BOARD OF DIRECTORS – ENTITY LISTED SPECIFIED SECURITIES

Regulation 17 of the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015 talk about Board of Directors of a listed entity which got listed its specified securities.

Composition

The composition of board of directors of the listed entity shall be as follows:

• board of directors 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 shall comprise of non-executive directors.
• where the chairperson of the board of directors is a non-executive director, at least one-third of the board of directors shall comprise of independent directors and where the listed entity does not have a regular non-executive chairperson, at least half of the board of directors shall comprise of independent directors. Where, the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors. [Regulation 17(1)]

These two simple conditions require lot of calculation, in complex board structure. We may put it simply in following form:

1. At least one director shall be woman. She may be Executive director, non – executive director or independent director.
2. Independent director is sub – set of non – executive director.
3. Not less 50% of board shall be comprised of Non – executive directors.
4. Where Chairperson is “regular” non – executive director; at least one third of board shall comprise of independent director. When we keep both independent director and non – executive directors at minimum level; 1/3 board be independent director and (1/2 – 1/3 = 1/6) be other non – executive director. Rest ½ will be executive directors. (we are here not touching upon rotational director issue under the Companies Act, 2013)
5. Where chairperson is executive director or any director which is not a regular non – executive director means is additional director appointed as non – executive director, situation is different. In such case, at least half the board shall be independent director. All other non – executive directors and all executive directors shall be in other half. (we are here not touching upon rotational director issue under the Companies Act, 2013)

Related to any promoter

For the purpose of this clause, the expression “related to any promoter” shall have the following meaning:

(i) if the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it;

(ii) if the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it. [Explanation to Regulation 17(1)]

This exempt independent director of promoter entity form expression “related to any promoter” and include all other directors, employees and nominees to the expression.

Board Meetings

The board of directors shall meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings. [Regulation 17(2)]

Compliance Report

The board of directors shall periodically review compliance reports pertaining to all laws applicable to the listed entity, prepared by the listed entity as well as steps taken by the listed entity to rectify instances of non-compliances. [Regulation 17(3)]

This regulation is cause of trouble:

1. Periodically review – what will be the period; regular or irregular?
2. All laws applicable to listed entity – whether all laws related to listing applicable to listed entity or all laws of all genres applicable to listed entity? This is cumbersome if possible.

Compliance report is to be prepared by the listed entity, which means prepared by executives and executive directors. The company shall also inform the Board about steps taken by the listed entity.

Succession Plan

The board of directors of the listed entity shall satisfy itself that plans are in place for orderly succession for appointment to the board of directors and senior management. [Regulation 17(4)]

This sub – regulation require a practical plan based upon factual position of rotation, removal, retirement and resignations. The plan shall be prepared by the listed entity to the satisfaction of the board.

Code of Conduct

The board of directors shall lay down a code of conduct for all members of board of directors and senior management of the listed entity. [Regulation 17(5)(a)]

The code of conduct shall suitably incorporate the duties of independent directors as laid down in the Companies Act, 2013. [Regulation 17(5)(b)]

This code of conduct may have following elements:

1. Generally applicable provision to all,
2. Provisions generally applicable to directors,
3. Provision specifically applicable to senior management, and
4. Provision specifically applicable to independent directors.

Regulation 17(5)(a) cast duty of laying down code of conduct to the board, not on the company. This enunciates an active involvement of the Board. Regulation 17(5)(b) recognise duties of independent directors as laid down in the Companies Act, 2013. This is worth mentioning that Section 166 of the Companies 2013 also laid down duty of Directors also. This code of conduct should suitable incorporate duties of directors as well as duties of independent directors, and also duties of all classes of key managerial personnel like duties of company secretary laid down in the Act.

Compensation package

The board of directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting. [Regulation 17(6)(a)]

The board shall recommend fees or compensation paid to non – executive directors including independent directors. This recommendation in Regulation 17(6)(a) is additional to the requirement given in Section 178(4) of the Companies Act, 2013, which deals with executive remuneration. On the recommendation of board, shareholders in general meeting shall approve all these fees or compensation.

The requirement of obtaining approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government. [Regulation 17(6)(b)]

Regulation 17(6)(b) restrict application of Regulation 17(6)(a), where sitting fees to non – executive directors is made within limits prescribed under the act without approval of the Central Government.

The approval of shareholders mentioned in clause (a), shall specify the limits for the maximum number of stock options that may be granted to non-executive directors, in any financial year and in aggregate. [Regulation 17(6)(c)]

Regulation 17(6)(c) require two limits in maximum number of stock option that may be granted to non – executive directors: (a) a financial year limit and (b) aggregate per non – executive director for term of appointment.

Independent directors shall not be entitled to any stock option. [Regulation 17(6)(d)]

Minimum Information to Board

The minimum information to be placed before the board of directors is specified in Part – A of Schedule – II. [Regulation 17(7)]

The minimum information to be placed before the board under Regulation 17(7) specified in Part – A of Schedule – II is:

1. Annual operating plans and budgets and any updates.
2. Capital budgets and any updates.
3. Quarterly results for the listed entity and its operating divisions or business segments.
4. Minutes of meetings of audit committee and other committees of the board of directors.
5. The information on recruitment and remuneration of senior officers just below the level of board of directors, including appointment or removal of Chief Financial Officer and the Company Secretary.
6. Show cause, demand, prosecution notices and penalty notices, which are materially important.
7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.
8. Any material default in financial obligations to and by the listed entity, or substantial non-payment for goods sold by the listed entity.
9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the listed entity or taken an adverse view regarding another enterprise that may have negative implications on the listed entity.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.
12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc.
13. Sale of investments, subsidiaries, assets which are material in nature and not in normal course of business.
14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc.

Compliance Certificate

The chief executive officer and the chief financial officer shall provide the compliance certificate to the board of directors as specified in Part B of Schedule II. [Regulation 17(8)]

The following compliance certificate shall be furnished by chief executive officer and chief financial officer:

1. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief:
   1. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;
   2. these statements together present a true and fair view of the listed entity’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.
2. There are, to the best of their knowledge and belief, no transactions entered into by the listed entity during the year which are fraudulent, illegal or violative of the listed entity’s code of conduct.
3. They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the listed entity pertaining to financial reporting and they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.
4. They have indicated to the auditors and the Audit committee
   1. significant changes in internal control over financial reporting during the year;
   2. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and
   3. instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the listed entity’s internal control system over financial reporting.

Risk Assessment and Minimization Procedure

The listed entity shall lay down procedures to inform members of board of directors about risk assessment and minimization procedures. [Regulation 17(9)(a)]

The board of directors shall be responsible for framing, implementing and monitoring the risk management plan for the listed entity. [Regulation 17(9)(b)]

Performance Evaluation

The performance evaluation of independent directors shall be done by the entire board of directors. [Regulation 17(10)]

In the performance evaluation, the independent directors who are subject to evaluation shall not participate. [Proviso to Regulation 17(10)]

Practically, every independent director shall leave the board room or will sit there merely as spectator.

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.