In this blog post, Mrinal Litoria, a student pursuing his BA LLB from the Rajiv Gandhi National University of Law, Patiala and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the amendments made to Clause 49 of the Listing Agreement of SEBI.



Listing means an admission of the securities to dealings on a recognized stock exchange[1]. Separate Listing Department grants approval for listing of securities of Companies by the provisions of the Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 2013, Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange. Companies enter into a Listing agreement with the Exchange and make certain disclosures and perform certain acts. Listing Department monitors the compliance of the companies.

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Clause 49 of the Listing Agreement by Securities Exchange Board of India explains on the issue of Corporate Governance and endorses the standards under which the Companies are ordered to work. After the enactment of the new Companies Act, 2013; SEBI through an official circular has amended Clause 49 of the Listing Agreement to bring it into conformity with the new Act. SEBI, vide Circular No. CFD/POLICY CELL/2/2014 dated April 17, 2014, has amended the provisions of Clause 49 of Listing Agreement relating to Corporate Governance, mandating, inter-alia, that the Board of Directors of listed entities shall have an optimum combination of executive and non-executive directors with at least one woman director. Further, vide Circular No. CFD/POLICY CELL/7/2014[2] Dated September 15, 2014; the timeline to comply with the requirement mentioned above was extended to March 31, 2015.images

Applicability of Clause 49[3] Extends to all listed companies except –

  • Companies with equity share capital of less than Rs 10 crore,
  • Companies having a net worth not exceeding of Rs 25 crore and
  • 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.

Provisions relating to the constitution of Risk Management Committee shall apply to top 100 listed companies by market capitalization as at the end of the immediate previous financial year. Clause 49 is also applicable to other listed entities which are not companies, but body corporate or are subject to regulations under other statutes (e.g. Banks, financial institutions, insurance companies, etc.). The clause 49 will apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant regulatory authorities.


Principles of Corporate Governance

Following the amendment, clause 49 has laid out the principles of corporate governance. It likewise explicitly expresses that if there should be an occurrence of any ambiguity, the provisions might be translated and connected incongruity with the said principles. The principles are:

  • The rights of shareholders –
    • The company should seek to protect and facilitate the exercise of shareholders’ rights.
    • The company should provide adequate and timely information to shareholders.
    • The company should ensure equitable treatment of all shareholders, including minority and foreign shareholders.
  • Role of stakeholders in corporate governance –
    • The company should recognize the rights of stakeholders and encourage co-operation between the company and the stakeholders.
  • Disclosure and transparency –
    • The company should ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the company.
  • Responsibilities of the Board of Directors –
    • Disclosure of information
    • Key functions of the Board of Directors
    • Other responsibilities

Board of Directors

  • Composition of Board of Directors
    • Woman Director – The Board of Directors of a listed company shall have at least one woman director, with effect from 1 April 2015
    • A minimum number of independent directors– Clause 49 has been reworded in this context as to replace the reference to executive director with the regular non-executive director. It adds that if the chairperson of the Board is a regular non-executive director who is also a promoter of the company or is related to any promoter or person occupying management positions at the Board level or one level below the Board, then at least one-half of the Board should comprise of independent directors.


