Companies Act, 2013 in its fervor to enhance disclosures, reporting and transparency has introduced a number of new compliance norms for listed companies. The Act not only imbibes the spirit of listing agreement but goes a step ahead in laying out a strict road map for the listed entities to traverse in the coming times. To top it with a cherry, the Act also humbly states that the requirements mentioned therein are the minimum requirements subject to any higher requirements of any other law.
Responding to the Companies Act, 2013, SEBI has in its Board Meeting held on February 13, 2014 reviewed the Corporate Governance norms for listed companies. SEBI vide a press release has announced that the Board has approved the proposals to amend the Listing Agreement with respect to corporate governance norms for listed companies. The amendments, inter-alia, propose to align the provisions of Listing Agreement with the provisions of the newly enacted Companies Act, 2013 and also provide additional requirements to strengthen the corporate governance framework for listed companies in India. The amendments shall be made applicable to all listed companies with effect from October 01, 2014.
In the current article we attempt to throw light on the key changes in provisions of the Companies Act, 2013 regarding listed companies and also the key changes proposed in the corporate governance norms for listed companies by SEBI as per its press release mentioned above.
PROVISIONS OF COMPANIES ACT, 2013
RELATING TO LISTED COMPANIES
MEANING OF LISTED COMPANY
Definition of Listed Company
“Listed company” means a company which has any of its securities listed on any recognised stock exchange. [Section 2(52)]
So, what is a Security?
As per section 2 (81) of the Companies Act, 2013, “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.
Let’s see, what is Security as per Section 2(h) of SCRA
As per clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, “Securities” include—
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;
Method of Issuance of Securities (Section 23)
ISSUE AND ALLOTMENT OF SECURITIES
A listed company, being a public company, may issue securities -
(a) to public through prospectus ("public offer") by complying with the provisions of Part I of Chapter III of the Act; or
(b) through private placement by complying with the provisions of Part II of Chapter III of the Act; or
(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder.
Drawing corollary from the above, a company which lists any of the above instruments in any recognized stock exchange would be a listed company and will have to comply with all the provisions of Companies Act, 2013 relating to listed companies.
Listing of Securities (Section 40)
a) Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges
b) prospectus shall state the name or names of the stock exchange in which the securities shall be dealt with
c) All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and can be utilized by the company only:
i) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or
ii) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities.
d) Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void.
Postal Ballot (Section 110)
POSTAL BALLOT AND GENERAL MEETING REQUIREMENTS
Following items of business can be transacted by listed companies through postal ballot only-
• Alteration of objects clause of MOA
• Alteration of AOA by means of insertion or removal of provisions necessary to constitute a company as a private company in terms of Section 2(68)
• Change of registered office outside the local limits of any city, town or village as specified in section 12(5).
• Change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised under section 13(8).
• Issue of shares with differential rights as to voting or dividend or otherwise under Section 43(a)(ii)
• Variation in the rights attached to a class of shares or debentures or other securities as specified under section 48
• Buy-back of shares by a company under section 68(1)
• Election of a director under section 151
• Sale of the whole or substantially the whole of an undertaking of a company as specified under section 180(1)(a)
• Giving loans or extending guarantee or providing security in excess of the limit prescribed under sub-section (3) of section 186.
Quorum for General Meetings (Section 103)
Unless Articles provides for larger number:
• 5 members personally present if total members of the company as on meeting date do not exceed 1000,
• 15 members personally present if total members of the company as on meeting date exceed 1000 but not 5000,
• 30 members personally present if total members of the company as on meeting date exceed 5000.
Voting through Electronic Means (Section 108)
Every listed company and a company having 500 or more shareholders shall provide facility to its members to exercise their right to vote at general meetings by electronic means. Complete details regarding electronic voting system and manner of conducting electronic voting process is provided in Rule 7.18 of the Draft Rules. The important points are listed below:
• Notice to contain the fact that facility for voting through electronic means is available and should contain the process and manner for voting by electronic means and time schedule including the time period during which the votes may be cast, address of places for casting votes duly sorted in order of name of states or union territories, where the members can cast their votes electronically.
• Company to publish advertisement in atleast one English and one regional language newspaper regarding the meeting and mentioning about the availability of facility of e-voting along with details regarding date of dispatch of notice, date of commencement and conclusion of facility of e-voting, website where notice can be accessed, contact details of person responsible to address the grievances connected with the electronic voting etc.
• E-voting shall remain open for not less than 7 days and not more than 10 days. After 10 days, portal to be blocked.
• Vote once cast cannot be changed subsequently.
• Board to appoint a scrutinizer who should not be employee of the company after ascertaining his willingness and availability.
• Scrutinizer to unblock portal in presence of 2 witnesses and make report to Chairman within 3 working days.
• Scrutinizer to maintain register (physically or in electronic mode) containing complete details of members who voted through electronic means mentioning the particulars of name, address, folio number or client ID of the shareholders, number of shares held by them, nominal value of such shares and whether the shares have differential voting rights.
