CS Chandni Gupta

CS Chandni GuptaIntroduction: SEBI vide its Notification dated 02nd September, 2015 had notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which became effective for all listed entities w.e.f. 01st December, 2015.

The LODR Regulations serve to consolidate the provisions of the various listing agreements in operation for different segments of the capital markets, such as equity listings (Main Platform & SME), listing of debt instruments, preference shares, Indian depository receipts, securitized debt instruments, units of mutual fund and any other securities specified by SEBI time to time. Further, the Regulations have been structured to align the provision of Companies Act, 2013 with the provision of Listing Agreement.

This article points out various exemptions provided to Certain Listed Entities under the SEBI (LODR) Regulations, 2015.

Definitions under SEBI (LODR) Regulations, 2015 along with various terms:

“Net Worth”: means net worth as defined in sub-section (57) of section 2 of the Companies Act, 2013.

“Specified Securities”: means ‘equity shares’ and ‘convertible securities’ as defined under clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

“Small and Medium Enterprises” or “SME”: shall mean an entity which has issued specified securities in accordance with the provisions of Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

“SME Exchange”: means an SME exchange as defined under clause (c) of sub-regulation (1) of regulation 106N of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

Section 2(57) of Companies Act, 2013 describing “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

Definition of SME Exchange under clause (c) of sub-regulation (1) of regulation 106N of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009: “SME Exchange” means a trading platform of a recognized stock exchange having nationwide trading terminals permitted by the Board to list the specified securities issued in accordance with this Chapter and includes a stock exchange granted recognition for this purpose but does not include the Main Board.

Criteria for issuing of specified securities in accordance with the provisions of Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009

Some of the key highlights are as under:

1. An issuer whose post-issue face value capital does not exceed 10 crore rupees shall issue its specified securities in accordance with provisions of this Chapter.

2. An issuer, whose post issue face value capital is more than 10 crore rupees and upto 25 crore rupees, may also issue specified securities in accordance with provisions of this Chapter.

3. The issuer making a public issue of specified securities under this Chapter shall not file the draft offer document with the Board;

provided that the issuer shall file a copy of the offer document with the Board through a merchant banker, simultaneously with the filing of the prospectus with the SME exchange and the Registrar of Companies or letter of offer with the SME Exchange;

Provided further that the Board shall not issue any observation on the offer document.

4. The issue made under this Chapter shall be 100% underwritten.

Explanation: The underwriting under this regulation shall be for the entire 100% of the offer through offer document and shall not be restricted upto the minimum subscription level.

5. The merchant banker/s shall underwrite at least 15% of the issue size on his/their own account/s.

6. The issuer shall stipulate in the offer document, the minimum application size in terms of number of specified securities which shall be at least 1 lakh rupees per application.

7. No allotment shall be made pursuant to any initial public offer made under this Chapter, if the number of prospective allottees is less than 50.

Exemption granted under Chapter IV of SEBI (LODR) Regulation 15 (2):

The compliance with the corporate governance provisions as specified in regulations 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27 and clauses (b) to (i) of sub-regulation (2) of regulation 46 and para C , D and E of Schedule V shall not apply, in respect of-

Listed Company which has:

i. Paid Up Share Capital < 10 Crores; and

ii. Net worth < 25 Crores.

(As on the last day of Previous F.Y.) OR

i. Specified securities Listed on the SME Exchange.

Note: Provided that where the provisions of the regulations specified in this regulation becomes applicable to a listed entity at a later date, such listed entity shall comply with the requirements of those regulations within six months from the date on which the provisions became applicable to the listed entity.

Note: Notwithstanding anything contained in sub-regulation (2) of Regulation 15 above, the provisions of Companies Act, 2013 shall continue to apply, wherever applicable.

Let us discuss all the above mentioned exempted Corporate Governance Regulations one by one.

Exemptions under Regulation 17 of SEBI LODR:

1. to have an optimum combination of executive and non-executive directors with at least one woman director is not necessary and no requirement to have at least fifty per cent of the board of directors shall comprise of non-executive directors;

2. No requirement to Periodically review compliance reports pertaining to all laws applicable to the listed entity, prepared by the listed entity as well as steps taken by the listed entity to rectify instances of non-compliances;

3. No need to lay down a code of conduct for all members of board of directors and senior management of the listed entity;

4. If the chairperson of the board of directors is a non-executive director, then it is not required to have at least 1/3 of the board of directors comprise of independent directors;

