Comparison Between Clause 49 of the Listing Agreement & Sarbanes Oxley Act 2002
Introduction:-
Corporate governance is about commitment to values and about ethical business conduct.
It is about how an organization is managed. This includes it’s corporate and other
structures, it’s culture, policies and the manner in which it deals with various
stakeholders. Accordingly, timely and accurate disclosure of information regarding the
financial situation, performance, ownership and governance of the company is an
important part of corporate governance.
The Sarbanes Oxley Act, which was signed by the US President George W. Bush into
law in July 2002, has brought about sweeping changes in financial reporting. This is
perceived to be the most significant change to federal securities law since 1930s. Besides
directors and auditors, the act has also led down new accountability standards for security
analyst and legal counsels.
In India, the CII took the lead in framing a desirable code of corporate governance in
April 1998. This was followed by the recommendations of the Kumar Mangalam Birla
Committee on corporate governance. This committee was appointed by SEBI. The
recommendations were accepted by SEBI in December 1999 and now enshrined in
Clause 49 of the listing agreement of every Indian Stock Exchange.
some of the differences are as follows:-
A) Internal control:-
Clause 49(revised) :-
CEO/CFO accept responsibility for establishing and maintaining internal controls and
that they have evaluated the effectiveness of the internal control systems of the company
and they have disclosed to the auditors and the Audit committee, deficiencies in the
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design or operation of internal controls, if any, of which they are aware and the steps they
have taken or propose to take to rectify these deficiencies. The role of audit committee is
to review this internal control report.
Sec. 302 of Sarbanes-Oxley:-
The principle executive officer or officers and the principle financial officer or officers or
persons performing similar functions have the responsibility of designing, establishing
and maintaining the internal controls. Here in the Sarbanes Oxley Act the public
company accounting oversight board will review the same and not the audit committee.
a. In Clause 49 the audit committee will review the internal control mechanism
whereas as per the Sarbanes Oxley Act the public company accounting
oversight board will review the same.
b. In Clause 49 Internal Control is only specified but no elaborative details are
given about it whereas in Sec. 404 of the Sarbanes Oxley act the details
regarding the same are specified.
B) Audit Committee composition:-
Section 301 of Sarbanes-Oxley:-
The committee (or equivalent body) established by the board of directors of the issuer for
the purpose of overseeing the accounting and financial reporting processes of the issuer.
If there is no such committee then entire board of director is considered to be the member
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of the audit committee. Each member of the company's audit committee must be a
director and must otherwise be independent.
Clause 49 (revised) :-
1. The audit committee shall have minimum three directors as members.
2. Two-thirds of the members of audit committee shall be independent directors.
3. All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise.
In Sarbanes Oxley act the number of directors constituting the audit committee is not
specified. Also the frequency, the time gap between the meetings of audit committee is
not specified. This points are clear in the Clause 49.
C) Independent Director:-
As per Sarbanes-Oxley:-
In order to be considered independent the one who does not
1. Accept any consulting, advisory or other compensatory fee from the issuer.
2. Be an affiliated person of the issuer or any subsidiary there of.
As per Clause 49 (revised) :-
For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a
non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
directors, its senior management or its holding company, its subsidiaries and
associates which may affect independence of the director;
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b. is not related to promoters or persons occupying management positions at the
board level or at one level below the board;
c. has not been an executive of the company in the immediately preceding three
financial years;
d. is not a partner or an executive or was not partner or an executive during the
preceding three years, of any of the following:
i) the statutory audit firm or the internal audit firm that is associated with
the company, and
ii) the legal firm(s) and consulting firm(s) that have a material association
with the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of
the company, which may affect independence of the director; and
f. is not a substantial shareholder of the company i.e. owning two percent or more
of the block of voting shares.
As per the clause 49 the definition of the independent director is wider in scope than the
one in Sarbanes Oxley Act.
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) Shareholders / Investors complaints:-
Sec. 301 of Sarbanes-Oxley:-
As per this section, each audit committee shall establish procedures for
1. The receipt, retention and treatment of complaints received by the issuer
regarding accounting, internal accounting controls or auditing matters and
2. the confidential, anonymous submission by employee of the issuer of
concerns regarding questionable accounting or auditing matters.
Clause 49 (revised) :-
Shareholders section in the disclosures of clause 49 states that:
A board committee under the chairmanship of a non-executive director shall specifically
look into the redressal of shareholder and investors complaints like transfer of shares,
non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee
shall be designated as ‘Shareholders/Investors Grievance Committee’.
Sarbanes Oxley act mainly considers the accounts related queries whereas Clause 49
covers the topic in the broad sense.