• Register and all other relevant paper pertaining to e-voting to remain in custody of scrutinizer till chairman signs minutes.
• Results declared and scrutinizer’s report to be placed on company’s website and website agency hosting e-voting within two days of passing of the resolution.
ACCOUNTS AND AUDIT
NEW AUDIT REQUIREMENTS
Secretarial Audit (Section 204)
Secretarial Audit is applicable to every listed company. Secretarial Audit has to be conducted by a Practising Company Secretary in respect of the secretarial and other records of the company. Secretarial Audit Report is to be made in Form No. 13.3 and is required to be annexed to the Board’s Report. The Board is required to provide explanation in the Board’s Report to every qualification, observation or other adverse remark made by the company secretary in their report. As per Section 143(14), all provisions regarding rights, duties and obligations of statutory auditors shall also apply to Company Secretary in Practice who is conducting secretarial audit.
Internal Audit (Section 138)
Every listed company shall appoint an internal auditor who will conduct an audit of the functions and activities of the company and make a report thereon to the Board of Directors. The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit. Any chartered Accountant (except statutory auditor of the company) or Cost Account or other professional as may be decided by the Board, can be appointed to conduct the internal audit.
Term of Appointment Of Statutory Auditor (Section 139)
o Individual – One term of 5 consecutive years. Can be re-appointed after cooling off period of 5 years.
o Firm of Auditors – Two Terms of 5 consecutive years. Can be re-appointed after cooling off period of 5 years.
BOARD COMPOSITION, COMMITTEES AND MEETINGS
Composition of Board of Directors
Woman Director: Within 1 year from the commencement of second proviso to sub-section (1) of Section 149, all listed companies, shall appoint at least 1 woman director.
Independent Director: Every listed company shall, within 1 year from commencement of sub-section (4) of Section 149 or from the date of notification of the rules in this regard as may be applicable, appoint at least 1/3 of total number of directors on their Board of Directors as independent directors.
Any fraction contained in such 1/3rd number shall be rounded off as 1.
Small Shareholders’ Director:
Under Section 151, listed companies may suo motu or upon the notice of not less 500 or 1/10th of the total number of small shareholders, whichever is lower, elect a small shareholders’ director from amongst the small shareholders.
Every company shall have atleast 1 director who has stayed in India for a total period of not less than 182 days in the previous calendar year. [Section 149(3)]
Audit Committee (Section 177):
• Audit Committee shall have minimum 3 directors with majority of independent directors.
• Every Audit Committee of a company existing immediately before the commencement of this Act shall, within 1 year of such commencement, be reconstituted in accordance with these requirements.
Nomination and Remuneration Committee (Section 178):
• Nomination and Remuneration Committee shall consist of 3 or more non-executive directors out of which not less than one-half shall be independent directors.
• The chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.
Stake Holders Relationship Committee (Section 178):
• Every company which has more than 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stake Holders’ Relationship Committee.
• Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director and such other members as may be decided by the Board of Directors.
Corporate Social Responsibility Committee (Section 135):
• Every company having -
- net worth of Rs. 500 Crore or more, or
- turnover of Rs. 1000 Crore or more or
- a net profit of Rs. 5 Crore or more
shall constitute a Corporate Social Responsibility committee.
• Corporate Social Responsibility Committee shall consist of 3 or more directors, out of which at least 1 director shall be an independent director.
Establishment of vigil Mechanism [Section 177(9)]
Every listed company shall establish a vigil mechanism for their directors and employees to report genuine concerns. This vigil mechanism shall be operated through the Audit Committee.
This mechanism shall provide for adequate safeguards against victimization of employees and directors who avail of the mechanism and also provide for direct access to the chairperson of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization. In case of repeated frivolous complaints being filed by a director or an employee, the audit committee may take suitable action against the concerned director or employee including reprimand.
• Section 173 and 174 of the Act contains provisions regarding holding a Board Meeting. Atleast 4 Board Meetings should be held in a year and time gap between two meetings should not be more than 120 days.
• Any Director or Manager/Secretary on requisition of any director can call a Board meeting. At least 7 days notice should be given to Directors regarding Board Meeting and notice needs to be served to each Director of the company By hand delivery or by post or by electronic means
• A Board Meeting at shorter notice is permitted provided atleast one independent director is present at the meeting or decision taken at meeting is circulated to all directors and ratified by atleast one independent director.
• A director will be deemed to have vacated office if he absents himself from all the meetings of the Board held during a period of 12 months with or without seeking leave of absence of the Board
• Quorum would be 1/3rd of the total number of directors or 2 directors whichever is higher
• Any fraction of a number shall be rounded off as one. Where number of interested directors equal or exceed 2/3rd, remaining directors, being not less than 2, will constitute quorum.
• Questions arising at any meeting of the Board regarding an item of business shall be decided by a majority of votes. In case of an equality of votes, the Chairperson of the Board, if any, shall have a second or casting vote.