5. If the listed entity does not have a regular non-executive chairperson, then also no requirement to have at least 1/2 of the board of directors comprise of independent directors;

6. No requirement to lay down procedures to inform members of board of directors about risk assessment and minimization procedures;

7. No requirement to evaluate the performance of independent directors by the entire board of directors.

8.  No requirement to obtain compliance certificate from the chief executive officer and the chief financial officer as specified in Part B of Schedule II of SEBI(LODR) Regulation, 2015 for the below mentioned matters that:

A. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief:

these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

these statements together present a true and fair view of the listed entity’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

B. There are, to the best of their knowledge and belief, no transactions entered into by the listed entity during the year which are fraudulent, illegal or violative of the listed entity’s code of conduct.

C. hey accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the listed entity pertaining to financial reporting and they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

D. They have indicated to the auditors and the Audit committee about:

significant changes in internal control over financial reporting during the year;

significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and

instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the listed entity’s internal control system over financial reporting.

Exemptions under Regulation 18, 19, 20, 21 and 22 of SEBI LODR:

Relaxation on Constitution of:

i. Audit Committee. (Regulation 18)

ii. Remuneration Committee. (Regulation 19)

iii. Stakeholders Relationship Committee. (Regulation 20)

iv. Risk Management Committee. (Regulation 21)

v. Formulation of a vigil mechanism for directors and employees to report genuine concerns. (Regulation 22)

Exemptions under Regulation 23 in respect of Related Party transactions:

i. No need to formulate a policy on materiality of related party transactions and on dealing with related party transactions.

ii. No need to take prior approval of the audit committee before entering into related party transactions.

iii. No requirement to take approval of the shareholders through resolution for material related party transactions.

iv. Related parties can also vote, if that entity is not a party to the particular transaction.

v. All existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall not required to be placed for approval of the shareholders.

Exemptions under Regulation 24, 25, 26 and 27:

i. No requirement to have at least one independent director of the listed entity be a director on the board of directors of an unlisted material subsidiary, incorporated in India. (Regulation 24)

ii. No requirement to place minutes of the meetings of the BOD of the unlisted subsidiary at the meeting of the board of directors of the listed entity. (Regulation 24)

iii. No requirement for the management of the unlisted subsidiary to periodically bring a statement of all significant transactions and arrangements entered into by the unlisted subsidiary in front of the board of directors of the listed entity. (Regulation 24)

iv. No requirement for independent directors of the listed entity to hold at least one meeting in a year, without the presence of non-independent directors and members of the management. (Regulation 25)

v. No requirement for members of the board of directors and senior management personnel to affirm compliance with the code of conduct of board of directors and senior management on an annual basis. (Regulation 26)

vi. No requirement to sent a half-yearly declaration of financial performance including summary of the significant events in last six-months to each household of shareholders. [Regulation 27(1)]

vii. No requirement to submit a quarterly compliance report on corporate governance in the format as specified by the Board from time to time to the recognized stock exchange(s) within fifteen days from close of the quarter. [Regulation 27(2)]

Certain Exemptions provided under clauses (b) to (i) of sub-regulation (2) of regulation 46 :

It is not mandatory to disseminate the following information on an Exempted listed entity website:

i. details of its business;

ii. terms and conditions of appointment of independent directors;

iii. composition of various committees of board of directors;

iv. code of conduct of board of directors and senior management personnel;

v. details of establishment of vigil mechanism/ Whistle Blower policy;

vi. criteria of making payments to non-executive directors , if the same has not been disclosed in annual report;

vii. policy on dealing with related party transactions;

viii. policy for determining ‘material’ subsidiaries;

ix. details of familiarization programmes imparted to independent directors including the following details:-

a) number of programmes attended by independent directors (during the year and on a cumulative basis till date),

b) number of hours spent by independent directors in such programmes (during the year and on cumulative basis till date), and

c) other relevant details.

Exemptions provided under Para C, D and E of Schedule V of SEBI (LODR) Regulations, 2015 are as listed below:

Para C (Corporate Governance Report: The following disclosures shall not required to be made in the section on the corporate governance of the annual report-

1) A brief statement on listed entity’s philosophy on code of governance.

2) Board of directors:

a) composition and category of directors (e.g. promoter, executive, non-executive, independent non- executive, nominee director – institution represented and whether as lender or as equity investor);

b) attendance of each director at the meeting of the board of directors and the last annual general meeting;

c) number of other board of directors or committees in which a directors is a member or chairperson;

d) number of meetings of the board of directors held and dates on which held;

e) disclosure of relationships between directors inter-se;

f) number of shares and convertible instruments held by non-executive directors;

g) web link where details of familiarisation programmes imparted to independent directors is disclosed.

