AN INSIGHT INTO SEBI LODR (AMENDMENT) REGULATIONS, 2018

INDORE CHAPTERMARCH 17, 2019

S.SUDHAKAR

VICE-PRESIDENT (CORPORATE SECRETARIAL)

RELIANCE INDUSTRIES LIMITED

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Disclaimer

Views expressed are of my own and not of the organisation in which I am employed

This presentation is to the best of my understanding of the complexities of the subject matter

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UDAY KOTAK COMMITTEE

• SEBI formed a committee on June 2, 2018 under the Chairmanship of Shri Uday Kotak

• The purpose of setting up this committee was to enhance the standards of corporate governance of listed entities in India

TERMS OF REFERENCE

• Terms of reference of the committee were as under:

• Ensure independence in spirit of independent directors and their active participation in the functioning of the company

• Improve disclosures pertaining to Related Party Transactions

• Accounting and audit practices by listed companies

• Improve effectiveness of Board Evaluation practices

• Issues related to voting and participation in general meetings

CHAIRMAN PREFACE

• In India there are broadly two styles of running a company – the “raja (monarch)” model and the “Custodian (trusteeship)” model

• In the Raja model, promoter interest i.e. self interest precedes interests of “Praja” i.e. other stakeholders

• The custodian model works on “Gandhian principles” and is relevant for both promoter-managed as well as professionally managed entities.

• Under this model promoters, boards and management wear the hat of ‘trustees’ and act in the interest of all stakeholders

CHAIRMAN PREFACE CONTD ….

• Research provides robust evidence that, companies that exhibit sound corporate governance generate significantly greater returns, when compared to companies that exhibit poor corporate governance

• Governance mechanisms that ensure such value creation highlights the role of • Composition of Boards• Expertise of the directors

• Composition and Independence of key Board committees

• Independence of Auditors and quality of its financial statements

• Quality disclosures

• Balancing of the interests of controlling shareholders vis-à-vis minority shareholders

COMMITTEE’S BELIEF

• This committee believed that ‘a stronger corporate governance code will enhance the overall confidence in Indian markets and in India

• This committee made a sincere attempt to support and enable sustainable growth of enterprise while safeguarding interests of various stakeholders

DOES CORPORATE GOVERNANCE REALLY MATTER

• Companies that exhibit sound corporate governance generate significantly greater returns when compared to companies that exhibit poor corporate governance

• Governance mechanisms that ensure such value creation highlights the role of • Composition of Boards especially their independence in law and in spirit

• Expertise of the directors on the Boards

• Composition and independence of key committees of Board

• Independence of company’ auditors

• Quality of audit of financial statements

• Balancing of interest of majority and minority shareholders

WHY TO REVIEW THE CORPORATE GOVERNANCE NOW

• Despite the fact that several committees made valuable recommendations on corporate governance which were largely adopted

• governance practices in some of the most reputed listed companies came under scanner in regard to number of dimensions

• such as evaluation of company boards, board diversity, reliability of disclosures, role of independent directors, protection of minority interests, managerial compensation and related party transactions

HIGH QUALITY OF CORPORATE GOVERNANCE

• Global trends also evident in India drive demand for such high quality of corporate governance, such as

• Increasing pace of change in market conditions

• Obsessive focus on short-term performance often at the cost of long-term performance rather than pursuing long-term strategies

• Overemphasis on short-term financial results and under emphasis on long-term value creation

• Several corporate governance failures across the world and an increasingly complex regulatory environment have sharpened the focus on good governance

• Behaviour of the board is a key element driving superior operational performance

Date of enforcement

Date of enforcement

Unless otherwise specifically provides the amended regulations shall come into force with effect from April 1, 2019

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EFFECTIVE FROM OCTOBER 1, 2018

REGULATION NO. PARTICULARS

16 (1) (b) Definition of Independent Director

25 (1) Alternate Director

25 (10) D&O insurance

46 (2) (q) Revision in the credit rating

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EFFECTIVE FROM APRIL 1, 2020

REGULAATION NO. PARTICULARS

17(1)(a) Woman Independent Director (above top 500 and below 1000 cos)

17(1) (c ) Minimum board strength six(above top 500 and below 1000 cos)

17 (1) (b) CMD role separation (top 500 companies)

17 (2A) Quorum for board meeting(above top 1000 and below 2000 companies)

17A Maximum number of Directorships to 7

Schedule V (c ) CG report related

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Amendments to the Definitions

