Corporate governance
There are certain requirements mentioned in Clause 49 of listing agreement which a listed company needs to follow. To have a quick review of those important requirement, summary is given below.
1. Rights of shareholders and role of stakeholders:
Company should seek to protect the rights of shareholders and should facilitate them so that they can exercise their rights. Shareholders should be part of any decision of fundamental change and should have right of voting in general meetings. They should be allowed to effectively participate in key corporate governance decisions, to questions to board, put up agenda items on general meeting, made clear on voting procedure, and their grievances (including violation of their rights) should be addressed including protection to Minority shareholders. Voting process should be easy and not a costly affair.
Company should give timely and sufficient information to shareholders about general meetings like time, place and agenda. Company should inform rights which each class of shareholders possesses before they invest including if any class of holders has disproportionate rights. Company should give equitable treatment to all shareholders including monitory and foreign shareholders who are under same series. Mechanism to avoid insider trading should be in place.
There should be mechanism for employee participation and timely sharing of information so that participation in corporate governance can be made. Whistleblower policy should be in place.
2. Disclosure and transparency:
Company should disclose material matters timely including BS, P&L, and ownership and governance issues. Company should follow applicable Accounting standards in true spirit and statutory audit should be conducted by competence and independent qualified person. Sharing of information should be timely and should be accessible to all users in cost effective manner. Minutes of meetings should be maintained recording dissenting opinions.
3. Responsibility of Board:
i. All members of board including KMPs to disclose any material interest in ant transaction/matter in any manner whether directly or indirectly.
ii. Board and management should maintain confidentiality and transparency of information.
4. Function of the board:
Review of corporate strategies, giving strategic guidance, major plans of action, risk policy, annual budgets and business plans, setting performance parameters, maintaining transparent board nomination process, monitoring potential conflict with different stakeholders, monitoring effectiveness of governance practices, integrity of financials reporting process and internal controls, management, compliances with law, communication with stakeholders, hiring and compensating including succession plan of key executives, overseeing of major capex, acquisition, divestments, work in good faith in a responsible manner , overview process of disclosure and communication, monitoring board evaluation process, training to directors, set a corporate culture and should work in best interest of the company with high ethical standards, and should have independent judgment .Allow independent directors and committee to function properly and also intimate them their role as board members and committee member.
Composition of Board:
1. At least one woman director
2. Minimum 50% of the board should be independent if chairman of the board is executive director. If chairman is non executive Director (NED) than 1/3 of the board should be independent. If chairman is non executive but is a promoter or related to promoter or to any person one level below board, than 1/2 of the board should be independent.
5. Independent directors:
He is a person who:
• Is a person of 21 years or more
• who possesses integrity and relevant expertise in board’s view
• is neither executive director nor a nominee director
• is not related to any of promoter/director of company (including of holding, subsidiary(subs), and associate).
• Who is not and was not a promoter of the company (including of holding, subs and associate) at any point of time.
• Apart from receiving sitting fee/directors remuneration, he does not have or had any time any material pecuniary relationship with company, holding, subs or associate or their promoter/directors in current year and previous two years.
• Same requirement applies for his relative also if they have such transactions with the company amounting to 2% or more of gross turnover or income or Rs. 50 lacs whichever is lower.
• Along with his relatives does not hold 2% or more of voting power or his relative does not have or have been in following positions in any of the preceding 3 financial years immediately preceding the financial year in which he is proposed to be appointed..
• employee or KMP of company (co.), holding, subs or associate
• employee, partner, proprietor of a CA, cost audit, co secretary firm, of co. holding, subs or associate or
• Employee, partner, proprietor of a legal or consulting firm who has transaction of 10% or more of the firm with co. holding, subs or associate.
• Is or his relative is not a material supplier, customer, service provider, lessor or lessee of the company
• Is or his relative is not a director of CEO of Non profit organization which receive 25% or more of receipts from company or its relatives.
• A person shall not serve as an Independent director of more than 7 listed entities ( 3 listed entities if he is whole time director (WTD) in any listed entity).
• Formal letter of appointment should be issued and terms and conditions of appointment should be posted on website of the company.
