Revised Clause 49 of the Listing Agreement


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.

Corporate Governance as a concept aims to balance the interests of the various parties involved. It may be referred to as the rules or the system through which the Company is directed or controlled. By balancing the interests of all the stakeholders- management, shareholders, consumers etc, it formulates ways to attain company’s objectives. The concept of Corporate Governance became a central issue after the Sarbanes-Oxley Act was introduced in the United States. This Act was passed to restore the faith of general public in the Companies. Clause 49 of the Listing Agreement by Securities Exchange Board of India elaborates on the issue of Corporate Governance and prescribes the norms under which the Companies are mandated to operate. Subsequent to the enactment of the new Companies Act, 2013; SEBI through an official circular has amended Clause 49 of the Listing Agreement to bring it in conformity with the new Act.[1] The amended clause has been operative since October, 2014.

This paper aims to analyse the various heads discussed under Clause 49 of the Listing Agreement with special emphasis on the amended parts and to bring in a comparative analysis with the Companies Act, 2013.

The need was felt to amend the Listing Agreement in order to align the provisions of the Listing Agreement with the new Companies Act. Also, to strengthen the Corporate Governance framework for listed companies in India.

Applicability of Clause 49:

Clause 49 of the Listing Agreement is applicable to all the listed companies through the official circular with effect from 1st October, 2014. Other entities which are not Company per se but fall under the head of body corporate and are guided or regulated by some other Statute, the clause shall apply on them till it is conformity with their statute. In case, any of the provision of the clause violates the concerned statute, the Listing Agreement would cease to apply. This clause is not applicable to mutual funds.

Clause 49(I) Principles:

Rights of Shareholders:  Listing Agreement enumerates the following rights of the shareholders which must be met by the Company: Shareholder’s must be sufficiently informed about the fundamental corporate changes and must get a right to participate in it. They must have an opportunity to participate and vote in general shareholder’s meetings. They should have a right to place items on the agenda of the meeting (general), propose resolutions etc. The shareholders must have the opportunity to exercise ownership rights. Minority protection from the abusive action of the majority must be protected. Further, the Company must adequately and timely inform the shareholders about the general meetings, capital structures and arrangements, rights attached to shares or class of shares they seek to invest in. The Company must design ways to avoid Insider trading and abusive self dealing. Finally, there must be equitable treatment of all shareholders.

Role of Stakeholders in Corporate Governance: This section provides for the need of recognition of the rights of stakeholder and encourage cooperation between stakeholders and company. The stakeholders must be effectively recognised and respected. A mechanism must be created to protect their rights from abuse or violation. Further, they must be timely and adequately informed about every process relating to Corporate Governance.

Disclosure and Transparency: Disclosures must be made regarding proper compliance of prescribed standards of accounting, financial and non- financial disclosure. Maintenance of records containing minutes of the meeting must be done, specifically recording dissenting opinions.

Duties/ Responsibilities  of the Board: One of the key responsibilities of the Board is to observe transparency and disclose every material fact or report which is required to be disclosed. Other key functions include monitoring the effectiveness of the Company’s governance practice, setting performance objectives, aligning board remuneration and other key executive with the interests of the Company and shareholders etc.

Clause 49(II) Board of Directors:

Composition: This part requires that the Company must have an optimum combination of Executive and non executive directors i.e. the Board must necessarily have 50% non- executive directors. Also, it is mandated that there must be at least one woman director.  In case, the Chairman of the company is a non executive director, one-third of the Board must comprise of independent directors. However, if the Chairman is an executive director, half the Board must comprise of Independent directors.

Independent Directors: The amended agreement excludes nominee director to fall under the meaning of independent director. Independent director is any non executive director who possess relevant  expertise and integrity and in no way is related to the Company.

According to the clause, no person can be an independent director of more than seven listed companies. If any person is serving as a whole time director in any listed company, then he/she shall not be the independent director of more than three listed companies.

The tenure of the Independent director has been amended to be in accordance with the Companies Act, 2013 and the relevant rules released by Ministry of Corporate Affairs from time to time. Under the Companies Act, 2013 the tenure of independent directors has been given of five years. However, an independent director cannot be an independent director of a company consecutively. There has been prescribed a cooling period of three years in between.

The appointment of the independent director has to be made through a formal letter of appointment as prescribed in the Companies Act, 2013.

The evaluation of the performance of the independent directors must be made as per the criteria laid down by the Nomination Committee which must be disclosed in the annual report. The evaluation of the director would be done by the entire board except the director evaluated or concerned. Based on this evaluation, the Director’s tenure would be extended or not.

The independent directors of a company shall hold a meeting where only independent directors are present and no other member or director. The objective behind such meeting is to analyse the performance of the other directors and to assess the quality and quantity of information flow between the Company and the Board for the effective functioning.

Instead of the training programme for the independent directors, the familiarisation programme for the independent director has been introduced whereby the directors would be familiarised with their role, functions in the Company. Also, the details of the business functioning would be elaborated through programmes. The details of this programme have to be disclosed in the website of the Company along with a link attached to the Company’s annual report.

