THE CLAUSE 49 OF LISTING AGREEMENT WITH PERTINENCE

TO CORPORATE GOVERNANCE IN INDIA

Saurabh Singh1

1. Introduction -

This paper touches the origin and development of corporate governance practices in India
starting from CII Code on Corporate Governance, Birla committee report and Narayan Murthy
committee report and examines the recent amendments to Clause 49 of listing agreement in
India. Corporate Governance is essentially all about how organizations are directed, controlled
and held accountable to the shareholders. The adoption of Clause 49 marked a watershed in the
history of corporate governance in India and set the ball rolling for many more governance
initiatives that were to be carried out in the coming years. Corporate governance in India has
undergone a paradigm shift by gradually becoming more conscience-driven due to interests of
customers, employees, vendors and regulators. With the recent spate of corporate scandals and
the subsequent interest in corporate governance, a plethora of corporate governance norms and
standards have sprouted around the globe. The Sarbanes-Oxley legislation in the USA, the
Cadbury Committee recommendations for European companies and the OECD principles of
corporate governance are perhaps the best known. In the last few years, the thinking on the topic
in India has gradually crystallized into the development of norms for listed companies. The
problem for private companies, that form a vast majority of Indian corporate entities, remains
largely unaddressed. Development of norms and guidelines are an important first step in a
serious effort to improve corporate governance. The bigger challenge in India, however, lies in
the proper implementation.

Development and maintenance of a robust corporate governance framework therefore demands

for the commitment of numerous persons and institutions throughout society. Legislatures,
regulatory bodies, courts and self-regulating professional organizations must establish, monitor
and enforce legal norms actively and even-handedly. Private associations and institutes must
develop and broadcast codes of conduct, particularly with respect to corporate directors, that

1
raise expectations for behaviour and generate formal and informal sanctions for failure to meet
these expectations. Educational institutions should promote research on professional and
managerial ethics. Institutions throughout government and society must educate and train
persons ranging from judges to regulators to managers and to retail investors. Investment
advisors and business media must constantly weigh information provided by companies and
probe for additional information of interest to investors. This would not only benefit the society
but would also be beneficial for the companies as well. It is required that the government must
step in and ensure the effective implementation of Clause 49 of the Listing Agreement on
corporate governance so that the interest of the investors must be protected as well as
transparency in the corporate functioning may be maximized. India’s corporate governance
reforms were made by government through SEBI, responded relatively quickly to industry by
adopting Clause 49 of listing agreement.2

2. LODR Regulations and Clause 49 of listing Agreement -

The SEBI (LODR), Regulations 2015 have taken various measures to repose investor confidence
and the procedures have been prescribed to protect the interest of the security holders and also to
ensure that fraud and malpractices do not take place in the company. The Listing and Disclosure
Regulations issued by the SEBI in 2015 contain provisions dealing with related party
transactions and the scope of these Regulations appear to be wider than the provisions on that
subject contained in the Companies Act, 2013. Greater importance has been given by the
regulators on the issue of investor protection, particularly that of the minority shareholders. The
provisions related to corporate governance were introduced by Clause 49 of Listing Agreement.
Clause 49 of the listing agreement was amended along with the changing requirements and the
first major amendment was carried out and brings it in the alliance with the provisions of the
Corporate Governance principles contained in the Companies Act, 2013. The past decade has
seen a number of scandals and shareholder disputes, all of which indicate gaps, if not lapses, in
governance. Regulators have responded to these challenges by amending and, in some cases,
introducing new legislation, and shareholders are resorting to activist intervention in companies

2
Bhasin, M. “Corporate Governance Practices In India: An Empirical Study”. Available at
https://www.reasearchgate.net/..../228435019
to secure their rights. This coupled with the closely held shareholding of Indian companies as
well as the several factors that contribute to India’s ranking on the Transparency Index, keep
corporate governance on the radar. Perhaps the most important issue is that Indian regulators
must address is ensuring that Independent directors can fulfill their obligations in the closely held
and controlled world of Indian corporates. Clause 49 of the Listing Agreement lays significance
on Independent Directors and the amendments seek to lay greater emphasis on the aspects, such
as the definition and scope of independent directors, eligibility criteria, their reasons for
resignation and addressing the fear of disproportionate liability. The institution of Independent
director is important for an effective and efficient functioning of the corporate governance
framework in the company. Generally, an Independent Director is a person who has significant
expertise relevant3 to the company. Indian legislators and regulators have emphasized the
requirement for, and role of independent directors as a significant factors contributing towards
good corporate governance. While there is no doubt that reducing promoter nominees on the
board necessarily reduces direct promoter control of the Board, there is reason to continue to
monitor the real impact of independent directors given the concentration of promoter control in
the Indian economy. The fact that shareholders retain the ultimate authority to appoint a director
is not uncommon but poses unique challenges in India.

Clause 49 of the Listing Agreement outlines the mandatory requirements for publicly-held
companies. It is an umbrella regulation that requires company to furnish details of the board
composition, director’s compensation and disclosures, code of conduct, audit committee – its
meetings, powers, role and review and other disclosures, including the basis of related party
transaction and CEO/CFO certification.