Independent Directors

  • Separate meetings of independent directors– The recent amendment stipulates that the independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management. They shall:
  • Performance evaluation of independent directors– The amendment clarifies that the Nomination Committee shall lay down the evaluation criteria for performance evaluation of independent directors. It shall be done by the Board of Directors and shall form the basis for determination of reappointment of the independent director. The company shall disclose the criteria for performance evaluation in its annual report.corporate-management
  • Maximum tenure of independent directors– it is proposed to be by the Companies Act 2013. Under the 2013 Act, the maximum tenure of an independent director is up to five consecutive years, followed by a reappointment for another term of up to five consecutive years on passing of a special resolution by the company. On completion of the said maximum tenure of 10 years, an individual shall be eligible for an appointment again as an independent director in that company only after a cooling-off period of three years. Further, the tenure already served by an independent director in the past shall not be considered, and for the purpose of determining the maximum tenure, the only future term shall be considered.
  • Limit on a number of directorships– An individual shall not serve as an independent director in more than seven listed companies. Further, any individual who is also serving as a whole-time director of any listed company shall not serve as an independent director in more than three listed companies.
  • Definition of independent director– Disqualification criteria for independent directors has been expanded which makes the definition more restrictive[4]. Also, the definition specifically excludes a nominee director.
    • Review the performance of non-independent directors and the Board of Directors as a whole
    • Review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors, and
    • Assess the quality, quantity, and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform its duties.
  • Familiarization program for independent directors– The company shall familiarize the independent directors with the company, their roles, rights, responsibilities in the company, nature of the industry in which the company operates, the business model of the company, etc. through various programs. The company shall disclose the details of such familiarization programs on its website and also provide that web link in its annual report.


Non-executive Directors’ compensation and disclosures

The revised Clause 49 specifically forbids the independent directors from being entitled to any stock option.


Code of Conduct

In the code of conduct of the company shall be incorporate the duties of independent directors as laid down in the Act. An independent director shall be held liable in respect of acts by a company that occur with his knowledge or if an independent director doesn’t act diligently on the requirements of the listing agreement.


Whistle Blower Policy

With the amendments to Clause 49, it is mandated that the company shall establish a vigil system for directors and employees to report concerns about

  • unethical behavior,
  • actual or suspected fraud,
  • Violation of the company’s code of conduct or ethics policy.

There must also be provided adequate safeguards against victimization of individuals who utilize such mechanism to report any concerns.


Audit Committee

The new Clause 49 enhances the part of audit committees to include:

  • Review and monitor the auditor’s independence and performance, and effectiveness of the audit process.
  • Approval or any subsequent modification of transactions of the company with related parties;
  • Scrutiny of inter-corporate loans and investments.
  • Valuation of undertakings or assets of the company, wherever it is necessary, and
  • Evaluation of internal financial controls and risk management systems.


Nomination and Remuneration Committee

A company through its Board of Directors shall constitute a ‘Nomination and Remuneration’ Committee which shall comprise of at least three non-executive directors, half of which should be independent. The chairman of the committee shall be an independent director. The chairperson of the company, even if an executive, can be appointed as a member, but not as the chairman, of such committee. Such committee shall be responsible for:

  • remittance-by-foreign-companies-and-repatriation-of-dividendsFormulation of the criteria for determining qualifications, positive attributes and independence of a director
  • Formulation of criteria for evaluation of independent directors and the Board
  • Identifying persons who are qualified to become directors and who may be appointed by senior management by the criteria laid down, and recommend their appointment and removal
  • Recommend to the Board of Directors, the policy for remuneration of the directors, key managerial personnel, and other employees; and
  • Devising a policy on Board diversity The company shall disclose the remuneration policy and the evaluation criteria in its annual report.


Subsidiary Companies

The amendments now require companies to form a policy for the determination of ‘material subsidiaries,’ which is required to be published online. It is also prescribed that at a minimum, a subsidiary shall be considered as material if the investment of the company in the subsidiary exceeds 20% of its consolidated net worth as per the audited balance sheet of the previous financial year or if the subsidiary has generated 20% of the consolidated income of the company during the previous financial year. The revised Clause 49 mandates a special resolution, except in cases where a scheme or arrangement has been duly approved by a court/tribunal, to dispose of shares in its material subsidiary which would reduce the shareholding to less than 50% or results in loss of control over the subsidiary. Further, selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary shall, except in cases where a scheme or arrangement has been duly approved by a court/tribunal, also require prior approval of shareholders by way of special resolution. The amendment has also modified the definition of a ‘material non-listed Indian subsidiary,’ and replaces the references to ‘turnover’ by ‘income,’ thereby expanding the applicability of provisions for material non-listed Indian subsidiary.


