Provisions relating to DVR & DRR- stands amended

Amendments introduced in Companies (Share Capital and Debentures) Amendment Rules, 2019

by Smriti Wadehra (smriti@vinodkothari.c0m)

The recent Notification of Ministry dated 16th August, 2019 has amended the provisions of Companies (Share Capital and Debentures) Rules, 2014 with respect to quantum of holding of equity shares with differential voting rights by a Company and provisions pertaining to creation of debenture redemption reserve. The amended provisions are applicable from the date of notification in the e-gazette i.e. 16th August, 2019.

Differential Voting Rights

SEBI in its Board Meeting dated 27th June, 2019 proposed insertion of the provisions of DVRs in SEBI ICDR Regulations. The proposal was w.r.t inter alia to cap the total voting rights of superior rights shareholders (including ordinary shares) at 74% of the total voting power. The respective amendments are still awaited. Meanwhile, the Ministry vide the aforesaid Notification amended the provisions under CA, 13 related to DVRs. The Notification has escalated the limit of DVR shares in the Company from 26% of total post-issue paid up equity capital of the Company to 74% of the total voting power.

The erstwhile provisions of the Companies (Share Capital and Debentures) Rules, 2014 permitted issuance of equity shares with differential rights subject to compliance of conditions mentioned in Rule 4(1) of the said Rules. One of criterion for issuance of equity shares with differential rights by a Company was that shares with differential rights should not exceed 26% of total post-issue paid up equity capital of the Company at any point of time. However, the amendment has increased this limit to 74% of the total voting power at any point of time. Notably, this is another significant highlight of the amendment  that the erstwhile cap of 26% was based on the post-issue paid up equity capital which has now been changed to 74% of the voting power.

Further, in this regard, condition on companies issuing shares with differential rights having consistent track record of distributable profits for the last three years have been done away with.

Debenture Redemption Reserve

The erstwhile provisions of Section 71(4) read with Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014 required every company issuing redeemable debentures to create a debenture redemption reserve (“DRR”) of at least 25% of outstanding value of debentures for the purpose of redemption of such debentures. Apart from creation of DRR, such companies were required to either deposit, before April 30th each year, in a scheduled bank account, a sum of at least 15% of the amount of its debentures maturing during the year ending on 31st March of next year or invest in one or more securities enlisted in Rule 18(1)(c) of Debenture Rules.

Under the erstwhile framework, the following classes of companies were required to comply with the provisions relating to DRR:

  1. NBFCs registered with RBI under section 45-IA of RBI Act, 1934 issuing debentures through public issue;
  2. Other listed companies coming up with public issue or private placement;
  3. Unlisted companies issuing debentures on private placement basis.

With a view to liberalise the legal framework surrounding issuance of debentures by NBFCs, the FinMin proposed Union Budget of 2019-20 proposed to scrap off the requirement of creation of DRR for publicly issued debentures also so as to motivate NBFCs.  Subsequently, the MCA came out with notification to amend the Companies (Share Capital and Debentures) Rules, 2014.

The amended provisions has exempted NBFCs registered with RBI and HFCs registered with National Housing Bank from creation of DRR in case of public issue of debentures. Further, the requirement of listed companies to create DRR has been done away with. The amended Rules have also lowered down the quantum of funds to be transferred to DRR by unlisted companies. However, as a flipside to the exemptions granted, the MCA has knowingly or unknowingly, unsettled an otherwise settled matter on creation of debenture redemption fund as per Rule 18(7).

Under the erstwhile provisions required creation of debenture redemption fund only by those companies on which DRR was applicable. However, under the current set of rules, the requirement to create DRF will apply to all listed companies, other than AIFIs or other FIs as per the clause of section 2(72). This new rule applies even to NBFCs.

It is pertinent to note that until now, NBFCs were required to create debenture redemption reserve only for publicly issued debt securities. However, under the new rule, all listed NBFCs will have to create a DRF even in case of private placement of debentures. This change in the rules seems to be contradicting the intention of proposal in the Union Budget.

The intention of the proposal was to promote NBFCs to explore Bond markets more often for fund raising, however, the language of the new rule has jeopardised the existing cases of debenture issuances, let alone be new debenture issuances. Considering the ongoing liquidity crisis, the entire financial system is going through, the implications of this requirement could be severe.

Creation of DRR is somewhat a liberal requirement then creation of DRF, this is because, where the former is merely an accounting entry, the latter is investing of money out of the Company and the fact the new rule casts an exemption from the first and not from the second makes the situation a bit awkward. Therefore, where there is no requirement even for annually conserving a part of their profits, the requirement of creating a fund out of the same becomes completely illogical.

