New Financial Year Moots Additional Reporting and Action Points for Listed Corporates – Part I
Vijay Bhutada (Partner, Pantomath Advisors LLP)
Manisha Tejwani (Assistant Manager)
1. BACKGROUND
Over the past decade, the Regulators in India have been acutely conscious of the importance of Corporate Governance. There’s been alignment with some of the best practices followed globally and renewed focus on improved corporate governance through better structures, more rigorous checks and balances and greater independence of all key gate-keepers including boards and auditors. The principle agenda of Regulators has been long-term value creation and protection of shareholders’ interests by applying proper care, skills and diligence to business decisions.
The Securities and Exchange Board of India (SEBI) released on May 9, 2018the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 (‘the Amendments’) in order to adopt and give effect to several recommendations that were proposed in a Report given on October 5, 2017by the SEBI Committee on Corporate Governance formed on June 2, 2017 under the Chairmanship of Mr. Uday Kotak (‘Kotak Committee’). The SEBI also issued a Circular on
May 10, 2018 for implementation of certain recommendations of the Kotak Committee. Consequently, the amendments endured a slew of changes in corporate governance norms.
Though the SEBI aims to put into effect these Corporate Governance Amendments from April 1, 2019, it has provided a phased timeline from October 1, 2018 to April 1, 2020 for most of the amendments. In addition to these amendments, SEBI has periodically issued circulars and guidelines to listed entities for additional compliance reporting. Considering the onset of reporting timeline, it is crucial for the Corporates to heed to the ‘actionable points’ for timely compliances.
In this article, we closely look at the additional reporting requirements for listed entities, applicable for Financial Year 2019-20 and onwards.
2. KEY IMPACTING AREAS AND COMPLIANCES THEREON
2.1. Board Composition and Functionality
a. Minimum number of directors on Board
The Board of Directors of top 1000 listed entities (w.e.f. April 1, 2019) and top 2000 listed entities (w.e.f. April 1, 2020) shall comprise of not less than six directors.
b. Gender Diversity on the Board
The Board of Directors of top 500 listed entities by April 1, 2019 and the Board of Directors of top 1000 listed entities by April 1, 2020 should have at least one independent woman director on the Board.
c. Maximum number of Directorships
A person can be Director in maximum eight listed entities w.e.f. April 1, 2019 and in not more than seven listed entities w.e.f. April 1, 2020. Directorship as independent director is restricted to seven listed entities. However, where a person is serving as a whole time director / managing director in any listed entity, he can serve as an independent Director in not more than three listed entities. Only companies whose equity shares are listed on stock exchange should be counted for this purpose.
d. Chairperson of the Board
The Chairperson of the Board of Directors of top 500 listed entities except for listed entities which do not have any identifiable promoters w.e.f. April 1, 2020 shall:
- be a non-executive director;
- 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.
e. Approval for appointment of Non-Executive Directors on attaining a certain age
Prior shareholders’ approval by a special resolution shall be required, for the appointment of or continuation of directorship of any person as non-executive director on attaining the age of 75
years. Explanatory statement annexed to the notice for such motion should indicate the justification for appointing such a person.
f. Remuneration to Executive Promoter Directors
Prior shareholders’ approval by a special resolution shall be required, for the fees or compensation payable to the executive directors who are promoters or members of the promoter group, if:
- the Company has one executive director and annual remuneration payable to such director exceeds Rs. 5 crores or 2.5% of the net profits of the listed entity, whichever is higher.
- the Company has more than one executive director and the aggregate annual remuneration to such directors exceeds 5% of the net profits of the listed entity.