Risk Management

The amended Clause 49 requires that the Board of Directors shall be responsible for framing, implementing and monitoring the risk management plan for the company. It also adds (for only top 100 listed companies by market capitalization as at the end of the downloadimmediate previous financial year) that a company through its Board of Directors shall constitute a Risk Management Committee.

The majority of the members, and the chairman, of such committee, shall comprise the members of the Board. The Board shall define the roles and responsibilities of the Risk Management Committee and may delegate its said responsibilities to such committee.


Related Party Transactions

The amended Clause 49 has added a detailed new section on related party transactions. This section describes ‘related party transactions,’ and defines the term ‘related party.’ This definition of related party comprises the definition of the related party provided in, both, the 2013 Act as well as the applicable accounting standards. The amended Clause 49 also prescribes that a company shall form a policy on the materiality of related party transactions, and also on dealing with related party transactions. The revised Clause 49 also prescribes that at a minimum, a transaction with a related party shall be considered material if the transaction(s), individually or taken together with previous transactions during a financial year, exceed 10% of the annual turnover of the company as per the last audited financial statements of the company[5]. The amendment requires that all related party transactions shall require prior approval of the audit committee. The audit committee may grant an omnibus approval if:images (4)

  • The audit committee shall lay down the criteria for granting the omnibus approval in line with the Policy on Related Party Transactions of the company, and such approval shall be applicable in respect of transactions which are repetitive in nature.
  • The audit committee shall satisfy itself about the need for such omnibus approval, and that such approval is in the interest of the company.
  • Such an omnibus approval shall specify –
    • the name/s of the related party, nature of transaction, period of transaction, the maximum amount of transaction that can be entered into,
    • the Indicative base price / current contracted price and the formula for variation in the price if any, and such other conditions as the Audit Committee may deem fit. However, where the need for related party transaction cannot be foreseen, and details above are not available. Audit Committee may grant omnibus approval for such transactions subject to their value not exceeding INR 1 crore per transaction
    • such other conditions as the Audit Committee may deem fit. However, where the need for related party transaction cannot be foreseen, and details above are not available. Audit Committee may grant omnibus approval for such transactions subject to their value not exceeding INR 1 crore per transaction.
  • download (3)The Audit Committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the company pursuant to each of the omnibus approval given.
  • Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

Also, all material related party transactions shall require the approval of shareholders through a special resolution and all related parties shall abstain from voting on such resolutions. Following transactions shall be exempt from the approvals above of the audit committee and the shareholders, respectively:

  • transactions entered into between two government companies, or
  • transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.



The amendments are a mix of clarifications and relaxations to the requirements of corporate governance under Clause 49 of Listing Agreements. It is through the communication between SEBI and large corporate that has brought to light the prevailing difficulties in interpretation and recognition of problem areas under the clause. It is a welcome change taking into consideration the practicality of implementation of provisions for corporate governance. These changes bring clause 49 of the listing agreement in conformity with the Companies Act, 2013, but does not completely pave the way for smooth implementation standards. Alignment of a definition of ‘related parties’ and an increase in the threshold for determining the materiality of related party transactions to 10 percent of consolidated annual turnover, and permitting omnibus approvals were much-needed changes.


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[1] Guideline for Company Listing, available at, Last Accessed on 31/07/2016.

[2] Available at, Last Accessed on 31/07/2016.

[3] According to SEBI circular no. CIR/CFD/POLICY CELL/2/2014, dated April 17 2014; Para 4 ‘Applicability’. Available at:, Last Accessed on 31/07/2016.

[4] The independent director should not have any ‘material’ pecuniary relationship with the company, it’s holding, subsidiary, associate company, promoters or directors, in preceding two financial years, except for receiving director’s fee. Earlier an independent director was prohibited from having any pecuniary relationship, even if it was not material, in the ordinary course of business and at an arm’s length.

[5] The criteria of 5% of turnover or 20% of net worth, whichever is higher, has been removed.



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