Hence, in our view, the amendments have actually slashed the expectation to relax issuance of debentures by NBFCs and on the other hand has also taken away the available exemption to the NBFCs for not creating DRF in case of issuance of debt securities through private placement. The actual intent of the amendment would have been to reduce the requirement of DRR from somewhat say 25% to 10%, however, in a completely unexpected move, the requirement for parking liquid funds, in form of a debenture redemption fund (DRF) has been extended to all bond issuers except unlisted NBFCs (which are hardly any in India), irrespective of whether they are covered by the requirement of DRR or not.

In this regard, the notification also fails to clarify the basic question that is whether the requirement will be applicable to debentures/bonds already issued, before the date of the notification or only after the date of notification. Though, the language suggest that the same shall be applicable on debentures due for redemption after the date of notification, i.e. for debentures maturing during the year ending on 31st March, 2020. However, in our view, one should try to create a DRF for the debentures maturing within 31st March, 2020 itself. Lastly needless to say, the MCA notification needs to be considered immediately.

A brief analysis of the amendments are discussed below:

Applicability of DRR and Debenture Redemption Fund

a)    All India Financial Institutions and Banking Companies

b)   NBFCs registered with RBI under section 45-IA of RBI Act, 1934 and Housing Finance Companies registered with National Housing Bank

  1. Other companies

Synopsis of amendments in DRR provisions

Sl. No. Particulars Type of Issuance DRR as per erstwhile provisions DRR as per amended provisions DRF as per erstwhile provisions DRF as per amended provisions
1. All India Financial Institutions Public issue/private placement


× × × ×
2. Banking Companies Public issue/private placement


× × × ×


Listed NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and HFC registered with National Housing Bank


Public issue


25% of value of outstanding debentures

Private Placement


× × ×
4. Unlisted NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and HFC registered with National Housing Bank



Private Placement












Other listed companies


Public Issue



25% of value of outstanding debentures


Private Placement



25% of value of outstanding debentures


6. Other unlisted companies Private Placement


25% of value of outstanding debentures



10% of the value of outstanding debentures








Highlights of Companies (Amendment) Bill, 2019

by Vinod Kothari 

The Companies (Amendment) Bill, 2019 has been placed before the Parliament[1] on 25th July, 2019. While the Bill, 2019 is largely to enact into Parliamentary law the provisions already promulgated by way of Presidential Ordinance, the Bill also brings some interesting changes.

The key feature of the Bill is to replace the existing system of judicial prosecution for offences by a departmental process of imposition of penalties. As a result, while the monetary burden on companies may go up, but offenders will not be having to face criminal courts and the stigma attached with the same.

Some of the other highlights of the changes are as follows:

Dematerialisation of securities may now be enforced against private companies too

It is notable that amendments were made by the Companies (Amendment) Act, 2017 effective from 10th September, 2018 effective from 2nd October, 2018, whereby all public unlisted companies were required to ensure that the issue and transfer of securities shall henceforth be done in dematerialised mode only. This provision alone had brought about major cleansing of the system, as in lots of cases, shareholding records included men of straw.

However, the reality of India’s corporate sector is private companies, constituting roughly 90% of the total number of incorporated companies.

The provision of section 29 is now being extended to all companies, public and private. This means, that the Govt may now mandate dematerialisation for shares of private companies too. Whether this requirement will be made applicable only for new issues of capital by private companies, or will require all existing shares also to be dematerialised, remains to be seen, but if it is the latter, the impact of this will be no lesser than “demonetisation-2” at least for the corporate sector. Evidently, all shareholders of all private companies will have to come within the system by getting their holdings dematerliaised.

CSR is now mandatory, and unspent amounts will go to PM’s Funds

When the provision for corporate social responsibility was introduced by Companies Act 2013, the-then minister Sachin Pilot went public to say, the provision will follow what is globally known as “comply or explain” (COREX). That is, companies will not be mandated to spend on CSR – the board report will only give reasons for not spending.

Notwithstanding the above, over the last few months, registry offices have sent show-cause notices to thousands of companies for not spending as required, disregarding the so-called reasons given in the Board report.