Non Executive Directors’ Compensation and Disclosures: Under this, the payment scheme as fixed by the Board of all the non- executive directors must be approved by the shareholders in a general meeting. The shareholders would decide the number of Stock option that would be granted to the non executive directors in a financial year. Further, it has been provided that the independent directors are not entitled to stock options. This rule regarding the prior approval of shareholders shall not apply in case of the payment of sitting fees to the non executive directors.

Code of Conduct:  The Board of Directors are responsible to lay down a code of conduct for all the Board members and senior management of the company which shall be posted on the website of the Company. A strict compliance of this code must be witnessed on an annual basis and the CEO would sign a declaration annexed with the annual report conforming such compliance. The duties of independent directors must be in accordance with those laid down in the Companies Act, 2013. An independent director must be held responsible for only those acts of omission or commission which had occurred with his knowledge.

Other Provisions: Clause 49 (II)(D) talk about the other provisions which are to be complied with in respect of Boards and Committees. The foremost being the meeting of the Board, four times in a year. The gap prescribed between two meetings is a maximum of hundred and a twenty days. The second provision in this part is regarding Committee membership. A cap has been placed with regard to the committees a director can be a member of. A director cannot be a member of more than 10 Committees or act as a Chairman of more than 5 Committees in all the companies where he is designated as a director. The Board is responsible to review all the compliance reports of every law applicable to the Company and rectify instances of non compliances.

Whistle Blower Policy: Last but the most important provision is regarding the Whistle Blower Policy. Previously being one of the non mandatory provision of the Agreement, it has now been amended and made a mandatory provision. Under this, the Company is required to establish a vigil mechanism to report unethical behaviour or any sort of violation of the company’s code of conduct, any actual or suspected fraud. The website of the Company along with the Board report must disclose the establishment of such mechanism. The mechanism should provide for safeguards against victimization of the personnel availing it.

Clause 49(III) Audit Committee:

Composition: The Board must have minimum three members out of which at least two/third  must be independent directors. Further, all the members must be financially literate and one member must be an expert in accounting or related financial management. The Chairman of the Audit Committee must be an Independent Directors, who must be present at the Annual General Meeting to answer shareholder’s query.

The Audit Committee must meet four times in a year with a gap of not more than four months in between two meetings. The quorum must be two members or one third of the total members whichever is greater, but minimum two independent directors must be present.

Powers of Audit Committee: The powers of the Committee extend to investigate any activity within its reference, seek information from employee, obtaining outside professional advice and secure attendance of expert outsiders in the relevant area.

Role of Audit Committee:  Under the Listing Agreement, the Audit Committee has been empowered with several duties or roles. Some of which are recommendation on the appointment, remuneration of auditors, approving the payment to statutory auditors, review annual financial statement of the Company along with the Auditor’s report, review quarterly financial statements before submission to the Board for approval, review the independence and performance of the auditors.

Review of Information by Audit Committee:  The Committee is mandatorily authorised to review the following items: Management discussion and analysis of financial condition and results of operation, statement of significant related party transactions, management letters issued by statutory auditors, the appointment, removal or terms of remuneration of Chief Internal Auditor.

Clause 49(IV) Nomination and Remuneration Committee:

This committee must consist of at least three members, all of whom are non executive directors with at least half of them being independent directors. The Chairman of the Committee must necessarily be an independent director. Chairperson of the Company may become a member of the Committee irrespective of him/her being executive or non executive director, however, they cannot Chair the committee. Role of the Committee includes formulation of criteria to evaluate Independent directors, policy devising on Board diversity, identifying prospective directors and senior management in accordance with the criteria laid down, recommendation to the Board policies relating to remuneration of directors and other employees including key managerial personnel.

Clause 49(V) Subsidiary Company:

At least One Independent Director of the holding Company would be the on the Board of the material non-listed Indian subsidiary company. The Audit Committee of the holding listed company shall review the financial statements of the unlisted subsidiary company with special reference to the investments made. The management should regularly bring to the notice of the Board of the listed holding company, a statement containing all significant transactions entered into by the unlisted subsidiary.

The Company must disclose the policy formulated to determine material subsidiaries in the website of the Company with a link to its annual report. The company would be considered a material subsidiary, if the investment of the company exceeds 20% of its consolidated net worth as per the audited balance sheet of previous financial year or if the company has generated consolidated income exceeding 20% in the previous financial year. Disposing of shares in the subsidiary( material) which would reduce its shareholding to less than 50% or the exercise of control would cease without passing a special resolution is not allowed. Further, Selling, disposing and leasing of assets which would amount to more than twenty percent of the assets of the subsidiary shall require prior approval of the shareholders through special resolution unless duly approved by a Court/ Tribunal.

