“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” - -Sir Adrian Cadbury, UK, Commission Report: Corporate Governance 1992
The basic criterion on which the whole Listing Agreement based is Corporate Governance. Currently there are 54 Clauses in the Listing Agreement and all of them based on this very concept. Further, there is a clause which specifically deals with Corporate Governance i.e. Clause 49.
Listing means admission of securities to dealings on a recognized stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to: • provide liquidity to securities; • mobilize savings for economic development; • protect interest of investors by ensuring full disclosures.
A company, desirous of listing its securities on the Exchange, shall be required to file an application, in the prescribed form, with the Exchange before issue of Prospectus by the company, where the securities are issued by way of a prospectus or before issue of 'Offer for Sale', where the securities are issued by way of an offer for sale.
The basic criterion on which the whole Listing Agreement based is Corporate Governance. Currently there are 54 Clauses in the Listing Agreement and all of them based on this very concept. Further, there is a clause which specifically deals with Corporate Governance i.e. Clause 49. By way of Listing Agreement inter alia, Stock Exchange ensures on behalf of SEBI that the Companies are following good Corporate Governance Practice.
As such, the Listing Agreement is of great importance and is executed under the common seal of a company. Under the Listing Agreement, the Company is required to make certain disclosures and perform certain acts, failing which the company may face disciplinary action, including suspension / delisting of securities. A Company undertakes, amongst other things, to provide facilities for prompt transfer, registration, sub-division and consolidation of securities; to give proper notice of closure of transfer books and record dates, to forward copies of Annual Reports, Balance Sheets and Profit and Loss Accounts to Stock Exchange, to file shareholding patterns and financial results on a quarterly basis; to intimate promptly to the Exchange the happenings which are likely to materially affect the financial performance of the Company and its stock prices, to comply with the conditions of Corporate Governance, etc. The Listing Department of Stock Exchange monitors the compliance by the companies with the provisions of the Listing Agreement, especially with regard to timely payment of annual listing fees, submission of results, shareholding patterns and corporate governance reports on a quarterly basis.
A company intending to have its securities listed on BSE has to comply with the listing requirements prescribed by it. Some of the requirements are as under: Ø Minimum Listing Requirements for New Companies Ø Minimum Requirements for Companies Delisted by BSE seeking relisting on BSE Ø Permission to Use the Name of BSE in an Issuer Company's Prospectus Submission of Letter of Application Ø Allotment of Securities Ø Trading Permission Ø Requirement of 1% Security Ø Payment of Listing Fees Ø Compliance with the Listing Agreement Ø Cash Management Services (CMS) - Collection of Listing Fees Minimum Listing Requirements for New Companies- The following eligibility criteria have been prescribed effective August 1, 2006 for listing of companies on BSE, through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs):
Companies have been classified as large cap companies and small cap companies. A large cap company is a company with a minimum issue size of Rs. 10 crore and market capitalization of not less than Rs. 25 crore. A small cap company is a company other than a large cap company.
In respect of Large Cap Companies, The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; and
The minimum issue size shall be Rs. 10 crore; and
The minimum market capitalization of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).
In respect of Small Cap Companies, The minimum post-issue paid-up capital of the Company shall be Rs. 3 crore; and
The minimum issue size shall be Rs. 3 crore; and
The minimum market capitalization of the Company shall be Rs. 5 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and
The minimum income/turnover of the Company shall be Rs. 3 crore in each of the preceding three 12-months period; and
The minimum number of public shareholders after the issue shall be 1000.
A due diligence study may be conducted by an independent team of Chartered Accountants or Merchant Bankers appointed by BSE, the cost of which will be borne by the company. The requirement of a due diligence study may be waived if a financial institution or a scheduled commercial bank has appraised the project in the preceding 12 months.
For all companies: In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to include in the disclaimer clause forming a part of the offer document that in the event of the market capitalization (product of issue price and the post issue number of shares) requirement of BSE not being met, the securities of the issuer would not be listed on BSE.
The applicant, promoters and/or group companies, shall not be in default in compliance of the listing agreement. The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Disclosure and Investor Protection) Guidelines, 2000.
