Background:

SEBI formed a committee on corporate governance in June 2017 under the Chairmanship of Mr. Uday Kotak with a view to enhancing the standards of corporate governance of listed entities in India. The committee comprised of stalwarts from diverse fields viz. the government, industry, professional bodies, stock exchanges, academicians, lawyers, proxy advisors, etc. The committee submitted its report on October 5th 2017. The recommendations of the committee were discussed and deliberated by SEBI in its meeting dated 28th March 2017.

Some of the recommendations were accepted by SEBI without any modifications, some were accepted with modifications and for the remaining, SEBI is in the course of consultations with the relevant stakeholders.

Consequently, SEBI has amended the SEBI(LODR) Regulations 2015, notified on 9th May 2018. As has been the practice of SEBI, though the amendments have been notified, they would be implemented in a staggered manner. This is to allow the listed companies time to take the requisite steps to comply with the amendments.

This article elucidates the amendments in the Definitions and the actions to be taken by the listed companies pursuant to the amendments.

Amendments and the consequent course w.r.t other Chapters will follow.

Definitions

1. Related party

As per the amendment, the definition of related party has been amended to cover persons belonging to promoter or promoter group of the listed company and holding 20% or more of the shareholding in the listed company.

The amended definition is as follows:

2(1)(zb): related party means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards: Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);

“Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party”

Applicability- to all listed companies.

Effective date: 1st April 2019.

Actions to be taken

A) Identify persons belonging to the promoter or promoter group who are holding 20% or more of the shareholding (equity and preference) in the listed entity. All transactions with such persons will be considered as related party transactions and hence the various provisions of the Companies Act 2013 (Section 188) and SEBI (LODR) Regulations 2015 will apply w.e.f 1st April 2019.

B) Audit committee shall require to approve all transactions entered with the persons specified in clause a).

C) Audit committee may grant omnibus approval for entering into transactions with the persons specified in clause a), subject to the criteria laid down in Regulation 23(3).

D) A policy shall be formulated in respect of the transactions entered into with the persons specified in clause a). (Regulation 23(1))

E) The Board of directors shall monitor any misuse and abuse of corporate assets of the company in transactions entered into with the aforementioned persons.

F) All transactions entered with such persons exceeding 10% of the annual consolidated turnover of the listed company shall require approval by the shareholders in general meeting.

G) Such persons shall not vote in case of any transactions entered with a related party whether such person is a related party to the transaction or not.

H) The listed company shall on its website lay down the policy for entering into transactions with such persons.(Regulation 46(2)(g)

I) The company’s annual report shall contain disclosures relating to the aforesaid persons.(Regulation 53(f) r/w para a of Schedule V).

J) The audit committee shall while reviewing the audited financial statements and auditors report with the management before approval by the board shall give emphasis on transactions entered with the aforesaid persons.

Note: The definition of promoter and promoter group shall be in accordance with the SEBI(ICDR) Regulations.

2. Independent directors

As per the amendment, the definition of independent directors has been altered to cover further two exclusions as per Regulation 16(1)(b)(ii) and (viii).

They are as under:

(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of listed entity; …

(viii) who is not a non-independent Director of another company on the Board of which any non-independent Director of the listed entity is an independent Director.

Applicability- all listed companies.

Effective date- 1st October 2018.

Actions to be taken

a) Identify independent directors of the listed company who are members of the promoter group. Promoter group has been defined under SEBI(ICDR) Regulations 2009 as follows:

“promoter group” includes:

(i) the promoter;

(ii) an immediate relative of the promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse);

(iii) in case promoter is a body corporate:

(A) a subsidiary or holding company of such body corporate;

(B) any body corporate in which the promoter holds ten per cent. or more of the equity share capital or which holds ten per cent. or more of the equity share capital of the promoter;

(C) any body corporate in which a group of individuals or companies or combinations thereof which hold twenty per cent. or more of the equity share capital in that body corporate also holds twenty per cent. or more of the equity share capital of the issuer; and,

(iv) in case the promoter is an individual:

(A) any body corporate in which ten per cent. or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;

(B) any body corporate in which a body corporate as provided in (A) above holds ten per cent. or more, of the equity share capital;

(C) any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than ten per cent.

