for the purpose of requirements of the listing agreement.

26. Fiduciary responsibility of controlling shareholders

Controlling shareholders, better known as promoters in India, who controls the management of the company, owe a fiduciary responsibility to the minority shareholders and the company as a whole. There have been instances where the controlling shareholders have used the company to steer their personal interests sacrificing the overall interest of the company, mostly through abusive RPTs.

Current laws/regulations do not explicitly lays down fiduciary responsibilities of the controlling shareholders.

In UK, FSA has proposed to reinstate the express provision that a listed company must be capable of acting independently of a controlling shareholder and its associates. Accordingly, it has proposed definitions for controlling shareholders, independent shareholders, etc. Further, proposal has also been made to mandate the listed company to enter into a relationship agreement, where it has a controlling shareholder, and that this agreement must comply with content requirements set out by FSA which may, inter-alia, include the following:

· transactions and relationships with a controlling shareholder are conducted at arm’s length and on normal commercial terms;

· a controlling shareholder must abstain from doing anything that would have the effect of preventing a listed company from complying with its obligations under the Listing Rules;

· a controlling shareholder must not influence the day to day running of the company at an  operational  level  or  hold  or  acquire  a  material  shareholding  in  one  or  more significant subsidiaries;

· the relationship agreement must remain in effect for so long as the shares are listed and the listed company has a controlling shareholder, etc.

The requirement for a relationship agreement will apply to a listed company on a continuous basis. It is also proposed to subject all material amendments to the relationship agreement to a shareholder vote that excludes a controlling shareholder in order to allow independent shareholders to  have  a  say  in  how  the  relationship between the  listed company and a controlling shareholder is managed and how it develops going forward. In determining what constitutes a material change, the listed company should have regard to the cumulative effect of all changes since the shareholders last had the opportunity to vote on the relationship agreement or, if they have never voted, since listing.

In line with the above, it is proposed to lay down specific fiduciary responsibilities of controlling shareholders and also consider the feasibility of mandating relationship agreement between the company and the controlling shareholder specifying the duties and responsibilities of controlling shareholders.

 27. Strengthening Private Sector Enforcement

Enforcement of Corporate Governance can be through intervention of public sector agencies such as government, regulators and government controlled stock exchanges or through private sector intervention through class action suits etc. The key actors of private enforcement may include individual shareholders and stakeholders, self-regulatory organisations and institutions to which supervision and regulation is delegated, private- sector stock exchanges, associations of industries, shareholder associations, etc. The OECD Thematic Review on  Supervision and  Enforcement has  observed that  private supervision and enforcement can complement public supervision and enforcement, but in most countries are seldom used.

In this regard, the following steps, which are expected to strengthen the private sector enforcement, may be considered:

·    Recognising and encouraging proxy advisory firms

·    Improving  financial  and  other  support  to  investor  associations/groups for  group action

·    Delegating more enforcement powers to stock exchanges

·    Improving Investor education and awareness and the grievance redressal machinery

28. Improving   investor   education   and   awareness  for   better  participation  and deliberations at General Meetings

Investor education has been hailed as the key for improving governance standards and preventing abusive RPTs. This would not only improve the level of participation in general meetings but also in improving the quality of deliberations happening at the General Meetings.

SEBI has been the front runner in conducting investor education and awareness programmes.

29. Provision for regulatory support to class action suits

Presently, Regulation 5 (2) of SEBI (Investor Protection and Education Fund) Regulations, 2009 mentions that Investor Protection and Education Fund created by SEBI may, inter- alia, be used for aiding investors’ associations recognized by SEBI to undertake legal proceedings (not  exceeding seventy  five  per  cent.  of  the  total expenditure on  legal proceedings) in the interest of investors in securities.

Though there are provisions for oppression and mismanagement, there is no express recognition of class action suits in Companies Act, 1956. However, Clause 245 of the Companies Bill, 2012 expressly provides for class action suits and Clause 125 provides for re-imbursement of expenses incurred in class action suits from the Investor Education and Protection Fund of MCA.

This provision in the proposed Companies Bill, if enacted, would address the issue.