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E) Penal Provisions:-
Clause 49 (revised) :-
For violation of the listing agreement, Section 23E of Securities Contract Regulation
Act, 1956 provides for a pecuniary penalty of upto Rs.25 crores-on the company.
Sec. 302 of Sarbanes-Oxley:-
For violation of Sarbanes-Oxley Act, Sefflion 906 provides for fines and imprisonment of
up to $ 1 million and 10 years for knowing violations of Section 906, and up to $5
million and 20 years for willful violations
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F) Code of Conduct/Ethics:-
Section 406 of Sarbanes-Oxley:-
The act directs the companies to disclose if they have adopted code of conduct, if not,
reasons thereof. Code of ethics for senior financial officers: Issuers shall adopt a code of
ethics for senior financial officers, applicable to its principal financial officer and
comptroller or principal accounting officer, or persons performing similar functions.
Clause 49(Revised):-
1.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.
2. 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.
3. For this purpose, the term "senior management" shall mean personnel of the
company who are members of its core management team excluding Board of
Directors. Normally, this would comprise all members of management one level
below the executive directors, including all functional heads.
As per the above paragraph, in the Indian context, it will be obligatory for the board of
the company to lay down a code of conduct for the board members and the senior
management of the company. As per Sarbanes-Oxley restricts the code of conduct to be
applicable to only 'principal financial officer and comptroller or principal accounting
officer, or persons performing similar functions.
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G) Public Company Accounting Oversight Board:-
As per the Sarbanes Oxley act, a Public Company Accounting Oversight Board has been
set up to oversee the audit of listed companies in order to protect investors’ and public
interest in matters relating to the preparation of audited financial statements.
There is no such provision in the Clause 49. In India the ICAI is legally empowered to
carry out most of the regulatory, oversight and disciplinary functions outlined in the SOX
Act (barring prosecution and levying of penalties). But the public perception is that the
ICAI mechanisms are slow and the institute is not interested in adequately disciplining
the members. In India the functions of PCAOB are carried out by various regulatory
agencies viz. SEBI, RBI, ICAI, ICSI, ICWAI etc. If there were to be an Indian version of
the PCAOB, then such powers would need to be withdrawn from the existing regulatory
agencies and concentrated in the proposed public oversight board.
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Instances of overstepping of jurisdiction by SEBI :-
In enacting the new clause, SEBI has overstepped its jurisdiction and had encroached on
the powers of the Central Government in regard to the substantive provisions under the
purview of the Companies Act, 1956.The limited power, available to SEBI under the
companies act is clarified in the statement of objects and reasons of the Companies
(amendment) Bill 2000.The limited jurisdiction of SEBI has been judicially approved.
When SEBI cannot enforce other provisions, obviously, it cannot enact new or parallel
provisions in the garb of listing clause, as has been done vide revised clause 49.
Some of the instances are:
a. Independent director:-
The definition in Clause 49 is much more comprehensive than in the
Companies Act or Draft Bill where certain aspects concerning ‘Independent
Director’ are yet to be prescribed. Apparently, SEBI has included certain
matters related to independence on which the government has yet to decide in
the context of the Companies Act. The SEBI has widened the definition of the
term ‘Independent Director’ in its scope and applications so as to make it
more stringent.
b. Remuneration:-
Clause 49 which has been made in the exercise of delegated power, visualizes
prior approval of shareholders in regard to remuneration, as also sitting fees
payable to directors which is not being done at present and shows exercise of
power in excess of what has been delegated to SEBI.
c. The number of companies where a person can be director:-
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Section 275 of the companies act provides a person cannot be a director in
more than 15 companies. The same is the position in the draft bill with the
rider that where any such person also holds office as a managing director or
whole time director in the company, the limit for directorship for him shall be
10 companies. The Clause 49 limits this number to 10 without any other
stipulation. To this extent the clause 49 overrides the provisions in the
Companies act.
d. Board of director meetings:-
As per the Companies Act and Clause 49, the board should meet at least 4
times in a year. But the additional requirement in the Clause 49 is that there
should be a minimum gap of 3 months. This additional requirement of 3
months overrides the provisions of the Companies Act.
e. Code of conduct:-
As per Clause 49 the board shall adopt a code of conduct for the directors as
well as members of senior management of the company and all board
members and senior management personnel are to affirm it annually.
There is no such requirement under the Companies Act.
f. Audit Committee:-
The requirements prescribed in regard to audit committee are much more
specific than those prescribed under section 292A of the Companies Act. The
requirement of being ‘financially literate’ is not there in the act. Similarly the
act does not provide specifically for checking of related party transactions,
management decisions, management letters, whistle blower mechanism etc.
g. Other Aspects:-
1. Disclosure in the annual report in respect of non executive directors
regarding their pecuniary relationships, packages, stock options etc.
2. Requirements regarding the disclosures.