Clause 49 Vs Companies Act,2013: Part II
CS. Kutralanathan
Particulars
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Clause 49
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CA2013 &Rules,2014
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Related Party Transaction(RPT)
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Clause 49 (VII)
A RPT is a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged.
A ‘related party' is a person or entity that is related to the company. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions and includes the following:
1. A person or a close member of that person’s family is related to a company if that person:
a. is a related party under Section 2(76) of the Companies Act, 2013;or
b. has control or joint control or significant influence over the company; or
c. is a KMP of the company or of a parent of the company; or
2. An entity is related to a company if any of the following conditions applies:
a. The entity is a related party under Section 2(76) of the Companies Act, 2013; or
b. The entity and the company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others); or
c. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member); or
d. Both entities are joint ventures of the same third party; or
e. One entity is a joint venture of a third entity and the other entity is an associate of the third entity; or
f. The entity is a post-employment benefit plan for the benefit of employees of either the company or an entity related to the company. If the company is itself such a plan, the sponsoring employers are also related to the company; or
g. The entity is controlled or jointly controlled by a person identified in (1).
h. A person identified in (1)(b) has significant influence over the entity (or of a parent of the entity); or
The company shall formulate a policy on materiality of RPTs and also on dealing with RPTs.
A transaction with a related party shall be considered material if the transaction / transactions to be entered into individually or taken together with previous transactions during a financial year;
· exceeds 5% of the annual turnover or
· 20% of the net worth of the company as per the last audited financial statements of the company.
whichever is higher.
All RPTs shall require prior approval of the Audit Committee.
All material RPTs shall require approval of the shareholders through special resolution and the related parties shall abstain from voting on such resolutions
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Section 2 (76) & 188
“related party”, with
reference to a company, means—
(i) a director or his relative
(ii) a KMP or his relative;
(iii) a firm, in which a
director, manager or his relative is a partner;
(iv)a pvt company in
which a director or manager is a member or director;
(v) a public company in
which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital;
(vi) any body corporate
whose Board of Directors, MD or manager is accustomed to act in accordance with the advice,directions or instructions of a director or manager;
(vii) any person on
whose advice, directions or instructions a director or manager is accustomed to act
(viii) any company which
is—
(A) a holding, subsidiary
or an associate company of such company; or
(B) a subsidiary of a
holding company to which it is also a subsidiary
“Related party” means
a director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.
No company shall
enter into any contract or arrangement with a related party, except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions
A a company having
a paid-up share capital of Rs.10 Crores or more shall not enter into a contract or arrangement, except with the prior approval of the company by a special resolution.
A company shall not
enter into any contract or arrangement with related party subject to conditions;
· sale, purchase or supply
of any goods or materials directly or through appointment of agents exceeding 25%. of the annual turnover
· selling or otherwise
disposing of, or buying, property of any kind directly or through appointment of agents exceeding 10% of Net Worth
· leasing of property of
any kind exceeding 10% of the net worth or exceeding 10% of turnover.
· availing or
rendering of any services directly or through appointment of agents exceeding 10% of Net Worth.
· appointment to any
office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rs.2,50,000/-
·remuneration for
underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth.
Turnover or Net Worth shall be on the basis of the Audited Financial statements of the preceding Financial Year.
In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company
No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party:
Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
Every contract or arrangement entered into, shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution in the general meeting and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.
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Disclosure of RPTs
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Clause 49(VIII)(A)-
Details of all material transactions with related parties shall be disclosed quarterly along with the compliance report on corporate governance.
The company shall disclose the policy on dealing with RPTs on its website and also in the Annual Report.
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No such Provision.
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Disclosure of different Accounting standard
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Clause 49(VIII)(B)-
Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report.
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Section-129(5)-
Where the financial statements of a company do not comply with the accounting standards ,the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation
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Constitution of Nomination & Remuneration Committee
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Clause 49(IV)-
The company shall set up a nomination and remuneration committee which shall comprise at least 3 directors, all of whom shall be NEDs and at least ½ shall be independent. Chairman of the committee shall be an independent director.
B. The role of the committee shall, inter-alia, include the following:
1. Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration of the directors, KMP and other employees;
2. Formulation of criteria for evaluation of IDs and the Board;
3. Devising a policy on Board diversity;
4. Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the Board their appointment and removal. The company shall disclose the remuneration policy and the evaluation criteria in its Annual Report.
C. The Chairman of the nomination and remuneration committee could be present at the AGM, to answer the shareholders' queries. However, it would be up to the Chairman to decide who should answer the queries
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Section 178 and Companies (Meetings of Board and its Powers) Rules, 2014:
The Nomination and Remuneration Committee is applicable to the following classes of Companies
· Every listed Company
· Every other Public company-
o Having Paid up capital of Rs.10crores or more; or
o Having turnover of Rs.100 Crores
o Which have, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores.
The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule.
The above mentioned classes of companies shall constitute the Nomination and Remuneration Committee consisting of –
3 or more NEDs out of which not less than one half shall be IDs.
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.
The Nomination and Remuneration Committee shall-
· Identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down,
· Recommend to the Board their appointment and removal,
· Carry out evaluation of every director’s performance.
· Formulate the criteria for determining qualifications, positive attributes and independence of a director and
· Recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.