 30. Role of Institutional Investors

Corporate governance codes and guidelines have long recognised the important role that institutional investors have  to  play  in  corporate governance. The  effectiveness and credibility of the entire corporate governance system and the company oversight to a large extent depends on the institutional investors who are expected to make informed use of their shareholders’ rights and effectively exercise their ownership functions in companies in which they invest. Increased monitoring of Indian listed corporations by institutional investors will drive the former to  enhance their corporate governance practices, and ultimately their ability to generate better financial results and growth for their investors. At present, there are four main issues with role of institutional investor and corporate governance:

·   Issues relating to disclosure by institutional investors of their corporate governance and voting policies and voting records

·   Issues relating to the disclosure of material conflicts of interests which may affect the exercise of key ownership rights

·   Focus on increasing the size of assets under management rather than on improving the performance of portfolio companies.

· Institutional investors are becoming increasingly short-term investors.

Several countries mandate their institutional investors acting in a fiduciary capacity to disclose their corporate governance policies to the market in considerable details. Such disclosure requirements include an explanation of the circumstances in which the institution will intervene in a portfolio company; how they will intervene; and how they will assess the effectiveness of the strategy. In most OECD countries, Collective Investment Schemes (CIS) are either required to disclose their actual voting record, or it is regarded as good practice and implemented on an “comply or explain” basis.

In addition, Principle 1G of the OECD Principles calls for institutional investors acting in a fiduciary capacity to disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights.

SEBI has recently required listed companies to disclose the voting patterns to the stock exchanges and Asset Management Companies of Mutual Funds to disclose their voting policies and their exercise of voting rights on their web-sites and in Annual Reports. Ministry of Corporate Affairs' (MCA) initiative on E-voting will also enable scattered minority shareholders to exercise voting rights in General Meetings.

a)  Institutional investors should have a clear policy on voting and disclosure of voting activity

Institutional investors should seek  to  vote  on  all  shares held.  They  should not automatically support the board.  If they have been unable to reach a satisfactory outcome through active dialogue then they should register an abstention or vote against the resolution. In both instances, it is good practice to inform the company in advance of their intention and the reasons thereof. Institutional investors should disclose publicly voting records and if they do not, the reasons thereof.

     b)  Institutional investors to have a robust policy on managing
            conflicts of interest
An institutional investor's duty is to act in the interests of all clients and/or beneficiaries when considering matters such as engagement and voting. Conflicts of interest will inevitably arise from time to time, which may include when voting on matters affecting a parent company or client. Institutional investors should formulate and regularly review a policy for managing conflicts of interest.

     c)  Institutional investors to monitor their investee companies

Investee companies should be monitored to determine when it is necessary to enter into an active dialogue with their boards. This monitoring should be regular and the process should be clearly communicable and checked periodically for its effectiveness.

As part of these monitoring, institutional investors should:

· Seek to satisfy themselves, to the extent possible, that the investee company's board and committee structures are effective, and that independent directors provide adequate oversight, including by meeting the chairman and, where appropriate, other board members;

· Maintain a clear audit trail, for example, records of private meetings held with companies, of votes cast, and of reasons for voting against the investee company's management, for abstaining, or for voting with management in a contentious situation; and

· Attend the General Meetings of companies in which they have a major holding, where appropriate and practicable.

Institutional investors should consider carefully the explanations given for departure from the Corporate Governance Code and make reasoned judgements in each case. They should give a timely explanation to the company, in writing where appropriate,  and  be prepared  to  enter  a  dialogue  if  they  do  not  accept  the company's position.

Institutional investors should endeavor to identify problems at an early stage to minimise any loss of shareholder value. If they have concerns they should seek to ensure that the appropriate members of the investee company's board are made aware of them.

Institutional investors may not wish to be made insiders. They will expect investee companies and their advisers to ensure that information that could affect their ability to deal in the shares of the company concerned is not conveyed to them without their agreement.

   d) Institutional investors to be willing to act collectively with other investors where appropriate

At times collaboration with other investors may be the most effective manner to engage. Collaborative engagement may be most appropriate during significant corporate or wider economic stress, or when the risks posed threaten the ability of the company to continue. Institutional investors should disclose their policy on collective engagement. When participating in collective engagement, institutional investors should have due regard to their policies on conflicts of interest and insider information.

    e)  Institutional investors to establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value

Institutional  investors  should  set  out  the  circumstances when they  will  actively intervene and regularly assess the outcomes of doing so. Intervention should be considered regardless of whether an active or passive investment policy is followed. Initial discussions should take place on a confidential basis. However, if boards do not respond constructively when institutional investors intervene, then institutional investors will consider whether to escalate their action, for example, by

·   holding additional meetings with management specifically to discuss concerns;

·     expressing concerns through the company's advisers;

·   meeting with chariman, senior independent director, or with adviser;

·     intervening jointly with other institutions on particular issues;

·     making a public statement in advance of the AGM;

·     submitting resolutions at shareholders' meetings; etc
   f) Institutional investors to report periodically on their responsibilities and voting activities

Those who act as agents should regularly report to their client’s details of how they have discharged their responsibilities. Such reports may comprise of qualitative as well as quantitative information. The particular information reported, including the format in which details of how votes have been cast are presented, should be a matter for agreement between agents and their principals.