Clause 49(VI) Risk Management:

This is applicable only to the top 100 Companies by market capitalization as at the closing of immediate previous financial year. Under this head, the Board must be informed through procedures about risk assessment and minimization procedures. The Board will constitute a Risk Management Committee. The Board shall determine its role and functions and delegate powers as it may deem fit. The Committee members must in majority consist of Board members. Senior Executives may become the member of the Committee but the Chairman of this Committee shall be a member of Board of Directors.

Clause 49(VII) Related Party Transactions:

The definition or the interpretation of the term related party has been brought in conformity with the Companies Act, 2013[2] along with the applicable accounting standards. The company must formulate a policy on the materiality and dealings with Related party transactions. A transaction with related party would be considered material if the transaction/transaction entered into exceeds 10% of the annual consolidated turnover of the Company. All such transaction require prior approval of the Audit Committee. An omnibus approval may be granted by Audit Committee subject to the fulfillment of the following conditions: Such approvals must be in respect of repetitive natured transactions, the Committee must be satisfied that such approval is in the interest of the Company. Such approval shall specify the name of the party, nature, period, maximum amount of transaction that can be entered into. The proviso to this provision lays down that the Audit Committee may grant omnibus approval for transactions where it cannot be foreseen or the details are not available, however, with the limit that the value must not exceed Rs. 1 Crore per transaction. Such approvals would be valid only for one year and fresh approval shall be required after the expiry of one year. All material related party transactions shall require the approval of the shareholders through special resolution.

Clause 49(VIII) Disclosures:

Related Party Transactions: Details of all material related party transactions must be disclosed along with compliance report on Corporate Governance. This disclosure must be made quarterly. The company must disclose the policy regarding Related party Transactions on its website and a web link should be provided in the Annual Report

Disclosure of Accounting Treatment: If any different accounting standard or treatment is being used while preparing the financial statement, then the same must be disclosed.

Remuneration of Directors: All pecuniary transactions or relationship of the non executive directors with the Company must be disclosed in the annual report. Apart from the necessary disclosures as required under Companies Act, 2013 certain other disclosures are to be made in the corporate governance section i.e. all elements of remuneration package of directors categorized under groups, details of performance linked incentives along with performance criteria, service contracts, notice period, severance fees, stock option detail if any, disclosure of convertible shares or instruments held by non executive directors, publish criteria regarding payment making procedure of non executive directors in its annual report.

Management: Management Discussion and Analysis report should form a part of the Annual report of shareholders containing discussion on the industry structure and developments, opportunities and threats, product wise performance, outlook, risk and concerns etc. Senior Management must disclose every financial or commercial transaction where they have a personal interest which might conflict with the interest of the company.

Shareholders: On the appointment or re appointment of a director the shareholders must be provided with certain information regarding the same like resume of the directors, nature of his expertise, name of companies where the person holds directorship and membership of Committees of the Board. Further, inter director relationships must be disclosed in the Annual report, prospectus, letter of offer for issuances or any related filing. A committee named Stakeholders Relationship Committee must be constituted which would consider and resolve the security holders’ grievances.

Lastly, proceeds from public issue, rights issue, preferential issues must be disclosed. If it is done on a quarterly basis, then on the quarterly declaration of financial results to the Audit Committee. On an yearly basis, a statement of funds utilized for purposes other than those states in the offer document must be placed before the audit Committee. This statement shall e certified by the statutory auditors of the company.

Clause 49(IX) CEO/CFO certification:

The CEO or the Managing Director or in their absence a whole time director and the CFO must certify that they have reviewed the financial statements and the cash flow statements to the best of their knowledge. Further, they certify that the Company to the best of their knowledge hasn’t entered into any transaction which is violative of Company’s Code of Conduct, illegal or fraudulent. They should further indicate to the auditors and the Audit Committee any significant changes made in internal control over financial reporting, changes in accounting policies which have been disclosed in the financial statement, instances of significant fraud that they have come across.

Clause 49(X) Report on Corporate Governance:

A separate section in the Annual report on Corporate Governance  must be made along with the detailed compliance report on Corporate governance. Any non compliance of any mandatory requirement must be highlighted. Company must submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter and such report must be signed by the Compliance Officer or the CEO.

Clause 49(XI) Compliance:

The Company is required to obtain a certificate regarding compliance of Corporate governance as enumerated in this clause and annex this certificate with the director’s report sent annually to the shareholders of the Company. The same certificate is to be sent to the stock exchanges along with the annual report. The auditors or practicing company secretaries shall give the certificate.


The need for ethical governance was felt required after the recent events, particularly in the United States. The United States reacted to these events and enacted the Sarbanes Oxley Act, 2002 which brought out fundamental changes in Corporate Governance’s every aspect. The revised clause 49 of the Listing Agreement has broadened the scope of Corporate Governance in India and provides for whistle blower policy, compliance report with the issue of certificate of compliance, widened definition of independent director, disclosure requirements etc.[3] As seen above, this revised clause has broadened the scope of Corporate Governance in listed companies in India and should provide for a good governance framework.

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