AMENDMENT TO DEFINITIONS

• Following definitions are amended

• Designated Securities

• Related Party

• Independent Director

• Material Subsidiary

• Senior Management

• New definition – Fugitive Economic Offender

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AMENDMENTS TO DEFINITIONS

• Fugitive Economic Offender - shall mean an individual who is declared a “fugitive economic offender” under section 12 of the Fugitive Economic Offenders Act, 2018

• Designated Securities - “security receipts” have also been added

• Securities receipts - shall have the same meaning assigned to it under the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008. Here it was referred to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where in it was defined as under

• "security receipt" means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation;

RELATED PARTY

• Related party means –

• related party as defined under section 2 (76) of the Companies Act, 2013 or

• under the applicable accounting standards

• A new proviso was added as under

• any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party

MATERIAL SUBSIDIARY

• ‘Material Subsidiary’ shall mean a subsidiary whose income or net-worth exceeds twenty ten percent of the consolidated income or net worth respectively - Regulation 16 (c)

• With regard to appointment of one independent director of the listed company on the board of the material subsidiary under regulation 24

• ‘material subsidiary’ means a subsidiary whose income or net worth exceeds twenty percent of the consolidated income or net worth respectively

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MATERIAL RELATED PARTY TRANSACTION

• Material related party transaction means transactions to be entered individually or taken together with previous transactions during a financial year exceeds ten percent of the annual consolidated turnover of the listed entity – Regulation 23 (1)

• With respect to payment for brand usage or royalty such transaction shall be considered material if it exceeds 2% of the annual consolidated turnover of the listed entity –Regulation 24 (1A)

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SENIOR MANAGEMENT

• ‘Senior management’ shall means officers / personnel of the listed entity …..one level below the executive directors including all functional heads

• CEO /MD/WTD/Manager (including CEO/manager even if they are not part of the Board) and shall specifically include Company Secretary and CFO

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Amendments to Regulation 15 Applicability

NON-APPLICABILITY OF NEW REGULATION 17A & 24A

• New regulation 17A relating to maximum number of directors and 24A relating to Secretarial audit are not applicable to

• entities having paid up equity share capital not exceeding rupees ten crore and net worth not exceeding rupees twenty five crore and

• to the listed entity which has listed its specified securities n the SME exchange

COMPANIES UNDER INSOLVENCY RESOLUTION PROCESS

• Provisions specified under Regulation 17 i.e. provisions relating to Board of Directors shall not be applicable during the insolvency resolution process period under the Insolvency Code

• Role and responsibilities of the Board of directors specified under Regulation 17 shall be fulfilled by the interim resolution professional or resolution professional

• Provisions specified under regulations 18, 19, 20 and 21 in regard to committees shall not be applicable during the insolvency resolution process period

• The role and responsibilities of the committees specified shall be fulfilled by the interim or resolution professional himself

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Amendments to Regulation 16

16 INDEPENDENT DIRECTOR

• Independent Director shall not be a member of the promoter group of the listed entity

• Board inter-locks are not permitted

• A person who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director

• A person who is not a non-independent director means – he is an Independent Director. Say Independent Director of A ltd

• on the board of which any non-independent director of the listed entity is an independent director – means the Executive Director of say B ltd is an Independent Director of A ltd

• In such case Independent Director of A ltd cannot be appointed as Independent Director of B ltd

• Aforesaid amendments shall come info force w.e.f. October 1, 2018

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Amendments to Regulation 17 Board of Directors

Woman Independent Director

At least one woman independent director shall be appointed on the Boards of

Top 500 listed entities by April 1, 2019 andTop 1000 listed entities by April 1, 2020

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Minimum six Directors

The Board of Directors shall comprise a minimum of six directorsTop 1000 listed entities w.e.f April 1, 2019 andTop 2000 listed entities w.e.f April 1, 2020

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Quorum for Board meeting

The quorum shall be one-third of the total strength or three directors which ever is higher, including at least one independent director

top 1000 listed entities w.e.f April 1, 2019 and top 2000 listed entities w.e.f April 1, 2020

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Non-executive director of 75 yearsShall neither be appointed nor can continue the directorship, unless a special resolution is passed to that effect

The explanatory statement annexed to the notice shall indicate the justification for such appointment

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CHAIRPERSON OF THE BOARD

• Separation of CEO / MD and Chairperson in top 500 listed entities by April 1, 2020

• Chairperson shall be non-executive director

• Chairperson shall not be related to the MD or CEO

• Definition of the term ‘relative’ as per Companies Act, 2013

• The above shall not be applicable to the listed entities which do not have any ‘identifiable promoter’

• ‘Identifiable promoter’ as per the shareholding pattern filed with the stock exchanges