Now, the rigour being added takes CSR spending to a completely different level:

  • If companies are not able to spend the targeted amount, then they are required to contribute the unspent money to the Funds mentioned in Scheduled VII, for example, PM’s National Relief Fund.
  • Companies may retain amounts only to the extent required for on-going projects. There will be rule-making for what are eligible on-going projects. Even in case of such on-going projects, the amount required will be put into a special account within 30 days from the end of the financial year, from where it must be spent within the next 3 years, and if not spent, will once again be transferable to the Funds mentioned in Schedule VII.
  • Failure to comply with the provisions makes the company liable to a fine, but very seriously, officers of the company will be liable to be imprisoned for upto 3 years, or pay a fine extending to Rs 5 lacs. Given the fact that the major focus of the Injecti Srinivas Committee Report, which the Ordinance tried to implement, was to restrict custodial punishment only to most grave offences involving public interest, this by itself is an outlier.

Unfit and improper persons not to manage companies

The concept of undesirable persons managing companies was there in sections 388B to 388E of the Companies Act, 1956. These sections were dropped by the recommendations of the JJ Irani Committee. Similar provisions are now making a comeback, by insertions in sections 241 to 243 of the Act. These insertions obviously seem a reaction to the recent spate of corporate scandals particularly in the financial sector. Provisions smacking similar were recently added in the RBI Act by the Finance Bill.

The amendment in section 241 empowers the Central Govt to move a matter before the NCLT against managerial personnel on several grounds. The grounds themselves are fairly broadly worded, and have substantial amplitude to allow the Central Govt to substantiate its case. Included in the grounds are matters like fraud, misfeasance, persistent negligence, default in carrying out

obligations and functions under the law, breach of trust. While these are still criminal or quasi-criminal charges, the  notable one is  not conducting the business of the company on  “sound business principles or prudent commercial practices”. Going by this, in case of every failed business model, at least in hindsight, one may allege the persons in charge of the management were unfit and improper.

Once the NCLT has passed an order against such managerial person, such person shall not hold as a director, or “any other office connected with the conduct and management of the affairs of any

Company”. This would mean the indicted person has to mandatorily take a gardening leave of 5 years!

Disgorgement of properties in case of corporate frauds

In case of corporate frauds revealed by investigation by SFIO, the Govt may make an application to NCLT for passing appropriate orders for disgorgement of profits or assets of an officer or person or entity which has obtained undue benefit.


Need for permanent chairperson – post in listed companies: an analysis

by Smriti Wadehra (


Corporate governance standards world-over have highlighted the role of the chairperson in corporate boards of listed entities. There has also been a move recently as to separation of the role of the CEO and the chairperson, such that the person who is executive head of the company (CEO) is also not its supervisory head (chairperson). However, what exactly is the function of the chairperson in Indian laws? Is the chairperson merely the convenor of board and general meetings, or does he/she have a role beyond meetings? In light of the answer to this question – a significant question is, is it necessary for a listed entity to have a permanent board chairperson, or can the chairperson be appointed for each meeting? We have tried to answer this question in the context of Indian and global laws.

Unless otherwise provided in the Articles of Association of the Company, the Companies Act, 2013 (‘CA, 2013’) and Listing Regulations, 2015 do not explicitly lay down provisions mandating the appointment/election of a permanent Chairperson of the Board. However, section 104 of the CA, 2013 provides that either the Chairperson of the Board, or the one of the directors or one of the directors, as the case may be shall act or be elected as the Chairperson of a general meeting. In view of the same, having a permanent chairman is not mandatory, however, having a chairman for board and general meeting is mandatory.

The word “Chairman” is used very loosely in general parlance, however, chairman of companies are of different types depending upon their requirement. Therefore, in order to understand the importance of chairperson in a Company, we have to first understand the reason of appointing chairman and capacities a chairman holds in a Company. Generally, a chairman may be:

a) Chairman of Board;

b) Chairman of General Meeting;

c) Chairman of Company and;

d) Chairman of Committees;

In most of the cases, they are the same, however, they have a thin line of difference between each one of them which has been discussed in a detailed manner below:

Chairman of Board

Usually, the Chairman of the company becomes the Chairman of the Board. However, if the company does not have a Chairman, the Directors elect one of themselves to be the Chairman of the Board and conducts the Meetings of the Board. Further, if no Chairman is elected by the Board or if the Chairman is unable to attend the Meeting, the Directors present at the Meeting shall elect one of themselves to chair and conduct the Meetings, unless otherwise provided in the Articles. Further, the board committees may elect different chairperson for its meetings. Considering the aforesaid, the listing regulations, 2015, also requires a Company to appoint Chairperson for board meeting and different chairpersons for board committees.