Shareholders’ approval shall be valid only till the expiry of the term of such director and the calculation of net profits should be as per section 198 of the Companies Act, 2013.
g. Remuneration to Non- Executive Directors
Prior shareholder approval by a special resolution shall be required every year, giving details of the remuneration thereof, in case the annual remuneration payable to a single non-executive director exceeds 50% of the total annual remuneration payable to all non-executive directors.
h. Quorum for Board Meetings
The quorum for every meeting of the Board of Directors of the top 1000 listed entities w.e.f
April 1, 2019 and top 2000 listed entities w.e.f April 1, 2020 shall be 1/3 of its total strength or three directors, whichever is higher, including at least one independent director. The participation of the directors by video conferencing or by other audio-visual means shall also be counted for the purposes of such quorum.
i. Obligation on the Board of Listed Entity with respect to Material Subsidiaries
i. At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, whether incorporated in India or not.
For this purpose, “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds 20% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
ii. The Board of Directors of listed entity shall periodically note statement of all significant transactions and arrangements entered into by the unlisted subsidiary that exceeds or is likely to exceed 10% of the total Revenues / Expenses / Assets / Liabilities of the unlisted subsidiary for the immediately preceding accounting year.
iii. Every Listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a company secretary in practice w.e.f. year ended March 31, 2019.
For this purpose “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds 10% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.
2.2. Institution of Independent Directors
a. Declaration by Independent Directors
The Independent Directors (IDs) shall submit a declaration at the board meeting in which they first participate and thereafter, at the first board meeting held in every financial year or whenever there is any change in the circumstances affecting their independence status, stating that they meet the criteria of independence followed with a confirmation that they are not aware of any circumstance or situation, which exists or may be reasonably anticipated, that could impair or impact their ability to discharge duties with objective independent judgements and without any external influence.
The Board of Directors are required to assess the veracity of the declaration and confirmation given by ID before taking the same on record.
b. Disclosure on Resignation of Independent Directors
The listed entities shall disclose to the stock exchanges, within 7 days from the date of resignation of ID, the detailed reasons for resignation of the ID before the expiry of their tenure along with a confirmation given by such director(s) that there are no other material reasons other than those provided.
c. Evaluation of Independent Directors
The evaluation of IDs shall be done by the entire board of directors which shall include -
- performance of the directors; and
- fulfilment of the independence criteria and their independence from management
In the above evaluation, the directors who are subject to evaluation shall not participate.
d. Directors and Officers insurance
Top 500 listed entities by market capitalization calculated as on March 31 of the preceding financial year, shall with effect from October 1, 2018 undertake Directors and Officers insurance for all their independent directors.
2.3. Board Committees
a. Audit Committee
The committee is required to review utilization of loans and / or advances from/ investment by the holding company in the subsidiary exceeding Rs. 100 crore or 10% of the asset size of the subsidiary, whichever is lower, including existing loans / advances / investments.
b. Nomination and Remuneration Committee
The Committee shall meet atleast once in a year. Quorum for committee meeting shall be two members or one – third of the members, whichever is higher, including at least one Independent Director. The committee shall additionally, recommend to the Board of Directors on all the payments made, in whatsoever form, to the senior management.
c. Stakeholder Relationship Committee
The Committee shall specifically look into various aspects of interest of all Security holders.
The Committee shall have at least three Directors, with at least one Independent Director and meet atleast once in a year. The Chairperson of committee shall be present at AGM to answer queries of security holders. The Committee shall satisfy following roles:
- Resolve grievance of the security holders;
- Review measures for effective exercise of voting rights by shareholders;
- Adherence to service standards in respect of various services being rendered by RTA; and
- Review measures and initiatives for reducing quantum of unclaimed dividend and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the shareholders of the company.
d. Risk Management Committee
The Board of Directors of top 500 listed entities shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to such committee. Functions of committee shall specifically cover Cyber Security. The Committee shall meet atleast once in a year.
* This article has been co-authored by Ms. Ruchira Singhania (Assistant Manager).
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Part-II of this series will cover LODR compliances w.r.t. Accounting and Audit Related issues, Annual General Meeting, and Disclosures in Board and Annual Reports and Transparency.