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. An illustrative note on the amendments in the first part viz. Definitions and the actions to be taken by listed companies consequent to the amendments is published here.  https://taxguru.in/sebi/actions-amendment-sebi-lodr-regulations-2015-part.html

II Board of Directors

1. Independent Woman director After the amendment, the board of the specified listed companies shall have one independent woman director.

As per amended Regulation 17(1)(a)

“the Board should have an optimum combination of executive and non-executive directors with one women director and 50% of Board should comprise of non-executive directors.”

“Provided that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020; “

Applicability- Top 500 listed companies by 1st April 2019 and top 1,000 listed companies by 1st April 2020.

Actions to be taken

A) Ascertain whether the listed company falls within the top 500 listed companies as per market capitalisation as on 31st March 2019.

B) If the company falls within the top 500 listed companies, then ascertain whether the woman director serving on the board of the company is independent. If not, then appoint a woman independent director.

C) If the company does not fall within the top 500 listed companies as on 31st March 2019, then ascertain whether the company falls within the top 1,000 listed companies as per market capitalisation as on 31st March 2020. If yes, then ascertain whether the woman director serving on the company’s board is independent. If not, then the company shall have to appoint an independent woman director.

D) The provisions pertaining to independent directors as enumerated under the Companies Act 2013 and SEBI (LODR) Regulations 2015 shall apply to the woman independent director appointed in clauses b) and c).

2. Number of directors

The amendment has increased the minimum number of directors to six in case of specified listed companies by the timelines specified.

As per Regulation 17(1)©,

The board of directors of the top   1000 listed entities (with effect from   April 1, 2019) and   the top 2000   listed entities (with effect   from April 1, 2020)shall comprise of not less than six directors.

Applicability- Top 1,000 listed companies by 1st April 2019 and top 2,000 listed companies by 1st April 2020.

Actions to be taken

a) In case the company falls within the top 1,000 listed companies as per market capitalisation as on 31st March 2019 and number of directors on its board is 5 or less, increase the number to at least six.

b) If the company does not fall within the top 1000 listed companies as in clause a), then ascertain whether the company falls within the top 2000 listed companies as per market capitalisation by 31st April 2020. If yes, ensure there are at least six directors serving on the board of the company .

3. Age limit in case of Non-executive directors

The amendment has specified a maximum age limit for a non-executive director of 75 years. The age limit can only be breached by passing a special resolution in general meeting.

As per Regulation 17(1A),

“No listed entity shall appoint a person or continue the directorship of any person as   a non-executive director   who has attained   the age of seventy   five years  unless a special   resolution is passed   to that effect,   in which case   the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.”

Applicability- all listed companies.

Effective date- 1st April 2019

Actions to be taken

a) In case any of the non-executive directors (including independent directors) of the listed company has attained the age of 75 years or more as on 31st March 2019, if the company wishes that his directorship shall continue, a special resolution shall be passed in general meeting to approve the same.

b) The explanatory statement accompanying the notice for the general meeting to pass special resolution shall provide the justification for such a motion.

c) If the company wishes to appoint a person as non-executive director (including independent director) who has attained the age of 75 years, a special resolution shall be passed in general meeting to approve the same. The explanatory statement accompanying the notice for such a meeting shall lay out the justifications for such an appointment.

d) The approval of the shareholders shall be obtained before 31st March 2019. The disqualification shall be immediate in case the approval is not obtained. This is similar to the requirement provided under Section 196 (3) of Companies Act, 2013 for managing directors, whole-time directors and managers. The interpretation was clarified in recent judgment by Bombay High Court in the matter of Sridhar Sundararajan vs Ultramarine & Pigments Limited.

4. Separation of roles of Chairperson and Managing director

The amendment provides that in case of specified listed companies from the timeline provided, the Chairman shall be a non-executive director and not be related to the Managing director/ Chief Executive officer as the case may be of the listed company.

As per Regulation 17(1)(1B),

“With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall –

(a) be a non-executive director;

(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013

Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.”

