Background
The SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy to further improve the standards of corporate governance in India.
Based on this report, SEBI vide its circular dated 26th August 2003, has introduced some major amendments to Clause 49 of the Listing Agreement.
The significant features of these amendments may be summarised as under:
¨ Broadening of the definition of independent director
¨ Fixing of norms relating to Non-executive directors' compensation and disclosures
¨ Additional duty on the independent director to periodically review the legal compliance reports prepared by the Company and steps taken by the Company to improve.
¨ Obligation on the Board of Directors to lay down a Code of Conduct for all Board members and senior management of the Company.
¨ Fixation of the term of Non-executive Directors to a maximum of nine years
¨ Requirement of all members of the Audit Committee being financially literate
¨ Increase in the powers of the Audit Committee
¨ Additional duty on the Audit Committee to review of certain information by the Audit Committee
¨ Requirements relating to Audit reports and Audit Qualifications
¨ New Requirement of Whistle Blower[/i] Policy
¨ Applicability of the requirements to subsidiary companies relating to composition of the Board of directors, laying of minutes of the Board meeting before the Board of the holding company and additional requirement to be included in the Board report of the Holding Company.
¨ Disclosure of contingent liabilities
¨ Additional Disclosures
¨ Certification by CEO/CFO
¨ Change in the Format of reporting to Stock Exchanges relating to Corporate Governance
¨ Entitlement to practising Company secretaries to certify the compliance of the conditions of corporate governance
I. [/b]Independent Director[/b]
Previous Definition
Amended Definition
'Independent Director'[/i] means apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;
Now besides the existing definition following additional requirements have been introduced:
Independent Director is one who[/i]:
¨ is not related to promoters or management at the board level or at one level below the board;
¨ has not been an executive of the company in the immediately preceding three financial years;
¨ is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity.
¨ is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also; and
¨ is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.
However, the previous guidelines relating to Institutional directors on the boards of companies being considered as independent directors (whether the institution is an investing institution or a lending institution).
II. [/b]Fixing of norms relating to Non-executive directors' compensation and disclosures[/b]
Previous Norms
Amended Norms
¨ The company agrees that all pecuniary relationship or transactions of the non-executive directors viz-a-viz. the company should be disclosed in the Annual Report
¨ Compensation paid to non-executive directors shall be fixed by the Board of Directors and shall be approved by shareholders in general meeting.
Limits shall be set for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate. The stock options granted to the non-executive directors shall vest after a period of at least one year from the date such non-executive directors have retired from the Board of the Company.
¨ The considerations as regards compensation paid to an independent director shall be the same as those applied to a non-executive director.
¨ The company shall publish its compensation philosophy and statement of entitled compensation in respect of non-executive directors in its annual report or put up the same on the company’s website and reference drawn thereto in the annual report.
The details of shares held by non- executive directors, including on an "if-converted" basis shall also be disclosed.
¨ Non-executive directors shall be required to disclose their stock holding (both own or held by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should accompany their notice of appointment
III. [/b]Additional duty on the independent director [/b]
An independent director would be supposed to periodically review the legal compliance reports prepared by the Company and steps taken by the Company to improve the taints. Further, in case of any proceedings against him, defence of ignorance of this responsibility shall not be permitted.
The considerations as regards remuneration paid to an independent director shall be the same as those applied to a non-executive director.
IV. Code of Conduct for all Board members and senior management of the Company.[/b]
The Board shall lay down the code of conduct for all Board members and senior management of a company.
Here senior management means " personnel of the company who are members of its management/operating council (i.e. core management team excluding Board of Directors). Normally, this would comprise all members of management one level below the executive directors
This code of conduct shall be posted on the website of the company. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed by the CEO and COO.
V. Fixation of the term of Non-executive Directors to a maximum of nine years[/b]
In order to be eligible for appointment to the office of non-executive Directors, the term of office has been specified as nine years in three terms of three years each, running continuously.
V. Audit Committee