Request under SEBI(Informal Guidance) Scheme 2003

Request under Securities and Exchange Board of India (Informal Guidance) Scheme, 2003

1.0 Please refer to your letter dated April 08, 2009 seeking interpretive letter under the SEBI (Informal Guidance) Scheme 2003.

2.0 In your letter under reference you have inter alia represented as follows:

2.1. Bharat Heavy Electrical Limited (BHEL) is a Central public Sector Enterprise (CPSE) and is listed with NSE and BSE. BHEL is exploring the possibility of entering into various kinds of business arrangements, joint business in South Europe and/or taking an equity stake in a Hungarian company. For this purpose BHEL intends to appoint a financial advisor through tendering process.

2.2. M/s IDBI Capital Market Services Limited (IDBI CMS), a wholly owned subsidiary of IDBI Bank (a public sector Bank) is one of the short listed companies for providing this service. One of BHEL’s independent directors is also an independent director in IDBI CMS though he does not hold any share in IDBI CMS or in BHEL.

2.3. BHEL has not placed order on IDBI CMS for the last 3 years.

3.0 You have sought SEBI’s clarification with respect to the following:

3.1. In the context of clause 49 of the listing agreement relating to independent directors, whether BHEL can place order on IDBI CMS, if it happens to be the lowest bidder?

3.2. Will placing of order on IDBI CMS affect independence of common independent director?

3.3. If answer to Q. 3.1 is yes, the precaution/requirement, if any, to be fulfilled by BHEL or independent director while placing the order?

4.0 Reply to queries:

4.1. Reply to Query 3.1 and Query 3.3 :

There is no provision presently in clause 49 of the listing agreement which prohibits a listed company to place order on another company which has a common independent director on its Board. The procedures regarding the contracts in which the directors of the company are concerned or interested are governed by the provisions of Section 297-301 of the Companies Act, 1956. As these sections are not under the administrative purview of SEBI, no views are expressed on the same.

4.2. Reply to Query 3.2 :

The query is generic in nature. The definition of "Independent director" as per Clause 49 (I) (A) (iii) is as follows:

"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;

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 per cent or more of the block of voting shares

g. is not less than 21 years of age."

As per the applicant, the director of BHEL is only an independent director in the board of IDBI CMS and hence, it is presumed that the said independent director fulfills the requirements and conditions as mentioned in clause 49 (I) (A) (iii). Based on the facts and circumstances of the case, the provision contained in Clause 49 (I) (A) (iii) (d) (ii) may be relevant for determining whether the independence of the director is affected. As per the said sub-clause, independent director cannot be an executive of the consulting firm(s) that has a material association with the company. Independent director by definition is a non-executive. Hence Independent director of IDBI CMS cannot be construed to be an executive of IDBI CMS and sub-clause (d) (ii) will not be attracted.

5.0 This position is based on the representation made in your letter under reference. Different facts or conditions might require different results. This letter does not express decision of the Board on the questions referred.

6.0 Please note that the above position is expressed only with respect to the clarifications sought on the applicability of Clause 49 of the listing agreement as referred above and does not affect the applicability of any other law and other SEBI Regulations, Guidelines and circulars administered by SEBI or the requirements of Listing Agreement or laws administered by any other authority.