Applicability- Top 500 listed companies

Effective date- 1st April 2020.

Actions to be taken

a) In case the listed company ranks among the top 500 listed companies as per market capitalisation as on 31st March 2020, then ensure that the Chairperson of the company is a non-executive director and not related to the Managing director/ Chief Executive Officer as the case may be, of the company.

b) The Chairperson shall be considered as related to the Managing Director/ CEO in the following cases:

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the other in the following manner: father, mother, son, daughter in law, daughter, son in law, brother or sister.

Note: The above provisions shall not apply to a listed company which has no identifiable promoter as per the latest shareholding pattern filed with the stock exchanges.

5. Quorum for board meeting

The amendment has increased the quorum for board meeting in specified listed companies as per the specified timelines. The quorum has increased to at least 1/3rd of total strength or 3 directors whichever is higher and including one independent director.

As per Regulation 17(2A),

“The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director.”

Applicability- Top 1000 listed companies by 1st April 2019 and top 2000 listed companies by 1st April 2020.

Actions to be taken

a) In case the listed company falls within top 1000 listed companies as per market capitalisation as on 31st March 2019, it shall be ensured that the quorum of board meetings shall be at least 1/3rd of the total strength or 3 directors whichever is higher and shall include one independent director.

b) In case the listed company does not fall within the top 1000 listed companies as on 31st March 2019, but falls within the top 2000 listed companies as per market capitalisation as on 31st March 2020, the quorum of board meetings shall be as specified in clause a).

c) The corporate governance policy/ code of the companies falling within the limits mentioned in clauses a) and b) shall be amended to incorporate the revised quorum requirement.

6. Remuneration to non-executive directors exceeding specified limits

The amendment states that the listed company shall obtain the shareholders’ approval via special resolution in case the annual remuneration paid to a single non-executive director exceeds 50% of the total annual remuneration paid to all the non-executive directors.

As per Regulation 17(6)(ca),

“The   approval of shareholders by special   resolution shall be obtained every year,   in which the annual   remuneration payable to a single non-executive director exceeds fifty per cent of the total annual remuneration   payable to all non -executive directors,   giving details of the remuneration thereof.”

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken

a) In case, the listed company is paying annual remuneration to a single non-executive director exceeding 50% of the total annual remuneration paid to all non-executive directors from the FY 1stApril 2018-31st March 2019, it shall have to first obtain shareholders’ approval via special resolution.

b) The approval shall have to be obtained every subsequent year where the remuneration exceeds the aforementioned limits.

c) In case, the company is certain to breach the aforementioned limits in the FY 1st April 2018-31st March 2019, the shareholders’ approval can be obtained in the AGM of 2018.

7. Remuneration payable to executive directors who are promoters

After the amendment, the listed company shall obtain the approval of shareholders via special resolution in case of payment of annual remuneration to executive directors who are promoters or belonging to promoter group where the remuneration exceeds the specified thresholds.

As per Regulation 17(6)€,

“The fees or compensation payable to executive directors who are promoters or   members of the   promoter group, shall be   subject to the approval of   the shareholders by   special resolution  in general   meeting, if-

(i) the   annual remuneration payable   to such executive director exceeds   rupees 5   crore or 2.5   per cent of   the net profits of the listed entity, whichever is higher; or

(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity:

Provided that the approval of the shareholders under this provision shall be valid only till the expiry of the term of such director.

Explanation: For the purposes of this clause, net profits shall be calculated as   per section 198   of the Companies   Act,

2013.”