Minimum Requirements for Companies Delisted by BSE seeking Relisting on BSE- Companies delisted by BSE and seeking relisting at BSE are required to make a fresh public offer and comply with the extant guidelines of SEBI and BSE regarding initial public offerings.
Permission to Use the Name of BSE in an Issuer Company's Prospectus- Companies desiring to list their securities offered through a public issue are required to obtain prior permission of BSE to use the name of BSE in their prospectus or offer for sale documents before filing the same with the concerned office of the Registrar of Companies.
BSE has a Listing Committee, comprising of market experts, which decides upon the matter of granting permission to companies to use the name of BSE in their prospectus/offer documents. This Committee evaluates the promoters, company, project, financials, risk factors and several other aspects before taking a decision in this regard. Decision with regard to some types/sizes of companies has been delegated to the Internal Committee of BSE. Submission of Letter of Application- As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities on BSE is required to submit a Letter of Application to all the stock exchanges where it proposes to have its securities listed before filing the prospectus with the Registrar of Companies. 5. Allotment of Securities- As per the Listing Agreement, a company is required to complete the allotment of securities offered to the public within 30 days of the date of closure of the subscription list and approach the Designated Stock Exchange for approval of the basis of allotment. In case of Book Building issues, allotment shall be made not later than 15 days from the closure of the issue, failing which interest at the rate of 15% shall be paid to the investors. 6. Trading Permission- As per SEBI Guidelines, an issuer company should complete the formalities for trading at all the stock exchanges where the securities are to be listed within 7 working days of finalization of the basis of allotment.
A company should scrupulously adhere to the time limit specified in SEBI (Disclosure and Investor Protection) Guidelines 2000 for allotment of all securities and dispatch of allotment letters/share certificates/credit in depository accounts and refund orders and for obtaining the listing permissions of all the exchanges whose names are stated in its prospectus or offer document. In the event of listing permission to a company being denied by any stock exchange where it had applied for listing of its securities, the company cannot proceed with the allotment of shares. However, the company may file an appeal before SEBI under Section 22 of the Securities Contracts (Regulation) Act, 1956.
Requirement of 1% Security- Companies making public/rights issues are required to deposit 1% of the issue amount with the Designated Stock Exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc.
8. Payment of Listing Fees- All companies listed on BSE are required to pay to BSE the Annual Listing Fees by 30th April of every financial year as per the Schedule of Listing Fees prescribed from time to time.
Compliance with the Listing Agreement- Companies desirous of getting their securities listed at BSE are required to enter into an agreement with BSE called the Listing Agreement, under which they are required to make certain disclosures and perform certain acts, failing which the company may face some disciplinary action, including suspension/delisting of securities. As such, the Listing Agreement is of great importance and is executed under the common seal of a company. Under the Listing Agreement, a company undertakes, amongst other things, to provide facilities for prompt transfer, registration, sub-division and consolidation of securities; to give proper notice of closure of transfer books and record dates, to forward 6 copies of unabridged Annual Reports, Balance Sheets and Profit and Loss Accounts to BSE, to file shareholding patterns and financial results on a quarterly basis; to intimate promptly to the Exchange the happenings which are likely to materially affect the financial performance of the Company and its stock prices, to comply with the conditions of Corporate Governance, etc.
The Listing Department of BSE monitors the compliance by the companies with the provisions of the Listing Agreement, especially with regard to timely payment of annual listing fees, submission of results, shareholding patterns and corporate governance reports on a quarterly basis. Penal action is taken against the defaulting companies.
Cash Management Services (CMS) - Collection of Listing Fees- In order to simplify the system of payment of listing fees, BSE has entered into an arrangement with HDFC Bank for collection of listing fees from 141 locations all over the country. Details of the HDFC Bank branches are available on the website site www.bseindia.com as well as on the HDFC Bank website www.hdfcbank.com. This facility is being provided free of cost. Companies intending to utilize this facility for payment of listing fee should furnish the information in the Cash Management Cash Deposit Slip.
