CORPORATE GOVERNANCE – COMPANIES ACT, 2013 and CLAUSE 49
CA. Amit G. Chandani
The Companies Act, 2013 has tried to overhaul the various provisions relating to strong Corporate Governance. The provisions relating to independent directors are examples which confer greater power and responsibility in the governance of a company. There are no explicit provisions for independent directors under the six decade old Companies Act, 1956 and only clause 49 of the Listing Agreementprescribed for the induction of independent directors and made it mandatory for listed companies. Thereafter, the Ministry of Corporate Affairs carried out corresponding changes to the provisions of 1956 Act, in an attempt to include the requirement of having an independent director on the board of listed companies and selective unlisted public companies to oversee corporate governance under the new Companies Act, 2013. These provisions are now applicable from 01st April, 2014.
In a step towards making listed companies more transparent and to align the provisions related to listing agreement with the Companies Act 2013, the Capital Markets Regulator, The Securities and Exchange Board of India (SEBI) has also now amended the Clause 49 of the Listing Agreement. The new Master Circular No. CIR/CFD/POLICY CELL/2/2014 dated 17.04.2014 will supersede all other earlier circulars issued by SEBI on Clause 49 of the Equity Listing Agreement.
The objectives of the revised Clause 49 aligns with the provisions of the Companies Act, 2013, focuses on adopting best practices on corporate governance and aims at making the corporate governance framework more effective. The said amendments of the revised clause 49 will be made effective on all listed companies w. e. f. 01st October, 2014.
This article highlights the comparison between the provisions of the Revised Clause 49 of the Listing Agreement and the Companies Act, 2013 in the context of Independent Directors.
A. Applicability:
Clause 49: Revised Clause 49 of the Listing Agreement is applicable on all listed companies w. e. f. 01st October, 2014.
The Companies Act, 2013: While, the provisions of Independent Directors are not applicable on all companies under the Companies Act, 2013. According to Sub-Section 4, of Section 149 read with Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014, the following categories of companies shall have Independent Directors:
1. Listed Public Company.
2. Public Companies having paid up share capital of 10crore rupees or more.
3. Public Companies having a turnover of 100crore rupees or more.
4. Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50crore rupees.
Time limit for compliance: According to sub-section 5of section 149 - Every company existing on or before the date of commencement of this Act shall, within one year from such commencement or from the date of notification of the rules in this regard as may be applicable, comply with the requirements of the provisions of sub-section (4) of section 149. The appointment will be only done at the general meeting of a company hence all the companies need to ensure compliance with the said provision in the upcoming AGM held in 2014 itself, so as to comply within March 31, 2015.
POINT OF DIFFERENCE: Revised clause 49 is applicable on all Listed companies while the provisions relating to independent directors under Companies Act, 2013 are only applicable on selective class of unlisted public companies in addition to Listed companies. The revised clause 49 would be applicable on all listed companies w. e. f. 01st October, 2014 while under Companies Act, 2013every company which are covered under the provisions relating to Independent Directors existing on or before the date of commencement of this Act shall, within one year from such commencement (i.e. on before 31st March, 2015) or from the date of notification of the rules in this regard as may be applicable, comply with the requirements of appointing Independent Director.
B. Composition/Number of Independent Directors:
Clause 49: Under Clause 49 of the Listing Agreement, the strength of number of independent directors is determined on the status of the Chairman of the Board. 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 the company does not have a regular non-executive Chairman, at least half of the Board should comprise of independent directors.
Provided that where the regular non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors
Explanation-For the purpose of the expression “related to any promoter” means:
i. If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it
ii. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.
The Companies Act, 2013: While under the Companies Act, 2013 the strength of number of independent directors for the prescribed companies under Section 149(4) read with Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 is as follow:
1. Listed Public Company – At least one-third of the total number of Directors.
2. Public Companies having paid up share capital of 10crore rupees or more– At least 2 Directors.
3. Public Companies having turnover of 100crore rupees or more– At least 2 Directors.
4. Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50crore rupees – At least 2 Directors.
Explanation— For the purposes of the Section 149(4), any fraction contained in such one-third number shall be rounded off as one.
Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.
Provided further that any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.
Provided also that where a company ceases to fulfill any of the three conditions (Category No. 2, 3 & 4 above) for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions;
Explanation - For the purposes of this rule, it is here clarified that, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.
Provided that a company, belonging to any class of companies, for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.
POINT OF DIFFERENCE: The strength of the independent directors under the revised Clause 49 is determined on the status of the Chairman of the Board, while under the Companies Act, 2013 there are no such parameters.
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C. Definition of Independent Director
Clause 49: Under the Revised Clause 49, the expression, ‘independent director’ shall mean a non-executive director, other than a nominee director of the company:
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) apart from receiving director's remuneration, has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or 50lakh rupees or such higher amount as may be prescribed, whichever is lower, during the 2 immediately preceding financial years or during the current financial year;
(e) who, neither himself nor any of his relatives —
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed, of —
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;
(iii) holds together with his relatives, 2% or more of the total voting power of the company; or
(iv) is a Chief Executive or irector, by whatever name called, of any non-profit organisation, that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% per cent or more of the total voting power of the company;
(v) is a material supplier, service provider or customer or a lessor or lessee of the company;
(f) who is less than 21 years of age.
Explanation:
For the purposes of the above clause:
i. "Associate" shall mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by The Institute of Chartered Accountants of India.
ii. “Key Managerial Personnel" shall mean “Key Managerial Personnel” as defined in section 2(51) of the Companies Act, 2013.
iii. “Relative” shall mean “relative” as defined in section 2(77) of the Companies Act, 2013 and rules prescribed there under.
The Companies Act, 2013: According to sub section 6 of Section 149 of The Companies Act, 2013 - An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or 50lakh rupees or such higher amount as may be prescribed, whichever is lower, during the 2 immediately preceding financial years or during the current financial year;
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed, of—
A. a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
B. any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;
(iii) holds together with his relatives, 2% or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any non-profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
Explanation.—For the purposes of this section, “nominee director” means 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.
On a combined reading of the clause (c) and (d) of the Section 149 (6) [similar to the definition under Revised Clause 49], one may observe that clause (c) takes into account pecuniary relationship of director and clause (d) covers pecuniary relationship or transaction of relatives of such directors. The lawmaker has consciously used only the word “relationship” in clause (c) while used both “relationship” or “transaction” in clause (d). In clause (d), there is a monetary de-minimis value, upto which transactions are not to be considered as affecting the independence of the director. There is no question of a de-minimis value for a relationship, as relationships, may not have any transactions at all, and therefore, may not have a value. Clause 49 only excludes director remuneration in the term ‘pecuniary relationship’.
Since the law uses the word “pecuniary relationship” without qualifying it with the word “material”, it will be important to hold that what is immaterial is trivial, and therefore, non-existent. It cannot be said to be a relationship at all, as relationship requires a continuity, staying together of parties. Mere isolated transactions performed on an arm length basis should not be construed as a pecuniary relationship.