Therefore, on conjoint reading of the above, it can be concluded that every meeting of the Board requires a Chairman, however, the Company may not have a chairman on board. To clarify, please note that the provisions of Act suggests for having a chairman for meeting of board therefore it is the discretion of the Company they may appoint a specific individual as ‘Chairman of the Board’ or appoint randomly any director at every meeting of Board as ‘Chairman of the Meeting’. Further all the provisions of law relates to Chairman of the Board and not Chairman of the Meeting i.e. for instance as per the provisions of SS-1:

“Chairman” means the Chairman of the Board or the Chairman appointed or elected for a Meeting.”

Hence, the chairman of general meeting can be either chairman of board or any member as may be selected by members themselves during the meeting.

Further, the Listing Regulations refers to having a Chairperson with respect to examining the composition of the board and appointment of requisite number of IDs in order to have proper composition as:

“17(1)(b) 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”

In this case, the composition of the Board is dependent on the designation of the chairman of the board, however, the same shall be applicable only when the Company has a permanent chairman on the board. Accordingly, if the company has a practice of appointing a chairman at the respective board meetings, the condition of the said regulation shall not apply.

Chairman of General Meeting

As per the provisions of Secretarial Standard 2 on General Meetings issued by ICSI provides:

“Chairman” means the Chairman of the Board or the Chairman appointed or elected for a Meeting.”

As per the SS-2 the Chairman of the Board shall take the Chair and conduct the General Meeting. However, in case the Chairman is not present within fifteen minutes after the time appointed for holding the Meeting, or if he is unwilling to act as Chairman of the Meeting, or if no Director has been so designated, the Directors present at the Meeting shall elect one of themselves to be the Chairman of the Meeting. Further, if no Director is willing to take the Chair, the Members present shall elect, on a show of hands, one of themselves to be the Chairman of the Meeting.

Further, the provisions of Section 104 of the Companies Act, 2013 provides:

“Unless the articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.”

Therefore, this suggests that the chairman of the Board appointed as per the Articles of the Company, may chair the meeting of shareholders. However, in case the Company does not have a chairman on board the members present may elect one of themselves as Chairman for that specific meeting.

Accordingly, one may conclude that having a Chairperson on the Board is required considering the role and responsibility and election of a Chairperson of general meeting is a mandatory as per law.

Chairman of the Company

Referring to our aforesaid discussion, we may say that appointment of permanent chairman is a discretionary power of companies, usually exercised to avoid inconvenience of appointing new chairman for the board and general meetings, respectively.

Chairman of Committees

A member of the Committee appointed by the Board or elected by the Committee acts as Chairman of the Committee, in accordance with the Act or any other law or the Articles, who shall conduct the Meetings of the Committee. However, if no Chairman has been so elected or if the elected Chairman is unable to attend the Meeting, the Committee shall elect one of its members present to chair and conduct the Meeting of the Committee, unless otherwise provided in the Articles.

Further, if no such Chairperson is elected, or if at any meeting the Chairperson is not present within five minutes after the time appointed for holding the meeting, the members present may choose one of their members to be Chairperson of the meeting.

The Listing Regulations specifically provides the eligibility for appointment of chairman in specific committees as appended below:

  • Audit Committee:

“18(1)(d) The chairperson of the audit committee shall be an independent director and he shall be present at Annual general meeting to answer shareholder queries.

  • Nomination and Remuneration Committee

19(2) The Chairperson of the nomination and remuneration committee shall be an independent director:

 Provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee and shall not chair such Committee.

  • Stakeholders Relationship Committee

20(2) The chairperson of stakeholders relationship committee shall be a non-executive director.

  • Risk Management Committee

21(3) The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.”

Therefore, in case of committees the regulations specifically provides the eligibility for appointment of chairman.

Who can be a Chairman?

Considering the aforesaid provisions, it is clear that designating one person as the permanent Chairman of the company is not mandatory. However, the same needs to be elected in every meeting. Therefore, the company has two options:

  • Designate a person or a position as the one to be the chairperson [for ex: the company may state that the MD shall always be the chairperson of the company];
  • Appoint the chairperson in every meeting.

Separation of role of Chairman and MD

In this regard, we would also like stress upon the fact that the Act, 2013 does not specifically requires companies to appoint a chairman however Section 203 of the Act, 2013 restricts a Managing Director or CEO to be a chairman of the Company. The provisions lays down:

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,—
(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesses:

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government

The provisions explicitly provides that the chairman of the Company cannot be the MD or the CEO considering the power and authority involved in both the spheres. Here, the Act provides that if the AoA of the Company permits so and if the Company is engaged in multiple businesses, then the companies may have the CEO and the chairman as the same individual.

