21 April 2014

SEBI's New Corporate Governance Norms

SEBI's New Corporate Governance Norms: A more transparent roadmap for Listed Entities

In a step towards ensuring lucidity in the regime, the Capital Market Regulator, SEBI, has floated new Corporate Governance Norms and revised Clause 35B with the basic premise of promoting interest of varied stakeholders on one hand and aligning the provisions of extant Clause 49 of the Listing Agreement with the Companies Act, 2013 on the other.

The new norms aim to intensify the corporate governance framework for listed companies in India and are considered as a step forward to increment harmonisation in SEBI & MCA laws. 

The main highlights are outlined as follows:

  • Amendment in Clause 35B in line with the Section 108 of the Act read with Rule 20 of Companies (Management and Administration) Rules, 2014, thereby casting a mandate on all the listed Companies for the mandatory electronic voting facility to all the members of the Company to exercise their right to vote on the resolutions which the company intends to pass, at the general meetings through electronic means. As per the extant SEBI Circular, only top 500 Listed Companies are mandatorily required to give e-voting facility to the members.
  • In line with Section 149 (6) of the Act, now the Nominee Directors have been excluded from the definition of Independent Directors.
  • In line with the provisions of vigil mechanism as specified in section 177 (9) of the Act, SEBI has mandated whistle blower mechanism in every listed company. Under the extant Cl 49, its a non mandatory requirement.
  • Role of audit committee has been extended and its roots are made widespread. This is very categorically reflected in the provisions of the new Clause, which has expanded the role of audit committee.
  • Stock options have been prohibited for independent director to protect their independence in real sense, in alignment with section 197 of the Act.
  • Broadened the ambit of Independent Directors as compared with the extant arena of Independent Directors
  • Board has also mandated for separate meeting for independent directors. This is also in line with the provisions of the Act. The Act also provides for atleast one separate meeting of independent director without attendance of non-independent director and members of management in a year. The intent is to provide the independent directors an opportunity to formulate the action plans to guide and drive themselves and to establish a better coordination between them because the Act poses enhanced responsibility on the independent directors.
  • A listed company is a type of corporate entity which deals with public at large in a wider way than the others do, so it is the need of the hour to have a committee to maintain relations with stakeholders, hence the requirement of Stakeholders Relationship Committee has been provided by SEBI. SEBI has also mandated for mandatory Nomination Committee, with the Chairman being Independent, which under the extant Clause is a non mandatory requirement.
  • The Act has posed the requirement of performance evaluation of Directors on nomination and remuneration committee. In lines with the said provision, SEBI has also mandated for evaluation of performance of independent directors and board of directors in a listed company.
  • As per the amendment, in all listed companies, any RPT is to be priorly approved by the audit committee. In addition, all material RPTs are to be approved by the shareholders, by way of special resolution, with the related parties being abstained from voting.  In this regard, SEBI has clearly defined what will tantamount to RPTs and material RPTs.
  • In addition, the four walls of RPTs have also been widened to include the elements of Accounting Standards and Companies Act 2013 as well. 
  • All listed companies to have at least one woman director on their Boards. 
  • SEBI by taking stricter view has specified the maximum number of boards an independent director can serve on listed companies, which is restricted to 7. This number has further been reduced to 3, in case the person is serving as a whole time director in a listed company. 
  • SEBI has prescribed the maximum tenure of five consecutive years for the Independent Directors that can be further extended to another term of upto five consecutive years subject to shareholders' approval by way of special resolution. Further, after the expiration of the term or extended term, such independent director shall be eligible for being appointed as an independent director only after expiration of 3 years of ceasing to be an independent director.
  • Bodies Corporate which are subject to regulations under other statutes (e.g. banks, financial institutions, insurance companies, etc.) are required to comply with the new norms to the extent that it does not violate the provisions of their respective statutes. However, the Mutual Funds are exempt from the applicability of such new norms.
  • In addition to the above mentioned mandates, the Board has also included the specific provisions related to the following:
    • Policy on dealing with RPTs
    • Enhanced Disclosure requirements related to remuneration of directors
    • Divestment of material subsidiaries
    • Disclosure of letter of appointment of independent directors along with their detailed profile
    • Policy on Risk management
    • Mandatory requirement to formulate Risk management Committee is only on top 100 listed entities by market capitalisation.
    • Providing training to independent directors
    • Boards of Companies have to satisfy themselves that plans are in place for orderly succession for appointments to the board and senior management.




All the above said requirements as amended by the SEBI shall be made applicable to the listed companies' with effect from October 01, 2014 and accordingly, all existing material related party contracts or arrangements as on the date of this circular which are likely to continue beyond March 31, 2015 shall be placed for approval of the shareholders in the first General Meeting subsequent to October 01, 2014 or even before the said date.  


Undoubtedly, the new norms will ensure more transparency in the day to today workings of listed entities but the roadmap ahead for the listed companies as well as for the Independent Directors is not simple as the new Corporate Governance Norms prescribes a stringent regime.

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