Based on the report of the Committee on Corporate Governance under the Chairmanship of Mr. Uday Kotak, SEBI notified the amendments to the SEBI LODR Regulations on 9 May 2018. These amendments are expected to improve the governance standards in large listed companies.

Most of the amendments are effective from 1 April 2019 but few amendments are effective earlier from 1 October 2018. The listed companies are expected to be in compliance with them as on the respective dates. This Article summarises the amendments to the SEBI LODR Regulations and the actions that the listed entities should take for implementing them. There are around 16 amendments to existing requirements and 31 new requirements in the revised SEBI LODR Regulations.

COMPARATIVE ANALYSIS:

Topic/ Regulations Existing Requirements New Requirements Actions to be taken by listed entities
Related Party defn. [Reg 2(1)(zb)] Related Party as per CA 2013 and applicable accounting standards New Proviso added:

"Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party"
Review the list of related parties and add person falling in the proviso, if not already included.
Related Party Transaction [Reg 23(1)] The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions. The listed entity shall formulate a policy on materiality of related party transactions (RPT) and on dealing with related party transactions including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly
  • Review and revise the policy on materiality of RPTs and include specific threshold limits for determining materiality. Separate thresholds for various categories of RPTs can be specified.
  • Obtain approval of the Board in a board meeting for revised RPT policy.
  • Review the RPT policy every three years.
Related Party Transaction [Reg 23(1A)] New provision A transaction involving payments with respect to brand usage or royalty shall be considered material if such transaction(s) during a financial year, exceed 2% of the annual consolidated turnover of the listed entity as per the last audited financial statements. Ascertain if payment for brand usage or royalty exceeds 2% threshold. If yes, obtain approval of the shareholders for such transaction.
Related Party Transaction [Reg 23(4)] A related party need to abstain from voting on shareholder's resolution. A related party shall not vote to approve shareholder's resolution. Now, a related party can vote to reject the shareholder's resolution.
Related Party Transaction [Reg 23(9)] New provision The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website.

The above is applicable from half year ended 31 March 2019.
  • Starting from half year ended 31 March 2019, Listed entity to separately disclose RPTs to stock exchanges and publish on its website.
  • The RPT disclosure should be prepared in prescribed format along with the financial results so that the timeline can be achieved.
Independent Director [Reg 16(1)(b)(ii)] A non – executive director who is or was not a promoter of the listed entity or its holding, subsidiary or associate company A non – executive director who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity.

[Effective from 1 October 2018]

Verify if any ID is a member of promoter group. If yes, then such ID cannot continue from 1 October 2018
Independent Director [Reg 16(1)(b)(viii)] No criteria added Following new criteria added:

(viii) who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director. [Effective from 1 October 2018]
Verify if any ID falls into this criteria. If yes, then such ID cannot continue from 1 October 2018
Evaluation of ID [Reg 17(10)] New criteria of evaluation specified. The evaluation of independent directors to include:
  1. performance of the directors; and
  2. fulfilment of the independence criteria as specified in these regulations and their independence from the management.
Review the evaluation process of IDs and include the specified criteria, if not covered.
Independent Director [Reg 25(1)] New provision No person shall be appointed or continue as an alternate director for an independent director of a listed entity with effect from October 1, 2018. The alternate director to independent director, if any, to resign prior to October 1, 2018.
Independent Director [Reg 25(8) & (9)] New provision Independent Director to provide, at first board meeting and thereafter every year, a declaration confirming his independence. [Similar to Section 149(7) of CA 2013]

Board to take on record such declaration and confirmation after undertaking assessment of the veracity of the same.
While the submission of such declaration is already covered under Section 149(7) of the CA 2013, but, the Board is now required to independently assess the truthfulness of the declaration provided by the ID.
Material Subsidiary [Reg 16(1)(c)] "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. Threshold is reduced to 10%

"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.
Review the list of subsidiaries and identify subsidiaries whose income or net worth exceeds 10% of the consolidated income or net worth to categorise them as material subsidiaries.
Senior Management [Reg 16(1)(c)] Mean officers/personnel of the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the executive directors, including all functional heads. Mean officers/personnel of the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the chief executive officer/managing director/ whole time director/manager (including chief executive officer/manager, in case they are not part of the board) and shall specifically include company secretary and chief financial officer. Identify officers/ personnel who will fall under the revised definition of Senior Management and update the list of Senior Management maintained by the listed company.
Board Composition [Reg 17(1)(a)] Need to have one woman director (can be either independent or non-independent). Top 500 listed entities should have atleast one independent woman director by April 1, 2019.