3. Drawbacks and loopholes of Clause 49 of listing Agreement -

The problem in the Indian corporate sector is that of disciplining the dominant shareholder and
protecting the minority shareholders. Clearly, the problem of corporate governance abuses by the
dominant shareholder can be solved only by forces outside the company itself. In an environment

3
With reference to finance, law, management, sales, marketing, administration, research, corporate governance and
technical operations.
in which ownership and management have become widely separated, the owners are unable to
exercise effective control over the management or the Board. The problem of the dominant
shareholder arises in three large categories of Indian companies. First are the public sector units
(PSUs) where the government is the dominant in fact the majority shareholder and the general
public holds a minority stake. Second are the multinational companies (MNCs) where the foreign
parent is the dominant in most of the cases the majority shareholder. Third are the Indian
business groups where the promoters (together with their friends and relatives) are the dominant
shareholders with large minority stakes, government owned financial institutions hold a
comparable stake, and the balance is held by the general public. It is important to bear in mind
that the relation between the company and its shareholders and the relation between the
shareholders is primarily contractual in nature. There are many other drawbacks such as family
owned businesses in which the shareholders belong to the same family and participate
substantially in the management, direction and operation of the company. A family business
refers to a company where the voting majority is in the hands of the controlling family; including
the founders who intend to pass on to the descendants. As the family and the business grow
larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the
continuity of the business. Family business also brings governance problems – not least of which
are a lot of checks and balances over executive decision making and behaviour, and lack of
transparent creating to the outside world. Apart from this Non-compliance with the disclosure
norms and even the failure of Auditor report to confirm to the law attract nominal fines with
hardly any punitive action. The Institute of Chartered Accountants in India (ICAI) has been
known to take action against the erring auditors. The main scams such as Harshad Mehta stock
market Scam of 1992 followed by incidents of companies allotting preferential shares to their
promoters at deeply discounted prices as well as those of companies simply disappearing with
investors’ money. These concerns about corporate governance arise from the corporate scandals
as well as opening up to the forces of competition and globalization gave rise to several
investigations into the ways to fix the corporate governance situation in India. One of the big
problems with Indian corporate governance is that regarding challenges in successful
implementation and effective enforcement of reforms such as local inhibitions and
comprehensive rules, lack of availability of qualified independent directors, underdeveloped
external monitoring systems and weak and multiple regulatory norms. This gives the need to
explore the actual impact of reforms on corporate governance and disclosure by Indian
companies. Clause 49 of the country’s listing rules sets out a series of corporate governance
regulations. For example, a listed company must have a non-executive and one-third of its board
should be non-executive directors. The non-executives should be on the board to challenge the
management, but in reality they tend not to do so. The failure of corporate governance and of
misleading accounts is a failure of both the management and of the auditors. The promoters
decided to inflate the revenue and profit figures of Satyam. In the event, the company has a huge
hole in its balance sheet, consisting of non-existent assets and cash reserves that have been
recorded and liabilities that are unrecorded. This episode has led to debates in India, about some
of inadequacies in the corporate governance norms. Questions have been raised about the
performance regarding effectiveness of board of directors, roles of auditors, the impact of
regulations, disclosures, etc.

4. Conclusion -

The concept of corporate governance centers on total transparency, integrity and accountability
of the management and the board of directors. The new Companies Act is a major step towards
updating what could be the called the keystone of Corporate governance and investor protection
in India. It redirects and regularizes several developments that have gradually emerged in the
country and the world of financial markets and the corporate governance and needed the
modernization. Once, the good Corporate Governance is achieved and the Indian Corporate
Body will shine to outshine the whole world. In the Indian context, the need for corporate
governance has been highlighted because of the scams that are frequently since the development
of the concept of liberalization from 1991. Corporate governance in India has undergone a
paradigm shift by gradually becoming more conscience-driven due to interests of customers,
employees, vendors and regulators. With the recent spate of corporate scandals and the
subsequent interest in corporate governance, a plethora of corporate governance norms and
standards have sprouted around the globe. The Sarbanes-Oxley legislation in the USA, the
Cadbury Committee recommendations for European companies and the OECD principles of
corporate governance are perhaps the best known. But Corporate Governance should be included
because it has much to offer to the Public Sector. Good Corporate Governance, Good
Government and Good Business go hand in hand. In short, the key to better corporate
governance in today lies in a more efficient and vibrant capital market. Disclosure of information
is the very important for the minority shareholders or for the capital market to act against those
managements who is not going in a right direction. The regulator can enhance the scope,
frequency, quality and reliability of the information that is disclosed. Reforms in bankruptcy and
related laws would bring the disciplining power of the debt holders to bear upon that
management that is having an uncooperative attitude. Public sector financial institutions that
have proved to be impassive spectators that holds large part of shares in Corporate India. These
shareholdings could be transferred to other investors who could exercise more effective
discipline on the company managements. These institutions could be restructured and privatized
to make them more vigilant guardians of the wealth that they control.
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