(v) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading “shareholding of the promoter group”:

b) In case any independent directors fall within the definition of promoter group stated in clause a) above, the same shall resign from office and new independent directors shall who fulfil the criteria as provided under Regulation 16(1)(b).

c) Identify the companies on whose boards the non-independent directors of the listed company serve as independent directors.

d) Check whether any of the non-independent directors of the companies identified in c) above serve as independent directors of the listed company. Such independent directors shall have to resign from office and new independent directors shall have to be appointed as per Regulation 16(1)(b).

3. Material subsidiary

The concept of material subsidiary has been altered vide the amendment. To qualify a subsidiary as a material subsidiary its income/ net worth shall be 10% (earlier 20%) of the consolidated income/ net worth of the listed company. And subsidiaries in the immediately preceding accounting year.

As per amended Regulation 16(c),

Material Subsidiary shall mean a subsidiary, whose income or net worth exceeds twenty ten percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken

a) Identify all subsidiaries of the listed company which contribute to more than 10% of the consolidated income/ net worth of the listed company and its subsidiaries in the previous financial year (1st April 2018- 31st March 2019).

b) Appoint an independent director (who is serving on the board of the listed company) to serve on the board of the unlisted subsidiaries identified in clause a) and which are incorporated in India (if not so appointed).

c) The management of the unlisted subsidiaries identified in clause a) above shall periodically bring to the notice of the board of directors of the listed company a statement of the individual transactions/ arrangements that exceeds or is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the said unlisted subsidiary during the previous accounting year(i.e from 1st April 2018- 31st March 2019 onwards).

d) The listed company shall not dispose of shares in the subsidiaries identified in clause a) resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal.

e) The listed company shall obtain shareholders’ approval via special resolution to facilitate selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the subsidiaries identified in clause a) on an aggregate basis during a financial year unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal.

4. Senior management

The amendment has altered the definition of senior management. The amendment has brought in greater clarity by providing for senior management to include all persons who are one level below the Chief Executive Officer/ Manager/ Managing Director/ Wholetime director. It shall include Chief Executive Officer / Manager (if they are not part of the board) and specifically includes CS and Chief Financial officer.

As per amended Regulation 16(d),

Senior management shall mean officers/personnel of the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the executive directors, including all functional heads. Chief executive officer/managing director/whole time director/manager (including chief executive officer/manager, in case they are not part of the board) and shall specifically include company secretary and chief financial officer”

Applicability- all listed companies

Effective date- 1st April 2019

Actions to be taken

a) Identify persons who are operating in the management one level below the Chief Executive Officer/ Whole time director/ Managing Director/ Manager. They shall form part of the senior management which also include CEO/ Manager(in case not part of the board), the CS and CFO.

b) The senior management (as enumerated in clause a)) shall conduct themselves so as to meet the expectations of operational transparency to stakeholders while at the same time maintaining confidentiality of information in order to foster a culture of good decision-making.

c) The senior management along with the board of directors shall facilitate the independent directors to perform their role effectively as a member of the board of directors and also a member of a committee of board of directors.

d) The board of directors shall formulate proper plans for succession to the senior management.

e) The board of directors shall lay down a code of conduct for all members of the senior management.

f) The members of senior management shall affirm compliance with the code of conduct laid down by the bboard of directors, on an annual basis.

g) The companys’ website shall disseminate information pertaining to code of conduct of the senior management.

h) Senior management shall make disclosures to the board of directors relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the listed company at large. Conflict interest shall cover transactions involving dealing in the shares of listed company, commercial dealings with bodies, which have shareholding of management and their relatives etc.

i) The Nomination and remuneration committee shall identify persons who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal.

(Author: Turab Chimthanawala (ACS, BA LLB), Contact Details: Email: turabhvc@gmail.com)

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One response to “Actions as per amendment in SEBI (LODR) Regulations 2015 (Part I)”

  1. Lalit Sharma says:

    Excellent analysis… Await Part 2

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