Importance Of Listing Agreement- 1. Through this agreement company undertakes to provide prompt facilities like transfer, consolidation, sub-division, consolidation of securities. 2. Provide proper notice for record dates and book closure. 3. Furnish accounts on quarterly basis. 4. Intimate Stock Exchanges the happenings which are likely to affect the financial performance of the company & its stock prices. 5. Comply with the corporate governance conditions. 6. Forward copies of its annual report and accounts to its shareholders. Clause 49 Of The Listing Agreement- “Business history suggests that it often takes a scandal or two of unhealthy proportion to really bring into sharp relief the role of ethics and governance in business.”
True to that, the Satyam debacle, India's Enron, has had a profound influence on the Indian business environment and there was a redoubled effort on the part of both the government and other corporations to ensure governance codes were tightened.
Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a listed entity should follow, was first introduced in the financial year 2000-01 based on recommendations of Kumar Mangalam Birla Committee. The report of the Committee was considered and adopted by SEBI Board in its meeting held on January25, 2000. The recommendations are to be implemented through the amendment to the listing agreement of the stock exchanges. Internationally, listing agreement has been used in most markets to implement corporate governance in the listed companies.
The initiatives taken by Government in 1991, aimed at economic liberalization and globalization of the domestic economy, led India to initiate reform process in order to suitably respond to the developments taking place world over. On accounts of interest generated by Cadbury Committee Report, Confederation of Indian Industries (CII), the Associated chambers of Commerce and Industry (ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to recommend initiatives in Corporate Governance. The recommendations of Kumar Mangalam Birla Committee, constituted by SEBI, led to the addition of Clause 49 in the Listing Agreement in February 2000. These recommendations, aimed at improving the standards of corporate governance are divided into mandatory and non mandatory recommendations. The recommendations have been made applicable to all listed companies, their Directors, Management, Employees and Professionals associated with such companies. The ultimate responsibility of putting the recommendations into practice lies directly with the Board of Directors and the Management of the Company.
After these recommendations were in place for about two years, SEBI, in order to evaluate the adequacy of the existing practices and to further improve the existing practices set up a committee under the Chairmanship of Mr. Narayana Murthy during 2002-03. The Murthy committee, after holding three meetings, had submitted the draft recommendations on corporate governance norms. After deliberations, SEBI accepted the recommendations in August 2003 and asked the Stock Exchanges to revise Clause 49 of the Listing Agreement based on Murthy committee recommendations. This led to widespread protests and representations from the Industry thereby forcing the Murthy committee to meet again to consider the objections. The committee, thereafter, considerably revised the earlier recommendations and the same was put up on SEBI website on 15th December 2003 for public comments. It was only on 29th October 2004 that SEBI finally announced revised Clause 49, which will have to be implemented by the end of financial year 2004-05. These revised recommendations have also considerably diluted the original Murthy Committee recommendations. Areas where major changes were made include:
● Independence of Directors, ● Whistle Blower policy, ● Performance evaluation of non-executive directors, ● Mandatory training of non-executive directors, etc.
The changes in corporate governance norm as prescribed in the revised Clause 49 are as follows:
Composition of Board- The revised clause prescribes six tests, which a non-executive director needs to pass to qualify as an Independent Director. The existing requirement is that to qualify as an Independent Director, the director should not have, apart from receiving director’s remuneration, any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the Board may affect independence of judgment of the director. This requirement finds place in the revised clause also except that the relationship will now extend to its management, its holding company and its associates in addition to the existing list. Further the Board is no longer required to judge the independence status of a director as at present. Five new clauses have been added to determine independence of a director. These are:
(i) He is not related to promoters or persons occupying management positions at the board level or at one level below the board;
(ii) He has not been an executive of the company in the preceding three financial years;
(iii) He is not a partner or an executive or was not partner or an executive during the preceding three years of (a) the statutory audit firm or the internal audit firm that is associated with the company; and (b) the legal and consulting firms that have a material association with the company;
(iv) He is not a material supplier, service provider or customer or a lessor or lessee of the company, and
(v) He is not a substantial shareholder of the company owning two percent or more of the block of voting shares. Non-Executive Directors’ compensation & disclosures- A new requirement has been provided for obtaining prior approval of shareholders for payment of fees/compensation to non-executive directors. If there is stock option, the limit for the maximum number that can be granted to non-executive directors in any financial year and in aggregate should be disclosed.