Those that act as principals, or represent the interests of the end-investor, should report at least annually to those to whom they are accountable on their policy and its execution.

Like US funds, Indian asset management funds are now required to disclose their general policies and procedures for exercising the voting rights in respect of the shares held by them on their websites as well as in the annual report distributed to the unit holders from the financial year 2010-11. However, there is only a marginal increase in for/against votes and many funds fail to even attend meetings and have abstention as  a  policy.  Even  among  funds  that  voted,  there  is  little  alignment between the votes and the voting policy.

In view of the above, existing policy need to be examined. It may be deliberated on how to create incentives for institutional investors that invest in equities to become more active the exercise of their ownership rights without coercion, without imposing legitimate costs on them, and given India's specific situation.

        Fund houses should be mandated to adopt the global practice of  quarterly   vote reporting and fund-wise vote reporting and to adopt detailed voting policies. Further, vote reporting by fund houses should also be subject to audit.

31. Enforcement for non-compliance of Corporate Governance Norms

While much has been talked on the policy aspect of the Corporate Governance, at present monitoring of the compliance of the same is done only through disclosures in the annual report of the company and periodic disclosures of the various clauses of Clause 49 of the Listing Agreement on the stock exchange website.

·  As per Clause 49 of the Listing Agreement, there should be a separate section on Corporate Governance in the Annual Reports of listed companies, with detailed compliance report on Corporate Governance. The companies should also submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as  per the prescribed format. The report shall be  signed either by  the Compliance Officer or the Chief Executive Officer of the company.

·  The listed companies should obtain a certificate from either the auditors or practicing company secretaries regarding compliance with all the clauses of Clause 49 and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company. Stock exchanges are required to send a consolidated compliance report to SEBI on the compliance level of Clause 49 by the companies listed in the exchanges within 60 days from the end of each quarter.

·   Listing Agreement is essentially an agreement between exchanges and the listed company. BSE and NSE have listing departments, which oversee the compliances with the provisions of listing agreement. Non-submission of corporate governance report may result in suspension in trading of the scrip. As per the norms laid by BSE, the  securities  of  the  company  would  trigger  suspension  for  non-submission of Corporate Governance report for 2 consecutive previous quarters or late submission of Corporate Governance report for any 2 out of 4 consecutive previous quarters.

For violations of the provisions of listing Agreement, following course of actions by SEBI is possible:

o Delisting or suspension of securities
o Adjudication for levy of monetary penalty on companies/directors/promotors by SEBI
o Prosecution
o Debarring directors/promoters from accessing capital market or being associates with listed companies.   

Delisting or  suspension is  generally not considered an  investor friendly action and therefore, cannot be resorted to as a matter of routine and can be used only in cases of extreme / repetitive non-compliance. Prosecution, on the other hand, is a costly and time-consuming process.

In order to strengthen the monitoring of the compliance, following measures may be considered:

· Carrying out of Corporate Governance rating by the Credit Rating Agencies.

· Carrying out of Corporate Governance rating the Credit Rating Agencies.

· Inspection by Stock Exchanges/ SEBI/ or any other agency for verifying the compliance made by the companies.

· Imposing penalties on the Company/ Its Board of Directors/ Compliance officers/ Key Management Persons for non-compliance either in spirit or letter.     

Presently, provisions of listing agreement are being converted into Regulations for better enforcement.

Public Comments

Comments on the above framework may be emailed on or before January 31, 2013 to / or sent by post to:-

Sunil Kadam
General Manager
Corporation Finance Department - Division of Issues and Listing
Securities & Exchange Board of India
SEBI Bhavan
Plot No. C4-A, "G" Block Bandra Kurla Complex Bandra (East)
Mumbai - 400 051
Ph: +912226449630   

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