• Directors may be paid sitting fees for attending Board meetings up to a maximum of Rs. 1,00,000/- per meeting.
• Every director present at any meeting of the Board shall sign his name in an attendance book.
• All other business except for approving the annual financial statements and approving the Board’s report can be transacted in a Board Meeting conducted through Electronic Means also.
NEW REPORTING REQUIREMENTS
Report on change in Share-holding (Section 93)
Section 93 of the Act specifies that all listed companies need to file a report with the Registrar of Companies on any change in the share holding pattern of the promoters and top 10 shareholders. This is a new requirement introduced by the Companies Act, 2013.
The important points regarding this report are:
Who should file:
All listed Companies
What needs to be prepared and filed:
A report regarding every change in shareholding of promoters and top ten shareholders.
When report has to be filed?
Within 15 days of any such change.
In which format report has to be filed?
Report has to be filed in form no. 7.10 along with the prescribed fee.
Report on Annual General Meeting (Section 121)
Manner of preparation and contents:
• This report shall be in addition to minutes of AGM and shall contain fair and correct summary of the proceedings of the meeting
• It shall contain the following details:
- The day, date, hour and venue of the AGM.
- Confirmation with respect to appointment of Chairman of the meeting
- Number of members attending the meeting
- Confirmation of quorum
- Confirmation with respect to compliance of the Act and the Rules made there under with respect to calling, convening and conducting the meeting
- Confirmation that the secretarial standards with respect to general meetings have been observed.
- Business transacted at the meeting and result thereof.
- Particulars with respect to any adjournment, postponement of meeting, change in venue
- any other points relevant for inclusion in the Report.
Signing of the report:
• The report shall be signed and dated by the Chairman of the meeting or in case of his inability to sign, by any 2 directors of the company, 1 of whom shall be the Managing Director, if there is one.
Time within which report has to be filed:
• Within 30 days of the conclusion of AGM.
Additional reporting requirements in Boards’ Report (Section 131)
Board’ Report of listed companies, among other disclosures as required for all companies, additionally
• A statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors; must contain disclosure on the following points -
• The ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year
• Percentage increase in remuneration of each director and CEO in the financial year
• Percentage increase in the median remuneration of employees in the financial year
• Number of permanent employees on the rolls of company
• Explanation on the relationship between average increase in remuneration and company performance
• Comparison of the remuneration of the Key Managerial Personnel against the performance of the company
• The key parameters for any variable component of remuneration availed by the directors
• The ratio of the remuneration of the highest paid director to that of the employees who are not directors but receive remuneration in excess of the highest paid director during the year
• Affirmation that the remuneration is as per the remuneration policy of the company
• In Directors’ Responsibility Statement a statement that, the directors had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
AMENDMENTS IN CORPORATE GOVERNANCE NORMS OF
(SEBI’s Press Release dated 13.02.2014)
The Securities and Exchange Board of India has approved the proposals to amend the Listing Agreement with respect to corporate governance norms for listed companies. The amendments shall be made applicable to all listed companies with effect from October 01, 2014.
The Board approved the following proposals:
o Exclusion of nominee Director from the definition of Independent Director
o Compulsory whistle blower mechanism
o Expanded role of Audit Committee
o Prohibition of stock options to Independent Directors
o Separate meeting of Independent Directors
o Constitution of Stakeholders Relationship Committee
o Enhanced disclosure of remuneration policies
o Performance evaluation of Independent Directors and the Board of Directors
o Prior approval of Audit Committee for all material Related Party Transactions (RPTs)
o Approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting
o Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees shall be independent.
o At least one woman director on the Board of the company
o It has been decided that the maximum number of Boards an independent director can serve on listed companies be restricted to 7
o To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if a person who has already served as an Independent Director for 5 years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more term of 5 years only. and 3 in case the person is serving as a whole time director in a listed company
o The scope of the definition of RPT has been widened to include elements of Companies Act and Accounting Standards.
In addition to the above, the Board also approved the proposal to put in place principles of Corporate Governance, policy on dealing with RPTs, divestment of material subsidiaries, disclosure of letter of appointment of Independent Directors and the letter of resignation of all directors, risk management, providing training to Independent Directors, E-voting facility by top 500 companies by market capitalization for all shareholder resolutions and Boards of companies to satisfy themselves that plans are in place for orderly succession for appointments to the Board and senior management.
Companies Act, 2013 has introduced a number of new provisions for listed companies mainly relating to the structure and composition of the Board of Directors and those relating to disclosure and reporting requirements. The Act aims at bringing about sufficient provisions in the periphery of the Companies Act itself to provide for a robust compliance and disclosure environment. SEBI, in turn has also revised its corporate governance norms to bring them in line with the Companies Act, 2013. Listed Companies need to tighten their reins to be in tandem with the new regulatory environment awaiting them.
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