On reading the provisions, we understand that the intent of law is to stress on the fact that the chairman of the Company have been entrusted with great responsibilities and powers which designating to an executive director may affect the independence of the board altogether. Further, Managing Director is a person entrusted with substantial powers of management, which makes an MD the decision maker in the Company. Therefore, designating a person a CMD in the Company may not do justice to both roles i.e. the MD may not be able to discharge his responsibilities completely as an MD or as Chairman. However, where the Company is engaged in multiple businesses with more than one MD/CEO in the Company, then in that situation the Company may rethink to designate a person as CMD.

Where the Companies Act, 2013 provided for separation of role of Chairman and CEO the provisions of SEBI (LODR) Regulations, 2015 remain silent on the topic and provided a discretionary requirement. However, the recommendations of Uday Kotak Committee on Corporate Governance clearly provided for separation of role of CEO/MD from the chairman for better governance. The relevant extract of the recommendation is provided below:

“The separation of powers of the chairperson (i.e.  the leader  of  the board)  and  CEO/MD (i.e. the leader of the management) is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management, by virtue of:

  1. providing a structural advantage for the board to act independently;
  2. reducing excessive concentration of authority in a single individual;
  3. clarifying the respective roles of the chairperson and the CEO/MD;
  4. ensuring that board tasks are not neglected by a combined chairperson-CEO/MDdue to lack of time;
  5. increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;
  6. creating a board environment that is more egalitarian and conducive to debate”

Considering the aforesaid recommendations of Uday Kotak Committee on Corporate Governance, the provisions of Regulations, 2015 were amended through the SEBI (LODR) (Amendment) Regulations, 2018 (“Amendment Regulations”) brought in force from 9th May, 2018. By virtue of the said regulations a new sub-regulation was inserted in regulation 17 which states:

“(1B). With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall –

(a) be a non-executive director;

(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013:

Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.

Explanation-The top 500 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.”

The new sub-regulation inserted provides that the chairman of the board has to be mandatorily a Non-executive director and should not be related to the MD or CEO of the Company. Here, the Amendment Regulations, has provided more stringent requirement that the Chairman can definitely not be a executive director i.e. MD or CEO but also he should not be a relative i.e. spouse, children, mother, father etc. of the MD/CEO as per the provisions of section 2(77) of the Act, 2013. The said amendment shall be applicable from 1st April, 2020 on top 500 listed companies. However, the question which arises here is that whether pursuant to this regulation every listed company is required to have a permanent chairman of the Board. The recommendation of the Uday Kotak Committee does not specify such an intention, however, the same is subject to interpretation of the reader. However, in our view, the sub-regulation requires a Company to have a non-executive chairman if the Company has one.

The separation of chairman and CEO or Managing Director is coming from Sarbanes Oxley, and thereafter has been adopted in corporate governance codes of several jurisdictions, including the UK. Its need and relevance to Indian context is quite limited. The term “Chairman” is a decorative position in India. Unlike global boards, chairman does not hold any substantial powers, except the power to convene board and general meetings. If chairmanship is a position without any substantial powers, and therefore, without any special responsibilities, not much can be hoped to be achieved by splitting the two. Hence, in our view, separation of role of MD and chairman shall not have any impact as the requirement may be complied by companies by executive directors giving up the chairman’s role to an independent director and control the company in other ways. Therefore, such requirement may result in a cosmetic change to corporate governance without any intent.

Comparison of role of Chairman in India and in other countries

In general, the role of a Chairperson in India, is to chair the meeting and head the Board or committee, as the case may be. Considering the provisions of CA, 2013, the Chairperson has been empowered to deliver various functions, which in a nutshell can be termed as the role of a Chairperson which inter-alia includes:

  1. ensuring that the meetings of the Company are conducted in a fair manner and look after the meeting related compliances in terms of his role to conduct or declare or answer on the related matters; and
  2. casting vote in case of deadlock of management (if explicitly provided in the Articles of Association of the Company)

In India, the role of chairman has been limited to conducting meetings. However, codes of various countries bestows a wider responsibility on the chairperson which includes shareholder engagement, ensuring effectiveness of Board relations and understanding of the organisation’s financial position, strategic performance, operations on the chairman of Company etc. Further, the corporate governance codes internationally prescribes bifurcation of role of CEO/MD and the role of Chairman.