3) Audit committee:

a) brief description of terms of reference;

b) composition, name of members and chairperson;

c) Meetings and attendance during the year.

4) Nomination and Remuneration Committee:

a) brief description of terms of reference;

b) composition, name of members and chairperson;

c) meeting and attendance during the year;

d) performance evaluation criteria for independent directors.

5) Remuneration of Directors:

a) all pecuniary relationship or transactions of the non-executive directors vis-à-vis the listed entity shall be disclosed in the annual report;

b) criteria of making payments to non-executive directors. alternatively, this may be disseminated on the listed entity’s website and reference drawn thereto in the annual report;

c) disclosures with respect to remuneration: in addition to disclosures required under the Companies Act, 2013, the following disclosures shall be made:

I. all elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc;

II. details of fixed component and performance linked incentives, along with the performance criteria;

III. service contracts, notice period, severance fees;

IV. stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.

6) Stakeholders’ grievance committee:

a) name of non-executive director heading the committee;

b) name and designation of compliance officer;

c) number of shareholders’ complaints received so far;

d) number not solved to the satisfaction of shareholders;

e) number of pending complaints.

7) General body meetings:

a) location and time, where last three annual general meetings held;

b) whether any special resolutions passed in the previous three annual general meetings;

c) whether any special resolution passed last year through postal ballot – details of voting pattern;

d) person who conducted the postal ballot exercise;

e) whether any special resolution is proposed to be conducted through postal ballot;

f) procedure for postal ballot.

8) Means of communication:

a) quarterly results;

b) newspapers wherein results normally published;

c) any website, where displayed;

d) whether it also displays official news releases; and

e) Presentations made to institutional investors or to the analysts.

9) General shareholder information:

a) annual general meeting – date, time and venue;

b) financial year;

c) dividend payment date;

d) the name and address of each stock exchange(s) at which the listed entity’s securities are listed and a confirmation about payment of annual listing fee to each of such stock exchange(s);

e) stock code;

f) market price data- high, low during each month in last financial year;

g) performance in comparison to broad-based indices such as BSE sensex, CRISIL Index etc;

h) in case the securities are suspended from trading, the directors report shall explain the reason thereof;

i) registrar to an issue and share transfer agents;

j) share transfer system;

k) distribution of shareholding;

l) dematerialization of shares and liquidity;

m) outstanding global depository receipts or American depository receipts or warrants or any convertible instruments, conversion date and likely impact on equity;

n) commodity price risk or foreign exchange risk and hedging activities;

o) plant locations;

p) address for correspondence.

10) Other Disclosures:

a) disclosures on materially significant related party transactions that may have potential conflict with the interests of listed entity at large;

b) details of non-compliance by the listed entity, penalties, strictures imposed on the listed entity by stock exchange(s) or the board or any statutory authority, on any matter related to capital markets, during the last three years;

c) details of establishment of vigil mechanism, whistle blower policy, and affirmation that no personnel has been denied access to the audit committee;

d) details of compliance with mandatory requirements and adoption of the non-mandatory requirements;

e) web link where policy for determining ‘material’ subsidiaries is disclosed;

f) web link where policy on dealing with related party transactions;

g) disclosure of commodity price risks and commodity hedging activities.

Para D (Corporate Governance Report: No mandatory requirement to sign declaration by the chief executive officer stating that the members of board of directors and senior management personnel have affirmed compliance with the code of conduct of board of directors and senior management.

Para E (Corporate Governance Report: No mandatory requirement to take Compliance certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance.

Conclusion: The above mentioned exemptions are provided only under SEBI (LODR) Regulations, 2015, and does not signify exemptions under in any other Law/Act. Therefore, in spite of having certain exemptions under SEBI (LODR) Regulation, 2015, provisions of Companies Act, 2013 and rules made there under shall continue to apply on companies.

The Compliance under Companies Act, 2013 prescribed as under:-

Sl. No.ParticularsSection/ Rules of Companies Act, 2013Compliance of Companies Act, 2013 with SS-1
1Audit Committee177Every Listed Company must have Audit Committee with the below mentioned Constitution:

Ø Minimum 3 directors as members; and

Ø Majority shall be Independent directors.

For Example: If Audit Committee of a company have 5 members then;

Minimum 3 members shall be Independent directors.

Note: majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement.

