Corporate Governance and Clause 49 of the Listing Agreement

SEBI revise Clause 49 of the Listing Agreement pertaining to corporate governance vide circular date October 29th, 2004, which superseded all other earlier circulars issued by SEBI on this subject.  All existing listed companies were required to comply with the provisions of the new clause by 31st December 2005.

The major provisions included in the new Clause 49 are:

  • The board will lay down a code of conduct for all board members and senior management of the company to compulsorily follow.
  • The CEO an CFO will certify the financial statements and cash flow statements of the company.
  • If while preparing financial statements, the company follows a treatment that is different from that prescribed in the accounting standards, it must disclose this in the financial statements, and the management should also provide an explanation for doing so in the corporate governance report of the annual report.
  • The company will have to lay down procedures for informing the board members about the risk management and minimization procedures.
  • Where money is raised through public issues etc., the company will have to disclose the uses/ applications of funds according to major categories ( capital expenditure, working capital, marketing costs etc) as part of quarterly disclosure of financial statements.

Further, on an annual basis, the company will prepare a statement of funds utilized for purposes other than those specified in the offer document/ prospectus and place it before the audit committee.

The company will have to publish its criteria for making its payments to non-executive directors in its annual report. Clause 49 contains both mandatory and non mandatory requirements.

Mandatory requirements refer primarily to:

  1. Board of Directors with respect to their composition, independence, procedures, code of conduct and disclosures;
  2. Audit Committee and its composition, powers, role and responsibilities;
  3. Subsidiary Companies to ensure their better control and supervision;
  4. Disclosures in the context of related party transctions, risk management and minimization procedures, utilization of proceeds from Initial Public Offerings, inverstor education and protection;
  5. CEO/CFO certification regarding the correction of the financial statement and compliance with prescribed Accounting  Standards
  6. Separate report on corporate Governance in the annual reports with respects to compliance of mandatory and non mandatory requirements; and
  7. Compliance certificate obtained either from the auditors or practicing company Secretaries

Non mandatory requirements refer to those requirements which are not compulsory and can be adopted at the discretion of the company.

These include requirements:

  1. Regarding the maximum tenure of the independent directors,
  2. Formation of a remuneration committee for determining the remuneration packages for executives directors,
  3. Moving towards a regime of unqualified financial statements,
  4. Training of board members,
  5. Evaluation of non – executive board members, and
  6. Establishing a mechanism for employees to report unethical behavior to the management under a Whistle Blower Policy.

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