Clause 49

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Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies.

In corporate hierarchy two types of managements are envisaged: i) companies managed by board of directors; and ii) those by a managing director, whole-time director or manager subject to the control and guidance of the board of directors.

As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the board should comprise independent directors. In the case of a company with a non-executive Chairman, at least one-third of the board should be comprised of independent directors.

It would be necessary for chief executives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others.

Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report.

A company is also required to obtain a certificate either from auditors or practising company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report.

The clause mandates composition of an audit committee; one of the directors is required to be "financially literate".

It is mandatory for all listed companies to comply with the clause by December 31, 2005.