Sl. No. Country Who can be chairman? Powers and responsibilities of Chairman


1. United Kingdom As per UK Corporate Governance Code:


The chair should be independent on appointment when assessed against the circumstances set out in Provision 10. The roles of chair and chief executive should not be exercised by the same individual. A chief executive should not become chair of the same company. If, exceptionally, this is proposed by the board, major shareholders should be consulted ahead of appointment. The board should set out its reasons to all shareholders at the time of the appointment and also publish these on the company website.


Also, United Kingdom’s Cadbury Committee in the Report of the Committee on the Financial Aspects of Corporate Governance (1992)


 Given the importance and the particular nature of the chairmen’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power.



The responsibility of chairman are as follows:


a)     To seek regular engagement with major shareholders in order to understand their views on governance and performance against the strategy.

b)     To receive written statement from NEDs on their resignation and circulate to the same to the board.

c)     Leads the board and is responsible for its overall effectiveness in directing the company.

d)     Facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information.

e)     Considers having a regular externally facilitated board evaluation.


2. Australia The Corporate Governance Code:


The Governance Principles recommend that a majority of the board should be independent (non-executives directors that are free from the relationships that may impede independent judgement) and that the chair be an independent director.



The role of the chair is not defined in the Corporations Act 2001, thus many functions of the chair are customary rather than formalised by law.

a)    facilitating proper information flow to the board;

b)    facilitating the effective functioning of the board including managing the conduct, frequency and length of board meetings;

c)    communicating the views of the board, in conjunction with the CEO, to the organisation’s security holders, broader stakeholders and to the public.

d)    setting the agenda for the matters to be considered by the board;

e)    seeking to ensure that the information provided to the board is relevant, accurate, timely and sufficient to keep the board appropriately informed of the performance of the organisation and of any developments that may have a material impact on the organisation or its performance;

f)     Seeking to ensure that the board as a whole has the opportunity to maintain adequate understanding of the organisation’s financial position, strategic performance, operations and affairs generally and the opportunities and challenges facing the organisation;

g)    Overseeing and facilitating board, committee and board member evaluation reviews and succession planning;

3. New Zealand Corporate Governance in New Zealand- Principles and guidelines:


We recommend the chair be independent. No director should simultaneously be a chair and chief executive of the entity (or equivalent). Only in exceptional circumstances should the chief executive go on to become the chair.

The chair also has a pivotal role between the chief executive and the board. The balance between these roles is important. It works best if the roles of chair and chief executive (or equivalent) are clearly separated, and the chair is an independent director. In general, the chief executive should not go on to become the chair. Only in special circumstances should this occur, for example where an individual has the skills, knowledge and experience not available elsewhere to the entity. These circumstances should be fully explained to investors and stakeholders.


The duties of the Chairman are as follows:


a)     fostering a constructive governance culture and ensuring directors and management apply appropriate governance principles.

b)     promoting cooperation, mediating between different perspectives, and leading informed debate and decision-making

c)     leading the process of evaluation and review of the board’s performance.

d)     exercises pivotal role in creating balance between the chief executive and the board.

4 NYSE NYSE- Corporate Governance Guide


We believe that the role of the Chief Executive Officer and management is to run the business of the company and the role of the board of directors is to oversee management. We believe given these different roles and responsibilities, leadership of the board should be separated from leadership of management.


The Chairman shall have such duties and powers as set forth in the Company’s By-Laws or as shall otherwise be conferred upon the Chairman from time to time by the Board.


To conclude, we may say that the requirement of appointing a chairman and their role is very subjective. Whereas, the Act, 2013 and the Listing Regulations does not mandatorily require a Company to have a permanent chairman on the board, however, the provisions require the chairman to be independent i.e. non-executive and his office should be separated from that of a CEO/MD. In this regard, whether the intent of the Amendment Regulations is to mandate the appointment of chairman or not is subject to interpretation and clarification. Recently, companies are receiving notices from stock exchange for not complying with the requirement of Regulation 17(1)(b) i.e. not having adequate number of independent directors in cases where companies do not have a permanent chairman on Board. Therefore, though the requirement is not mandatory, companies should exercise caution while constituting its Board.

Snapshot of SEBI Board Meeting

By Corplaw Team (

SEBI Board Meeting held on 27th June, 2019 has proposed certain amendments in various Regulations. We aim to briefly highlight the changes with analysis.