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RATIONALE FOR AMENDMENT

• In Cadbury Committee report on Financial aspects of Corporate Governance (1992) role separation was recommended with the rationale that “if the two roles are combined in one person, it represents a considerable concentration of power”

• World wide this is a growing concern in corporate governance

• Role separation is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management

• Reduces excessive concentration of authority in one individual

• Board tasks are neglected due to lack of time in view of managerial pressures

PAYMENT OF REMUNERATION – SPECIAL RESOLUTION

• Approval of shareholders by a special resolution shall be obtained every year in which the

• annual remuneration payable to a single non-executive director exceeds fifty per cent of the total remuneration payable to all non-executive directors

• Approval of shareholders is required by a special resolution, if the fees or compensation payable to executive directors who are promoters or members of the promoters group if

• the annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, which ever is higher

• such approval shall be valid only till the expiry of the term of such director

• net profits shall be calculated as per section 198 of the Companies Act, 2013

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EVALUATION OF INDEPENDENT DIRECTORS

• Evaluation of the independent directors shall be done by the entire board of directors which shall include

• performance of the directors

• fulfilment of the independence criteria as specified in the Listing Regulations and their independence from the management

• The Director who is subject to evaluation shall not participate in such evaluation

EXPLANATORY STATEMENT

• The statement to be annexed to the Notice under section 102 (1) of the Companies Act, 2013 for each item of special business to be transacted at a general meeting shall also set forth clearly the recommendation of the board to the shareholders on each of the specific items

17A MAXIMUM NUMBER OF DIRECTORSHIPS

• Maximum number of Directorships include ‘alternate directorships’

• The Directors of the listed companies have to comply with the following with respect to maximum number of Directorships

• a person shall not be a director (independent or non-independent) of more than eight listed entities w.e.f April 1, 2019 and seven listed entities w.e.f. April 1, 2020

• a person shall not serve as an independent director in more than seven listed entities• in case a person is a WTD or MD of any listed entity he shall not be an independent director in

more than three listed entities

• The count for the listed entities for the above purpose shall be of those entities whose equity shares are listed on a stock exchange (hence debt listed companies are not covered)

Amendments relating to ‘Committees’

19 NOMINATION & REMUNERATION COMMITTEE

• Quorum for NRC meeting shall be

• two or one third of the members of the committee which ever is greater, including at least one independent director in attendance

• NRC shall meet at least once in a year

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20 STAKEHOLDERS RELATIONSHIP COMMITTEE

• SRC shall look into the mechanism of redressal of grievances various aspects of interest of shareholders, debenture holders and other security holders

• The composition of SRC shall be of three directors with one being Independent Director

• Chairperson of SRC shall be present at all AGMs to answer shareholders queries

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21 RISK MANAGEMENT COMMITTEE

• The Risk Management Committee shall meet at least once in a year

• Risk Management Committee apart from other functions shall specifically cover and review ‘cyber security’

• The provisions of this regulation shall be applicable to the top 500 companies as against top 100 companies earlier

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23 RELATED PARTY TRANSACTIONS

• While formulating a policy on materiality of related party transactions and on dealing with related party transactions, the listed entity shall

• include clear threshold limits duly approved by the board of directors and

• such policy shall be reviewed by the board of directors at least once every three years and updated accordingly

PAYMENT OF ROYALTY OR FOR BRAND USAGE

• A transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if

• the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed two percent of the annual consolidated turnover of the listed entity

• the consolidated turnover shall be as per the last audited financial statements of the listed entity

RELATED PARTY TRANSACTIONS

• Related parties shall not vote to approve material related party transactions which require approval of the shareholders through a resolution

• It is immaterial that whether the entity is a related party to the particular transaction or not:

• However this shall not apply in respect of a resolution plan approved under section 31 of the Insolvency Code, by the shareholders, subject to the event being disclosed to the recognized stock exchanges within one day of the resolution plan being approved

• The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year,

• disclosures of related party transactions on a consolidated basis, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website

24 CORPORATE GOVERNANCE REQUIREMENT WITH RESPECT TO SUBSIDIARY

• At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, whether incorporated in India or not

• Earlier this was applicable to material subsidiary incorporated in India only

• For the purpose of this provision the term “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds twenty percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year (this is different to that of the definition of material subsidiary

24 CORPORATE GOVERNANCE REQUIREMENT WITH RESPECT TO SUBSIDIARY CONTD ….

• Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution,

• unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal[, or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved

24A SECRETARIAL AUDIT

• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a company secretary in practice, in such form as may be specified with effect from the year ended March 31, 2019