Top 1000 listed entities should have atleast one independent woman director by April 1, 2020
Determine if company is amongst the top 500 listed entities. If yes, appoint a women ID before 1 April 2019. Initiate selection and appointment process of woman ID well in advance to achieve the timeline.
Board Composition [Reg 17(1)(c)] New provision The board of top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors. Determine if company is amongst the top 1000 listed entities. If there are less than six directors, then appoint new directors.
Board Composition [Reg 17(1A)] New provision Special resolution required for appointing or continuing directorship of a non-executive director who has attained the age of 75 years.

Explanatory statement shall provide the justification for appointing such a person.
Verify if any NED has attained age of 75 years. If yes, then arrange to pass a special resolution for continuing directorship of NED either in general meeting or by postal ballot before 1 April 2019.
Board Composition [Reg 17(1B)] New provision With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson shall:
  1. be a non-executive director;
  2. 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:
Determine if company is amongst the top 500 listed entities. If yes, the Board of directors to appoint a chairman amongst themselves who satisfies these conditions.
Quorum [Reg 17(2A)] New provision For top 1000 listed entities (from 1 April 2019)

For top 2000 listed entities (from 1 April 2020)

Quorum for every Board meeting shall be 1/3 total strength or three directors, whichever is higher, including at least one independent director
Determine if company is amongst the top 1000 listed entities. If yes, the company to ensure compliance with new quorum requirement in all board meetings held from 1 April 2019.
Remuneration of NED [Reg 17(6)(ca)] New provision If remuneration of a single NED exceeds 50% of the total annual remuneration payable to all non-executive directors, then approval of shareholders by special resolution required every year. Arrange to pass a special resolution in the general meeting or by postal ballot if the remuneration of a single NED exceeds 50% of total remuneration of all NEDs.
Remuneration of ED [Reg 17(6)(e)] New provision The fees or compensation payable to executive directors (who are promoters or members of the promoter group) shall require the approval of the shareholders by special resolution in general meeting, if:
  1. the annual remuneration payable to such executive director exceeds INR 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or
  2. where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity.
The approval of the shareholders will be valid only till the expiry of the term of such director.
Arrange to pass a special resolution of the shareholders in general meeting or by postal ballot, if the remuneration of EDs (who are promoters or members of promoter group) exceed these thresholds.
Recommendation of Board [Reg 17(11)] New provision Explanatory Statement should set forth the recommendation of Board to the shareholders on each special business. Customarily, the explanatory statement contained the recommendation of the board but now it is statutorily prescribed.
Maximum number of Directorships [Reg 17A]
  • Independent Director in maximum 7 listed entities
  • A Whole time director can be independent director is maximum 3 listed entities
  • No limit prescribed for other directors
[Reg 25(1)]
  • Director in maximum 8 listed entities w.e.f. 1 April 2019
  • Director in maximum 7 listed entities w.e.f. 1 April 2020
  • Independent Director in maximum 7 listed entities.
  • Include alternate directorships also.
  • A Whole time director can be independent director is maximum 3 listed entities.
For this sub-regulation, only those listed entities whose equity share are listed will be counted.

CA 2013 – 20 companies (max 10 public companies)
Verify the list of directorships of all directors and ascertain their directorships are within these thresholds. If no, the relevant director would be required to resign from listed companies, in excess of the threshold.
Role of Audit Committee [Sch II, Part C] New provision Audit committee to review utilisation of loans and/or advances from investment by holding company in subsidiary company exceeding INR 100 crores or 10% of asset size of subsidiary, whichever is low. Revise the terms of reference of audit committee to include these matters.

Audit committee to review these matters in their meeting regularly.
Quorum of NRC meeting [Reg 19(2A)] New provision Quorum shall be either 2 members or 1/3rd (whichever is greater) including 1 independent director. Going forward, ensure the fulfilment of this quorum requirement.
NRC meeting [Reg 19(3A)] New provision Meeting of NRC to be held atleast once in a year Usually, all listed companies hold atleast 1 NRC meeting in a year, however now it is statutorily prescribed.
Role of NRC [Sch II, Part D(A)] New provision NRC to recommend to Board, all remuneration in whatever form, payable to senior management. The terms of reference of NRC should be revised accordingly.
Stakeholders Relationship Committee [Reg 20]
  • SRC to look in to mechanism of redressal of grievances of shareholders and other security holders
  • Board to decide number of members of SRC
  • SRC to look in to various aspects of interest of shareholders and other security holders
  • Atleast 3 directors, with atleast 1 independent director, to be members of SRC.
  • Chairperson of SRC to remain present in annual general meeting to answer queries of security holders.
  • SRC to meet at least once in a year.
  • SRC members to consider the interest of shareholders and security holders going forward.
  • The composition of SRC to be aligned with the new requirement.
  • Ensure presence of Chairperson of SRC at annual general meeting to answer queries.
  • Usually, all listed companies hold atleast 1 SRC meeting in a year, however now it is statutorily prescribed.
Role of SRC [Sch II, Part D(B)]
  • New provision
Following additional role of SRC:

  • Review of measures taken for effective exercise of voting rights by shareholders.
  • Review of adherence to the service standards adopted by the listed entity in respect of various services being rendered by the Registrar & Share Transfer Agent.
  • Review of the various measures and initiatives taken by the listed entity for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the shareholders
  • The terms of reference of SRC should be revised accordingly.
  • SRC to undertake these additional activities.
Risk Management Committee [Reg 21(3A)] Applicable to top 100 listed companies
  • Applicable to top 500 listed entities.
  • Functions of RMC to mandatorily cover cyber security.
  • RMC to meet at least once in a year.
  • Determine if company is amongst the top 500 listed entities. If yes, the company to set up RMC (if not done earlier) and ensure compliance with RMC requirement.
  • Role and responsibility of RMC to be revised to cover cyber security.
  • Hold at least one meeting of RMC every year.
Unlisted Material Subsidiary [Reg 24(1)] At least one independent director of the listed entity to be a director of an unlisted material subsidiary, incorporated in India. This requirement shall also apply to an unlisted material subsidiary incorporated outside India.

For this provision, '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
  • The listed entity to initiate the discussion for selecting the ID, who is willing to be appointed as director of material overseas subsidiary.
  • Additionally, verify the legal requirements of the countries, where the material overseas subsidiary is located, with respect to appointment of directors.
Unlisted Material Subsidiary [Reg 24(4)] Exp: the term "significant transaction or arrangement" shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the unlisted material subsidiary for the immediately preceding accounting year The word 'material' is deleted. This seems to bring in line with term 'unlisted subsidiary' used in Regulation 24(4). While ascertaining 'significant transaction', the listed entity should consider RPTs with all unlisted subsidiaries and not just material subsidiaries.
Secretarial Audit [Reg 24(A)] New provision A 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 with effect from the year ended March 31, 2019
  • Beginning from the year ended 31 March 2019, the listed entity to ensure that the secretarial audit of material unlisted subsidiaries is conducted and the secretarial audit report is annexed to its report.
  • Listed entity to identify and engage practising company secretary for conducting secretarial audit.
D&O Insurance [Reg 25(10)] New provision Top 500 listed companies to have a D&O Insurance for all independent directors w.e.f. 1 October 2018. Determine if company is amongst the top 500 listed entities. If yes, then procure a D&O Insurance for all IDs (if not already procured).
Prior Intimation for Bonus [Reg 29(f)] If Bonus is not part of agenda of board meeting, then prior intimation not required. This provision is deleted. Prior intimation mandatory for declaration of Bonus. Give prior intimation of 2 working days of the board meeting for declaration of bonus.

The exemption is not available for 'declaration of bonus' which is not included in the agenda of the board meeting.

Use of funds [Reg 32(7A)] New provision The listed entity shall disclose the utilisation of funds raised through preferential allotment or QIP in its Annual Report every year until such funds are fully utilised.

This is not applicable for public issue or rights issue.
Include the disclosure on utilisation of funds raised through preferential allotment or QIP in the Annual Report every year.
Financial Results [Reg 33(3)(b)] Submission of consolidated quarterly financial results was optional Submission of consolidated quarterly financial results is now mandatory. Plan in advance for preparing and submission of consolidated quarterly financial results within 45 days of end of the quarter.
Financial Results [Reg 33(3)(e)] Listed entity is required to submit audited financial results in respect of last quarter along with results of entire financial year. Listed entity will now be required to submit audited or limited reviewed financial results of last quarter along with results of entire financial year. Decide about the financial results (audited or limited reviewed) of last quarter to ne submitted to stock exchange so that the listed entity it can accordingly inform the auditors well in advance.
Financial Results [Reg 33(3)(g), (h) & (f)] New provision
  • As part of standalone and consolidated financial results for half year, the statement of cash flow for half year to be submitted.
  • For quarterly audited consolidated financial results, at least 80% of each of consolidated revenue, assets and profits should have been audited or subjected to limited review (in case of unaudited results).
  • Disclose in the results for last quarter, the aggregate effect of material adjustments made in the results of that quarter which pertain to earlier periods.
  • Prepare a cash flow statement every half year
  • Plan the audit schedule such that its auditors are able to complete the audit or limited review of 80% of the consolidated revenue, assets, and profits for preparation of its quarterly consolidated financial results.
  • Prepare a note on effect of material adjustments made in the results of last quarter which pertain to earlier periods.
Financial Results [Reg 33(8)] New provision The auditor of listed entity to undertake limited review of the audit of all entities/companies whose accounts are consolidated with the listed entity. Discuss with auditors and mandate them to conduct limited review of the audit of subsidiaries and other companies.
Annual Report [Reg 34(1)] Annual report to be submitted to stock exchange within 21 days from the AGM Annual report to be submitted to stock exchange and published on its website earlier or on the day of commencement of dispatch to the shareholder.