1.  Framework for issuance of DVR

a)   Eligibility

Company having Superior Rights (SR) shares will be permitted to do IPO of ordinary shares to be listed subject to fulfilment of conditions of SEBI (ICDR) Regulations, 2018 and with fulfilment of following conditions:

  1. Issuer company is a tech company having intensive use of technology.
  2. SR shareholder should be part of promoter group whose collective networth should not exceed Rs. 500 crore (excluding investment of SR shareholder).
  3. SR shares have been issued to promoters who hold executive position in the Company.
  4. Issue of SR shares should be authorised by special resolution.
  5. SR shares should have been issued 6 months prior to filing of RHP.
  6. SR shares should be in the ratio of 2:1 to max 10:1 compared to Ordinary Right (OR) shares.
VKC Comments

The proposal of SEBI intends to motivate raising of money and control in the hands of founders of the company. This especially has been introduced to motivate tech startups, to raise capital without losing control. The SEBI Board Meeting has accepted most of the recommendations proposed by SEBI’s discussion paper. However, some new insertions have been introduced keeping in pace with the international practice. Such proposal includes SR shareholder to be a part of promoter group whose collective networth should not exceed Rs. 500 crore. Further, the issuance of SR shares prior to filing of RHP has been imported from Hong Kong law.

b)   Listing & Lock-In

SR shares shall also be listed on Stock Exchange after the issuer company makes a public issue. However, SR shares shall be under lock-in after the IPO until their conversion to ordinary shares. Transfer of SR shares among promoters shall not be permitted. No pledge/ lien shall be allowed on SR shares.

VKC Comments

Recommendation of SEBI’s discussion paper has been accepted.

c)   Rights of SR shares

SR  shares  shall  be  treated  at  par  with  the  ordinary  equity shares  in  every  respect,  including  dividends,  except  in  the  case  of  voting  on resolutions. The total voting rights of SR shareholders (including ordinary shares), post listing, shall not exceed 74%.

VKC Comments

The voting rights of SR shareholders have been capped to 74% of total voting rights, whereas, the Companies (Share Capital) Rules limits that total DVR in the Company to maximum 26% of post issued share capital of the Company. However, SEBI in its discussion paper had recommended a cap of 75% of the total voting rights.

d)   Enhanced corporate governance

  1. Min ½ of Board and 2/3 of Committees other than audit committee shall comprise of IDs
  2. Audit Committee shall be comprised of only IDs
VKC Comments

Companies with promoters having superior voting rights have been exposed to enhanced corporate governance with more independence on their Board and Committees.

e)   Coat Tail Provision

SR shares shall be treated as OR shares in following circumstances:

  1. Appointment or removal of independent directors and/or auditor
  2. In case where promoter is willingly transferring control to another entity
  3. Related Party Transactions in terms of SEBI(LODR) Regulations involving SR shareholder
  4. Voluntary winding up of the company;
  5. Changes in the company’s Article of Association or Memorandum
  6. except any changes affecting the SR instrument
  7. Initiation of a voluntary resolution plan under IBC;
  8. Utilization of funds for purposes other than business
  9. Substantial value  transaction  based  on  materiality  threshold  as  prescribed under LODR;
  10. passing of special resolution in respect of delisting or buy-back of shares; and
  11. Any other provisions notified by SEBI in this regard from time to time.
VKC Comments

The matters of significant interest of the Company have been eliminated from the purview of superior rights. This is because there might be instances where the interest of minority shareholders could be adversely affected by the holder of SR shares, therefore, certain checks and balances to prevent the misuse of the instruments have been imposed by SEBI to protect the interest of the shareholders as well as the genuine issuers.

f)    Sunset Clause

SR shall be converted into OR in following cases:

  1. SR shares shall be converted to Ordinary Shares within 5 years of listing which can be extended by 5 years through a resolution
  2. SR would not be permitted to vote on such resolutions.
  3. SR shares shall compulsorily get converted into OR on occurrence of   certain   events   such   as
  4. demise
  5. resignation of   SR shareholders
  6. merger or acquisition where the control would be no longer with SR shareholder
VKC Comments

The Sunset Clause in case of SR shares shall keep a check on the tenure of the DVRs and companies issuing the DVRs shall have to observe better corporate governance practices which was missing in the proposed structure of DVRs.

g)   Fractional Rights Shares

Concept of fractional rights have been proposed to be done away with and may be revived only after reviewing the experience of superior rights.

2.  SEBI (LODR) Regulations, 2015

The existing materiality limit for brand usage and royalty payments is proposed to be increased from 2% to 5% of annual consolidated turnover of the listed entity.