The Nomination and Remuneration Committee shall ensure that—
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
(c) remuneration to directors, KMPs and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:
The policy shall be disclosed in the Board's report.
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Appointing one Woman Director
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Clause 49 (II)(A)-
The Board of Directors of the company shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the Board of Directors comprising non-executive directors
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Section 149(1) and Companies (Appointment and Qualification of Directors) Rules, 2014:
(i) every listed company;
(ii) every other public company having -
(a) paid–up share capital of Rs.100 Crores or more; or
(b) turnover of Rs.300 Crore or more
Shall appoint at least one woman director.
A company shall comply with provisions within a period of six months from the date of its incorporation
Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later
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Max.No. of directorship of IDs.
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Clause 49 (II)(B)(3)
A person shall not serve as an independent director in more than seven listed companies.
Any person who is serving as a whole time director in any listed company shall serve as an independent director in not more than three listed companies.
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Section 165:
A person shall hold not office as a director, including any alternate directorship in more than 20 companies
The max no..of public companies in which a person can b eappointed as a director shall not exceed 10.
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Max. tenure of IDs
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Clause 49(II)(B):
An independent director shall hold office for a term up to five consecutive years on the Board of a company and shall be eligible for reappointment for another term of up to five consecutive years on passing of a special resolution by the company.
A person who has already served as an independent director for five years or more in a company as on October 1, 2014 shall be eligible for appointment, on completion of his present term, for one more term of up to five years only.
An independent director, who completes his above mentioned term shall be eligible for appointment as independent director in the company only after the expiration of three years of ceasing to be an independent director in the company
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Section 149:
An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.
No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director.
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Risk management
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Clause 49 (VI):
The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures
The Board shall be responsible for framing, implementing and monitoring the risk management plan for the company
The company shall also constitute a Risk Management Committee. The Board shall define the roles and responsibilities of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.
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Section 134(3):
A statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company.
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e-Voting
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Clause 35B:
The issuer agrees to provide e-voting facility to its shareholders, in respect of all shareholders' resolutions, to be passed at General Meetings or through postal ballot.
Issuer shall continue to enable those shareholders, who do not have access to e-voting facility, to send their assent or dissent in writing on a postal ballot as per the provisions of the Companies (Management and Administration) Rules, 2014 or amendments made thereto
e-voting facility shall be kept open for not less than one day and not more than three days for shareholders to send their assent or dissent.
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Section 108 &Companies (Management and Administration) Rules, 2014:
Every listed company or a company having not less than one thousand shareholders, shall provide to its members facility to exercise their right to vote at general meetings by electronic means.
As per the Rules, the e-voting shall remain open for not less than one day and not more than three days.
In all such cases, such voting period shall be completed three days prior to the date of the
general meeting
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The Company shall mention the Internet link of such e-voting platform in the notice to their shareholders
It is applicable to all listed companies, w.e.f October 1, 2014 and the modalities would be governed by the provisions of Companies (Management and Administration) Rules, 2014
The Company shall utilize the service of any one of the agencies providing e-voting platform, which is in compliance with conditions specified by the Ministry of Corporate Affairs, Government of India, from time to time.
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The Company shall place the notice on the website of the company, if any and of the agency forthwith after it is sent to the members.
The relevant Section 108, voting by electronic means and corresponding rules are notified and effective from April 01,2014.
There is no such provision
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Succession planning
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Clause 49 (II)(D)(6):
The Board of the company shall satisfy itself that plans are in place for orderly succession for appointments to the Board and to senior management
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There is no such provision.
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Filing of Casual Vacancy of IDs
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Clause 49 (II)(D):
An independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director at the earliest but not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later
Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
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Schedule IV:
An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than one hundred and eighty days from the date of such resignation or removal, as the case may be.
Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
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Code of Conduct of BoD &Senior Management
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Clause 49(II)(E):
The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company.
All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.
The Code of Conduct shall suitably incorporate the duties of Independent Directors as laid down in the Companies Act, 2013.
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Section 149 & Part III of Schedule –IV:
The independent directors shall—
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
(2) seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
(4) participate constructively and actively in the committees of the Board in which they are chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external environment
in which it operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation
of the company’s code of conduct or ethics policy;
(12) acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law
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Disclosure of Appointment of Director
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Clause 49(VIII)(G):
The letter of appointment of the independent director along with the detailed profile shall be disclosed on the websites of the company and the Stock Exchanges not later than one working day from the date of such appointment
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A return containing the particulars of appointment of director or key managerial personnel and changes therein, shall be filed with the Registrar in Form DIR-12 along with such fee as may be provided in the Companies (Registration Offices and Fees) Rules, 2014 within thirty days of such appointment or change, as the case may be.
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Disclosure of Resignation of Director
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Clause 49(VIII)(F):
The company shall disclose the letter of resignation along with the detailed reasons of resignation provided by the director of the company on its website not later than one working day from the date of receipt of the letter of resignation.
The company shall also forward a copy of the letter of resignation along with the detailed reasons of resignation to the stock exchanges not later than one working day from the date of receipt of resignation for dissemination through its website
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Section 169:
A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within 30 days in form DIR-12 and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company.
Where a director resigns from his office, he shall within a period of thirty days from the date of resignation, forward to the Registrar a copy of his resignation along with reasons for the resignation in Form DIR-11 along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014
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