In case of change in annual report, the revised annual report (along with details of and explanation for changes) shall be sent within 48 hours after the AGM.

Applicable to Annual Report for March 31, 2019 and thereafter.
Make suitable arrangements to ensure that the annual report is published on website and submitted to stock exchanges prior to or on the day of dispatch of annual report to the shareholder.
Annual Report [Sch V, Part A] New provision Related Party Disclosure to cover disclosures on transaction with promoter/promoter group person holding 10% or more shareholding. Henceforth, the Related Party Disclosure in the annual report should include details of transactions with promoter/promoter group holding 10% or more shareholding in listed entity.
Management Discussion and Analysis [Sch V, Part B] New provision MDA to cover details of significant changes (25% or more) in key financial ratios along with details explanations. Cover details of significant changes in the MDA of the next annual report.
Corporate Governance Report [Sch V, Part C] New provision Disclosures to cover:
  • Names of other listed entities in which person is director and category of directorship
  • A chart or matrix of skills/expertise/competence of board of directors
  • Confirmation from Board that independent director fulfils criteria
  • Detailed reasons of resignation of independent director
  • Credit ratings and revisions
  • Details of utilisation of funds raised through preferential allotment or QIP
  • Certificate of PCS confirming director are not debarred or disqualified by SEBI/MCA or any statutory authority
Recommendations of committee not accepted by board, which is mandatory.
Include these additional disclosures in the Corporate Governance Report of the next annual report.
Documents & Information to Shareholders [Reg 36(4)] New provision
  • Disclosure to be made in XBRL format and format allowing users to find information through a searchable tool.
  • Explanatory statement for appointment of auditors to include the proposed fees payable to auditor along with terms of appointment and in case of new auditor, any material change in the fee payable to such auditor compared to outgoing auditor along with rationale
  • Basis of recommendation including details and credentials of auditor
  • File all disclosures in XBRL format and in .pdf format with searchable tool. Search options should not be blocked.
  • Appointment/ re-appointment of statutory auditor is an ordinary business and does not require an explanatory statement under the CA 2013. However, an explanatory statement will have to be provided in the notice giving details of proposed fees, terms of appointment, etc. This implies that the fees of the auditors will have to be fixed in advance before their appointment in the AGM instead of being fixed by the board at the end of the financial year.
Meeting of Shareholders and voting [Reg 44(5) & (6) New provision Top 100 listed companies:

  • to hold AGM within 5 months from the closing of financial year
  • Provide one-way live webcast of proceedings of AGM
  • Top 100 listed companies to plan the schedule and complete all activities so that it can hold their AGM within 5 months.
  • Also arrange for one way live webcast of the AGM
Website [Reg 46(2)] New provision Listed company to disseminate following additional information on its website:

  • All credit ratings and revision in ratings
  • Separate audited financial statements of each subsidiary atleast 21 days prior to the AGM
Make suitable arrangements for disclosing this information on its website.
Disclosures [Sch III, Part A (A)] New provision Additional disclosures:

  • Resignation of auditor along with detailed reasons within 24 hours of receipt of resignation.
  • In case of resignation of independent director, disclose
  • Detailed reasons of resignation
  • Confirmation that there is no other material reason.
Make these additional disclosures going forward.

CONCLUSION:

It will be observed that the management of the listed companies will have to plan and schedule all the activities well in advance so that they come out compliant as on the effective dates of the different provisions of the new SEBI LODR Regulations.

It is expected that in the long term, these amendments will improve transparency and cultivate the spirit of governance amongst the management of the listed companies. The governance standards are enhanced by increasing disclosures, shareholder approval requirements and involvement of Independent Directors. However, it remains to be seen to what extent these objectives are achieved in future.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com