According to the Companies Act, 1956 fees paid to directors do not form part of Managerial remuneration and hence no approval of shareholders for payment of fees to directors is required. Listed companies will now need to obtain prior approval of shareholders for payment of sitting fees to directors.
Unless the Government is contemplating to change the law and bring sitting fees within the ambit of Managerial remuneration this contradiction should have been avoided.
Audit Committee- Following are the changes with regard to Audit Committee: (i) Two-third of the members of Audit committee shall be independent directors as against the present requirement of majority being independent;
(ii) Earlier, only non-executive directors could be members of Audit committee. The revised clause has omitted this requirement.
(iii) All members of the Audit committee shall be financially literate (as defined in the revised clause) as against the existing requirement of at least one member having financial and accounting knowledge.
(iv) Minimum number of Audit committee meetings in a year increased to 4 from 3.
(v) Role of the Audit committee has been enlarged to include (a) matters required to be included in Directors’ Responsibility statement; (b) to review the functioning of Whistle Blower mechanism if the same exists and (c) review of performance of statutory and internal auditors.
(vi) The Audit committee will also mandatorily review (a) Management
Discussion and Analysis of Financial condition and results of operations; (b) statement of significant related party transactions;
(c) Management letters/letters of internal control weaknesses issued by the statutory auditors; (d) Internal audit reports relating to internal control weaknesses, and
(vii) To review the appointment, removal and terms of remuneration of the Chief Internal Auditor. The Audit committee will no longer be required to review the company’s financial and risk management policies. Risk assessment and minimization procedures will now be reviewed by the Board.
Listed companies should now ascertain from their respective Audit committees the frequency of reporting related party transactions, frequency of discussing Management letters issued by the statutory auditors etc. Other Provisions Related To Board- (i) Gap between two meetings has been reduced to three months from four months ruling at present.
(ii) A code of Conduct for Board members and senior management has to be laid down by the Board which should be posted on the website of the company. All Board members and senior management should affirm compliance with the code on annual basis and the annual report shall contain a declaration to this effect signed by the CEO.
Subsidiary Companies- These are new requirements, which provide for the following:
(i) At least one independent director on the Board of the holding company shall be a director on the board of a material non-listed Indian subsidiary company;
(ii) The audit committee of the holding company shall review the financial statements, in particular, the investments made by the unlisted subsidiary company;
(iii) The minutes of board meetings of the unlisted subsidiary company shall be placed at the board meeting of the holding company. The management should periodically bring to the attention of the holding company a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.
6. Disclosures- Following new disclosure requirements have been specified in the revised clause 49:
(i) Statement on transactions with related parties in the ordinary course of business shall be placed before the Audit committee periodically;
(ii) Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the Audit committee; and
(iii) Details of material individual transactions with related parties or others, which are not on arm’s length basis, should be placed before Audit committee together with management’s justification for the same. Here also, the word ‘material’ has not been defined. Listed companies should ascertain from their respective audit committees the frequency of reporting such transactions.
(iv) Financial statements should disclose together with management’s explanation any accounting treatment different from that prescribed in Accounting Standard.
(v)The company will lay down procedures to inform board members about the risk assessment and minimization procedures which shall be periodically reviewed by the Board.
(vi) The company shall disclose to the Audit committee on a quarterly basis the use of funds raised through public/ rights/preferential issues. Annually a statement showing use of funds for purposes other than those stated in
Offer document/prospectus should be placed before the Audit committee. Such statement should be certified by the statutory auditors.
(vii) Under ‘Remuneration of Directors’ new disclosure requirements have been prescribed, which include criteria of making payments to nonexecutive directors, shares and convertible instruments held by non-executive directors and shareholding (both own and held on beneficial basis) of nonexecutive directors to be disclosed in the notice of general meeting called for approving appointment of such director.
7. CEO/CFO Certification- This is a new requirement and is based on the Sarbanes Oxley Act of USA. This had also been recommended by the Naresh Chandra Committee set up by the Centre in 2002-03. The revised Clause only requires CEO and CFO to certify to the Board the annual financial statements in the prescribed format.