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken 

I) The listed company shall require to obtain approval of shareholders via special resolution in case the fees or compensation payable to executive directors who are promoters or belong to promoter group exceeds the following limits:

a) In case listed company has 1 executive director who is a promoter or member of promoter group: Rupees 5 crore or 2.5 per cent of the net profits of the listed company, whichever is higher.

b) In case listed company has more than 1 executive directors who are promoters or members of promoter group: 5 per cent of the net profits of the listed company.

ii) If the listed company is paying compensation/ fees to the executive directors exceeding the aforementioned limits, from the FY 1st April 2018-31st March 2019, it shall have to first obtain shareholders’ approval via special resolution.

iii) The company can obtain one time approval of the shareholders to be valid till expiry of the term of the executive directors.

iv) In case, the company is certain to breach the aforementioned limits in the FY 1st April 2018-31st March 2019, the shareholders’ approval can be obtained in the AGM of 2018.

v) The definition of promoters and promoter group shall be in accordance with the definition under SEBI(ICDR) Regulations 2009.

Vi) Net profit shall be computed in accordance with Section 198 of Companies Act 2013.

8. Performance evaluation of independent directors

After the amendment, the board of directors while evaluating the performance of independent directors, shall also evaluate whether the said director fulfils the independence criteria laid down in the SEBI (LODR) Regulations and is independent of the management.

As per amended Regulation 17(10),

“The evaluation of independent directors shall be done by the entire board of directors which shall include

(a) performance of the directors; and

(b) fulfillment of the independence criteria as specified in these regulations and their independence from the management:

Provided that   in the above   evaluation, the directors who   are subject to evaluation shall not participate.”

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken

The board of directors while evaluating the performance of an independent director shall also ascertain whether he meets the independence criteria as laid down under Regulation 16(1)(b) of the SEBI (LODR) Regulations and whether he is independent of the management.

9. Notice of General meeting

After the amendment, the board of directors shall give their recommendations in respect of every item of special business contained in the explanatory statement accompanying the notice for a general meeting.

As per Regulation 17(11),

“The statement to be annexed to the notice as referred to in sub -section (1) of section 102 of the Companies Act, 2013 for each item of special business to be   transacted   at     a   general   meeting     shall   also   set     forth   clearly   the   recommendation of the board to the shareholders on each of the specific items.”

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken

The board of directors of the listed company while issuing any notice for a general meeting u/s 102(1) of the Companies Act 2013, shall in the explanatory statement give their recommendations in respect of every specific item of special business to be transacted at the meeting.

10. Number of directorships

The amendment has put a cap on the maximum number of directorships a person can hold inn listed companies. The amendment also puts a limit on the listed companies in which a person can serve as an independent director.

As per Regulation 17A,

“(1) A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020:

Provided that a person shall not serve as an independent director in more than seven listed entities.”

(2) Notwithstanding the   above, any person   who is serving   as a whole   time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities”

Note: Listed entity shall mean only equity listed companies.

Applicability- directorship in all listed companies

Effective date- 1st April 2019 and 1st April 2020.

Actions to be taken

a) A person shall not as a director in more than 8 listed companies w.e.f 1st April 2019. Moreover, he shall serve as an independent director in only 7 listed companies.

b) A person shall not serve as director in more than 7 listed companies, w.e.f 1stApril 2020.

c) In case a person is serving as a Managing director/ whole time director in any listed company shall serve as an independent director in maximum 3 listed companies.

11. Quorum for Nomination and remuneration committee

The amendment has laid down the quorum for Nomination and Remuneration committee. The quorum for a  meeting of the nomination and  remuneration committee shall  be  two  or  one  third  of  the  members  of  the  committee, whichever is greater, with at least one independent director  in attendance.

As per Regulation 19(2A),

“The quorum for a meeting of the nomination and remuneration committee shall be   either  two   members or one   third of the   members of the   committee, whichever is greater, including at least one independent director in attendance.”

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken

W.e.f 1st April 2019, all meetings of NRC shall be convened with a quorum of at least 2 directors or 1/3rd of total strength, which ever is higher. There should be at least one independent director in attendance.

12. Meetings of Nomination and Remuneration committee

The amendment specifies the minimum number of meetings of NRC. As per the amendment, the NRC shall meet at least once a year.

Applicability- all listed companies.

Effective date- 1st April 2019.

Actions to be taken

W.e.f. 1st April 2019, the NRC of the listed company meet at least once a year.

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