VKC Comments

SEBI constituted committee under the chairmanship of Mr. Uday Kotak on 2 nd June, 2018 provided a report on corporate governance with certain recommendations for implementation. One of the recommendations was to insert provision pertaining to payments made for brand and royalty to related parties. In this regard, the Committee suggested that where royalty payout levels are high and exceed 5% of consolidated revenues, the terms of conditions of such royalty must require shareholder approval and should be regarded as material related party transactions. SEBI applied its discretion to make the provision stricter and subsequently reduced the limit to 2%. However, based on the representations made by the stakeholders, SEBI proposes to increase the limit to 5% of annual consolidated turnover.

3.  SEBI PIT Regulations

The current language of the Code of Conduct indicated a voluntary requirement for closure of trading window from the end of quarter. Later, NSE issued a circular on April 2, 2019 to the effect that the requirement is mandatory. Accordingly, SEBI Board meeting has also clarified that during the trading window closure from the end of the quarter till 48 hours from the declaration of the results, the following trades shall be an exception to the same:

  • off-market inter-se transfer between insiders,
  • transaction through block deal window mechanism between insiders,
  • transaction due to statutory or regulatory obligations,
  • exercising of stock  options,
  • pledging of  shares  for  bona  fide  transaction  such  as  raising  of funds and
  • transactions for acquiring shares under further public issue, right issue and preferential issue, exercising conversion of warrants / debentures, tendering shares under buy-back, open offer and delisting etc. under respective regulations.

The Board meeting indicates that the trading during such period shall be allowed only if certain specified conditions are complied. The conditions are however, not mentioned in the outcome. Clarification has also been approved in relation to material financial relationship (nature of clarification not provided in the press release).

VKC Comments

The proposed amendments were much awaited. The existing set of the PIT Regulations provide a leeway for most of these trading activities under contra-trade restrictions or trading under Regulation 4 (exemptions to insider trading). The aforesaid amendment will provide much needed clarity to stakeholders who were facing operational difficulties due to the implementation of the quarter end trading window closure. However, one needs to see the nature and extent of conditions imposed for availing the aforesaid exemption.

4.  Definition and compliances w.r.t. “Encumbrance” under Takeover Regulations

  1. The definition of the term “encumbrance” has been made broad to include the following under the SEBI Takeover Regulations:
  • Any restriction on  the  free  and  marketable  title  to  shares,  by  whatever  name called, whether executed directly or indirectly;
  • pledge, lien, negative lien, non-disposal undertaking;
  • any covenant, transaction,   condition   or   arrangement   in   the   nature   of encumbrance,   by   whatever   name   called,   whether   executed   directly   or indirectly.
  1. Promoters required to   disclose   separately   detailed   reasons   for encumbrance,  whenever:
  • the combined  encumbrance  by  the  promoters  and PACs crosses  20%  of  the  total  share  capital  in  the company; or
  • 50% of their shareholding in the company.
  1. Stock exchanges will maintain the details of such encumbrance along with purpose of encumbrance, on their websites.
  2. Annual disclosure by the promoters to the audit committee and the stock exchanges stating that no other encumbrance , either directly or indirectly has been made other than those declared by them.
VKC Comments

As we understand, the aforesaid change has been made in view of the growing concerns over the complex arrangement of fund raising by promoters. The existing definition of encumbrance was also an inclusive definition, however, the proposed amendment intends to make it wide enough to cover negative lien or even any arrangement entered for the purpose of creating restrictions on free transferability of the shares, either directly or indirectly.

Further, the obligation has been casted to report the same internally as well as to allow the same to be reflected in the public domain for ensuring transparency in the dealings whereby promoters create encumbrance over the shares of the company.

The Companies (Amendment) Ordinance, 2018- Disqualification pursuant to exceeding number of Directorship

By Shaifali Sharma (


In a move towards streamlining and strengthening the rules for directors, government has introduced and amended certain provisions in past which resulted into disqualification of lakhs of directors and deactivation of their DIN.

Recently, The Ministry of Law and Justice vide an Ordinance dated 2nd November, 2018 has now introduced a new clause adding another criteria leading to disqualification of a director.

Section 164 of the Companies Act, 2013 (‘Act’) states various disqualifications for appointment of Director in a company where sub-section (1) specifies disqualification due to personal default while sub-section (2) specifies about disqualification arising due to corporate default. This write-up endeavors to discuss the said new provision under Section 164(1) read with Section 165 and related situations in the above context. Read more