While this certification will certainly provide comfort to the non-executive directors and will indeed act as the basis for the Board to make Directors’ Responsibility Statement in terms of section 217(2AA) of the Companies Act,
1956, it is not clear why SEBI did not require the listed companies to include such certification in the Annual Report.
8. Compliance Reports- The format of quarterly report to be submitted to the Stock Exchanges has been revised and the new format follows the revised requirements of Clause 49. The CEO or the Compliance officer can now sign the compliance report. The annual corporate governance report should disclose adoption or non-adoption of non-mandatory requirements.
9. Non- Mandatory requirements- Five new items have been added under non-mandatory requirements and the existing item on Postal ballot has been deleted.
The first new item states that Independent directors may not have tenure not exceeding in the aggregate a period of nine years on the Board of the company.
The next item relates to companies moving towards a regime of unqualified audit report.
The third item deals with training of board members in the business model of the company as well as risk profile of the business parameters of the company and responsibilities of directors and how best to discharge it.
The fourth item deals with performance evaluation of non-executive directors by a peer group comprising the entire Board.
The fifth item relates to setting up of a whistle blower policy in the company.
Conclusion- Corporate governance in India has undergone a paradigm shift by gradually becoming more conscience-driven due to interests of customers, employees, vendors and regulators. With the recent spate of corporate scandals and the subsequent interest in corporate governance, a plethora of corporate governance norms and standards have sprouted around the globe. The Sarbanes-Oxley legislation in the USA, the Cadbury Committee recommendations for European companies and the OECD principles of corporate governance are perhaps the best known among these.
But developing countries have not fallen behind either. Well over a hundred different codes and norms have been identified in recent surveys and their number is steadily increasing. India has been no exception to the rule.
In the last few years, the thinking on the topic in India has gradually crystallized into the development of norms for listed companies. The problem for private companies, that form a vast majority of Indian corporate entities, remains largely unaddressed. Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level.
Even the most prudent norms can be hoodwinked in a system plagued with widespread corruption. Nevertheless, with industry organizations and chambers of commerce themselves pushing for an improved corporate governance system, the future of corporate governance in India promises to be distinctly better than the past. If practiced in the right spirit, it can lead to unlocking the intellectual power of the board and management to focus organizational efforts on value-creating objectives using ethical means.
Technology, laws and regulations, disruptive events and demand for greater accountability are the business drivers for embracing new governance practices. Moreover, security, identity and access, information rights management, e-mail retention, centrally controlled spreadsheets, management and reporting are the enabling technologies for visionary corporate governance practices. ******************************* # Ankur Srivastava, ‘Practical Aspects on Listing Agreement’, Corporate Law, 2011 # Ankur Srivastava, ‘Practical Aspects on Listing Agreement’, Corporate Law, 2011 # Available at http://www.bseindia.com/about/abintrobse/listsec.asp visited on August 16, 2011. # Available at http://www.bseindia.com/about/abintrobse/listsec.asp visited on August 16, 2011. # Available at http://www.bseindia.com/about/abintrobse/listsec.asp visited on August 16, 2011. # Available at http://www.bseindia.com/about/abintrobse/listsec.asp visited on August 16, 2011. # Available at http://www.bseindia.com/about/abintrobse/listsec.asp visited on August 16, 2011. # Available at http://www.bseindia.com/about/abintrobse/listsec.asp visited on August 16, 2011. # Available at http://articles.economictimes.indiatimes.com/2010-07-21/news/27605131_1_corporate-governance-governance-codes-companies visited on September 26, 2011. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # K.R. Chandratre & A.N. Navare, Corporate Governance- A Practical Handbook with Exhaustive Commentary on Clause 49 of the Listing Agreement, (New Delhi- Bharat Law House) 2010 # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # Available at http://www.directorsdatabase.com/Clause49.asp visited on August 16, 2011. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # Available at http://www.directorsdatabase.com/Clause49.asp visited on August 16, 2011. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # Available at http://www.directorsdatabase.com/Clause49.asp visited on August 16, 2011. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004. # Dilip Kumar Sen, ‘Clause 49 of the Listing Agreement on Corporate Governance’, The Chartered Accountant, 2004.
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