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Importance of Clause 49

CMA Gul S , Last updated: 12 September 2007  

Action against 20 firms for violating Clause 49

For the first time after the deadline for implementing Clause 49 ended in December 2005, stock market regulator, Securities and Exchange Board of India (SEBI) has initiated action against 20 listed companies, including 5 public sector undertakings for their failure to comply to with corporate governance regulations.

What the clause says

Listed companies are required to have at least one-third of their boards filled with independent directors if the chairman is a non-executive director
Half the board should comprise of independent directors if a company has executive chairman
Companies are required to appoint audit committee, submit CEO/CFO certification and disclose financial dealings

The regulator said on Tuesday that proceedings have been launched against the companies for their failure to fulfill the listings requirements as detailed under Clause 49.

However, SEBI has not disclosed the name of the companies involved.

The details available on the issue are minimal and we would like to get more information before we comment on the SEBI action, said spokesperson of an industry forum.

Listed companies are required to have at least one-third of their boards made up of independent directors, if the chairman of the company is a non-executive director, while half the board should be of independent directors if they have an executive chairman.

Apart from this, companies are required to appoint audit committees, submit CEO/CFO certifications and disclose various financial dealings.

Independent directors are required to protect the interests of the minority shareholders and it is not a tough task to find enough independent directors, said Prithvi Haldea, managing director, Prime Database.

The SEBI said action against the five PSUs was being taken for not appointing an adequate number of independent directors on their board. It is a good signal that SEBI has sent out indicting 5 PSUs, said Haldea.

The message is clear that Clause 49 is also a serious issue and cannot be glossed over, he added.

Out of the 15 private sector companies, proceedings have been initiated against three companies for non-compliance with almost all the major provisions of Clause 49, and against two companies for non-compliance with provisions like Board/Audit committee composition and CEO/CFO certification, while for the remaining 10, proceedings have been initiated for non-submission of compliance reports on Clause 49 to the stock exchanges, a SEBI press release said.

Companies have accepted that there is no other way but to ensure good corporate governance and most companies have complied with them in letter if not in spirit, said the spokesperson.

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