The Clause 49 of the Listing Agreement is Not Applicable To: Understanding the Exceptional Cases
For companies listed on Indian stock exchanges, the Clause 49 of the Listing Agreement holds great significance. It lays down the corporate governance standards that companies must comply with to ensure transparency, accountability, and integrity. However, there are some cases where the Clause 49 is not applicable. In this article, we will delve deeper into these exceptional cases and understand why they are exempted from the regulatory framework.
What is Clause 49?
Before we explore the exceptional cases, let us briefly revisit what the Clause 49 entails. The Clause 49 was introduced in 2000 by the Securities and Exchange Board of India (SEBI) as a part of its regulations for listed companies. It was based on the recommendations of the Kumaramangalam Birla Committee on Corporate Governance. The clause primarily deals with the composition of the board of directors, their duties, responsibilities, and powers, and the disclosure requirements.
Some of the salient features of Clause 49 are:
– The board of directors must have an optimum combination of executive and non-executive directors. At least 50% of the board must comprise independent directors.
– The board must meet at least four times a year, and a gap of not more than 120 days must be there between two meetings.
– The board must constitute various committees such as the Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, etc.
– The company must disclose its financial and non-financial performance, shareholding pattern, related-party transactions, and other material events on a regular basis.
Now that we have refreshed our memory on what Clause 49 entails let us understand in which cases this clause is not applicable.
When is Clause 49 Not Applicable?
1. SMEs (Small and Medium Enterprises)
SEBI has exempted SMEs from complying with Clause 49. SMEs are defined as companies with a paid-up capital of up to Rs. 25 crores. The rationale behind this exemption is that SMEs may not have the resources or the need to comply with the elaborate governance structure mandated by Clause 49. However, SMEs are still required to comply with basic corporate governance norms.
2. Companies with less than 50% public shareholding
Clause 49 is not applicable to companies where the public shareholding is less than 50%, and the management is in the hands of a promoter or a group of promoters. Such companies are governed by Clause 35 of the Listing Agreement, which mandates the submission of a quarterly compliance report to the stock exchange.
3. Companies listed on SME Exchange
SEBI has created a separate platform for SMEs to get listed, called the SME Exchange. Companies listed on SME Exchange are not required to comply with Clause 49. However, they are required to comply with Clause 36 of the Listing Agreement, which deals with submission of information and documents to the stock exchange.
4. Listed subsidiaries of foreign companies
Companies that are listed in India but are subsidiaries of foreign companies are exempted from complying with Clause 49, provided they comply with the corporate governance norms of their home country. However, such companies must disclose the extent of compliance to the Indian stock exchanges.
Conclusion
The Clause 49 of the Listing Agreement has become an integral part of the corporate governance framework in India. It has played a crucial role in improving the transparency and accountability of listed companies. However, it is important to understand that there are some exceptional cases where this clause is not applicable. The exemptions granted to SMEs, companies with less than 50% public shareholding, SME Exchange listed companies, and listed subsidiaries of foreign companies ensure that the regulatory burden does not become a hindrance to business growth.