Reconsitution: Every Audit Committee of a company existing immediately before the commencement of this Act shall, within one year of such commencement, be reconstituted in accordance with the above mentioned provisions for Constitution.

Role of Audit Committee: Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include

i. the recommendation for appointment, remuneration and terms of appointment of auditors of the company;

ii. review and monitor the auditor’s independence and performance, and effectiveness of audit process;

iii. examination of the financial statement and the auditors’ report thereon;

iv. approval or any subsequent modification of transactions of the company with related parties;

v. Scrutiny of inter-corporate loans and investments;

vi. valuation of undertakings or assets of the company, wherever it is necessary;

vii. evaluation of internal financial controls and risk management systems;

viii. monitoring the end use of funds raised through public offers and related matters.

Powers of Audit Committee:

Ø The Audit Committee may call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.

Ø The Audit Committee shall have authority to investigate into any matter in relation to the items specified in sub-section (4) (.i.e, specified as above from point i to viii) or referred to it by the Board and for this purpose shall have power to obtain professional advice from external sources and have full access to information contained in the records of the company.

Rights & Disclosures:

ü The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote.

ü The Board’s report under sub-section (3) of section 134 shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons therefor.

2Vigil Mechanism177 (9) and Rule 7 of Companies (Meetings of Board and its Powers) Rules, 2014System of Vigil Mechanism:
Ø Every listed company shall establish a vigil mechanism for directors and employees to report genuine concerns or grievances in such manner as may be prescribed.Ø The companies which are required to constitute an audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.Ø In case of other companies, the Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.Ø The vigil mechanism shall provide for adequate safeguards against victimization of employees and directors who avail of the vigil mechanism and also provide for direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit Committee, as the case may be, in exceptional cases.Ø In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.

Note: The details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

3Nomination, Remuneration & Stakeholders Relationship Committee178Every Listed Company must have Nomination & Remuneration Committee with the below mentioned Constitution:

Ø Minimum 3 Non-Executive directors; and

Ø out of which ½ shall be Independent directors.

Functions of the Nomination & Remuneration Committee:

ü The Nomination and Remuneration 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, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance.

ü The Nomination and Remuneration Committee shall 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.

ü The Nomination and Remuneration Committee shall, while formulating the policy ensure that-

a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

c) 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.

Note: 1. Above policy shall be disclosed in the Board’s report.

2. The chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.

Constitution Requirement for Stakeholders Relationship Committee:

A Company which consist of :

Ø > 1000 shareholders, debenture-holders, deposit-holders and any other security holders;

Ø at any time during a financial year

shall constitute a Stakeholders Relationship Committee consisting of:-

ü a chairperson who shall be a non-executive director and

ü such other members as may be decided by the Board.

Functions of the Stakeholders Relationship Committee:

v The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.

Note: Non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.

Explanation under section 178

• The expression ‘‘senior management’’ means personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads.

• The chairperson of each of the committees constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Penalty under section 177 & 178:

On Company: Fine minimum 1 Lac and maximum upto 5 Lcas.

Every officer in default: imprisonment for a term which may extend to one year or

Fine minimum of Rs.25,000/- and maximum to Rs.1,00,000/-

OR BOTH

4Board of Directors149Every Listed Public Company must have Board of Directors with the below mentioned Constitution:-
Ø Minimum 3 directors; with at least one woman directorØ At least 1/3 of the total number of directors as independent directors.Explanation: any fraction contained in such 1/3 number shall be rounded off as one.Note: 1) A Company may have maximum of fifteen directors; Provided that a company may appoint more than fifteen directors after passing a special resolution.2) At least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.

Some other provisions need to be comply under Companies Act, 2013 along with Rules enumerated as under:

i. An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

ii. In case of Listed Company all related party transactions shall require approval of Audit Committee.

iii. No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

iv. Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

v. Ordinary resolution is required to be passed in shareholders meeting in respect of related party transaction, wherever applicable.

vi. A statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company shall be included in the Board’s Report.

vii. All existing related party contracts or arrangements entered into prior to the commencement of Companies Act, 2013 does not require fresh approval under section 188 till the expiry of original term of such contracts. Thus, if any modification in such contract is made on or after 1st April, 2014, shall required to be placed for approval of the shareholders.

Disclaimer: Due diligence has been done to ensure accuracy and correctness of this article. The Author is not responsible for any harm, penalty that may be caused on the basis of the above article.

Author can be contacted at chandnigupta888@gmail.com

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