25 OBLIGATIONS WITH RESPECT TO INDEPENDENT DIRECTORS.

• No person shall be appointed or continue as an alternate director for an independent director of a listed entity with effect from October 1, 2018

• With effect from October 1, 2018, the top 500 listed entities by market capitalization calculated as on March 31 of the preceding financial year, shall undertake

• Directors and Officers insurance (‘D and O insurance’) for all their independent directors

• quantum and for such risks as may be determined by its board of directors

DECLARATION BY INDEPENDENT DIRECTORS

• Every independent director shall, at the first meeting of the board in which he participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director,

• submit a declaration that he meets the criteria of independence as provided in clause (b) of sub-regulation (1) of regulation 16 and that

• he is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his ability to discharge his duties with an objective independent judgment and without any external influence

• The board of directors of the listed entity shall take on record the declaration and confirmation submitted by the independent director under sub-regulation (8) after undertaking due assessment of the veracity of the same

29 INTIMATION TO STOCK EXCHANGES – BONUS ISSUE

• Proviso stating that In case declaration of Bonus is not on the Agenda of the Board meeting, then prior intimation to stock exchanges was not required – this is omitted w.e.f October 1, 2018

• This means that for declaration of Bonus at least two working days advance intimation is to be given to the stock exchanges

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32 STATEMENT OF DEVIATIONS & VARIATIONS

• Where a listed entity has raised funds through preferential allotment or qualified institutions placement (QIP)

• The listed entity shall disclose every year the utilisation of such funds during that year in its annual report until such funds are fully utilised

• The above is in addition to the monitoring agency’s report, if any, in regard to utilisation of public issue or right issues proceeds

S.SUDHAKAR VICE-PRESIDENT (CORPORATE SECRETARIAL) RELIANCE INDUSTRIES LIMITED

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33 FINANCIAL RESULTS

• In addition to standalone quarterly and year to date results, the listed entity shall (earlier this was ‘may’) also submit quarterly and year to date consolidated financial results

• Listed entities shall also submit with financial results for the half year by way of a note, statement of cash flow for the half year

• To ensure that for the purpose of quarterly consolidated financial results, at least eighty percent of each of the consolidated revenue assets and profits, respectively shall have been subject to audit or in case of unaudited results subjected to limited review

• In the financial results of the last quarter to disclose by way of a note, the aggregate effect of material adjustments made in the results of that quarter which pertain to earlier periods

• The statutory auditor shall undertake a limited review of the audit of all the entities / companies whose accounts are to be consolidated with the listed entity as per AS21

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34 ANNUAL REPORT

• The listed entity shall submit to the stock exchange and publish on its website-

• a copy of the annual report sent to the shareholders along with the notice of the annual general meeting not later than the day of commencement of dispatch to its shareholders;

• in the event of any changes to the annual report, the revised copy along with the details of and explanation for the changes shall be sent not later than 48 hours after the annual general meeting

• Earlier the annual report was to be submitted to the stock exchanges within twenty one days of it being approved and adopted in the AGM

36 DOCUMENTS & INFORMATION TO SHAREHOLDERS

• Disclosures to stock exchanges shall be made as under

• in XBRL format in accordance with the guidelines specified by the stock exchanges from time to time

• to the stock exchanges and on its website in a format that allows users to find relevant information easily through a searching tool

• The above is not applicable where in the disclosures are to be in formats which may not be searchable

APPOINTMENT OF AUDITORS

• In the Notice where in the statutory auditor is proposed to be appointed following disclosures are to be made as a part of the explanatory statement

• Proposed fees payable to the statutory auditors along with terms of appointment

• In case of a new auditor, any material change in the fee payable to the new auditor to that of the remuneration of the out going auditor along with the rationale for such change

• Basis of recommendation for appointment including the details in relation to and credentials of the proposed auditor

40 COMPULSORY DEMAT OF SECURITIES

• Except in case of transmission or transposition of securities requests for effecting transfer of securities shall not be processed unless the securities are held in the dematerialized form

44 MEETINGS OF SHAREHOLDERS & VOTING

• The top 100 listed entities shall hold their annual general meetings within a period of five months from the date of closing of the financial year.

• The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general meetings.

• The top 100 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year

46 WEBSITE

• W.e.f October 1, 2018 all credit ratings obtained by the listed entity for all its outstanding instruments, shall be updated immediately as and when there is a revision

• Separate audited financial statements of each of the subsidiary shall be uploaded at least 21 days prior to the date of the AGM

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THANK YOU