• Nomination committee should lay down evaluation criteria of Independent Directors (IDs) and also mention in AR. Evaluation is done by board excluding ID being evaluated. Evaluation becomes basis whether to extend the term or not.
• There has to be at least one meeting in a year of ONLY IDs. IDs should review performance of board, chairperson and Non independent Directors (NIDs), and should also assess whether flow of information was adequate with ref to time, quality and quantity between management and board.
• Company should make familiarization programme for IDs so that they cam have idea of business model of company, nature and risk appetite. Also disclose on website and link in AR.
6. Non-executive Directors’ compensation and disclosures:
Any fees, compensation should be approved by board and have prior approval of shareholders. Sitting fee to NED does not required prior approval if it is within limits of co act. IDs does not entitle for stock options.
7. Other provision of committee and code of conduct
i. Board shall meet at least 4 times in a year with maximum gap between two meetings of 120days. Minimum information to be made available to board is in Annex X to the listing agreement.
ii. A director shall not be a member of more than 10 committees and at the same time he can not act as chairman in more than 5 committees. He needs to update to board regularly about his membership in different committees or boards.
iii. Board should review compliance report prepared by company including action taken on non compliance if any.
iv. If an ID resigns or is removed by board and his position is not fulfilled before , than his position should be filled immediately within 3 months or next board meeting which ever is earlier.
v. A succession plan of Board and senior management should be in place.
vi. There has to be a written code of conduct for Board and senior management which should be posted on website. AR should have declaration of CEO of compliance of code of conduct by all concerned. Code of conduct should specify duties of IDs.
vii. IDs should be made responsible for acts or omission of companies which were in his knowledge.
viii. Company should have whistle blower policy and also safeguard to persons who avail such mechanism. Such policy should be on website as well as AR.
8. Audit committee (AC):
i. Composition, quorum and meetings
ii. There has to be a qualified and independent AC with terms of reference (TOR).
iii. AC should have minimum 3 directors with 2/3 of them independent. Chairman should be ID and should present at AGM.
iv. Directors should be financially literate at least one of them should have Accounting or financial management expertise.
v. AC may invite finance head or other executives including internal and statutory auditors to present in meeting. Company secretary to act as secretary to meeting.
vi. AC should meet at least 4 times in a year with maximum gap of 4 months. Quorum is 2 independent directors with minimum 1/3 of AC.
vii. AC can investigate any matter within its TOR and can seek information from any employee and can take legal or professional advice from outsider as and when required.
9. Role of AC
i. Oversight of financial reporting process and ensure disclosure of financial information which is reliable and credible.
ii. Recommending appointment, remuneration, terms of appointment and approval of payment for any other service of statutory auditors. Appointment of CFO or finance head.
iii. Review with management of annual along with audit report before submission to board with particular reference to
- Matters to be included in board report (Directors responsibility statement)
- Change in accounting policy, qualification of auditors and explanation thereto, significant estimate judgment by management, significant audit findings and resulting adjustment in books , RPT disclosure , compliance requirement related to financial statements
- Review of any substantial defaults in payment of debt/deposits including creditors and dividend.
- Review of effectiveness of whistleblower mechanism,
- Review with management uses /application of fund raised from IPO and deviation if any.
- Review with management of performance, independence (statutory auditors) and effectiveness of internal and statutory auditors and review of internal audit function, evaluation of internal financial control and risks management system.
- Discuss with statutory and internal auditors before audit for nature and scope and post audit on their findings and concerns including suspected frauds and inform to board.
- Scrutiny of inter corporate loan and investments, valuation of assets or business
AC must review following:
Management Discussion Analysis, financial status and performance, significant RPT,MRL, letter of internal control weakness issued by statutory auditors, Internal audit report and appointment/ terms appointment/removal of internal auditors , quarterly financials before they are submitted to board.
10. Nomination and Remuneration Committee
i. Board should appoint such committee of non executive directors (NEDs) which should have minimum 3 directors with 1/3 of them independent. Chairman of committee should be ID. Chairman of the company may be appointed as member of committee but can not chair the meeting.
ii. Role of the committee is to formulation of criteria for evaluation of performance of Board and IDs, qualification, independence and attribute of a director and recommend to board a policy for remuneration of Directors, KMP and employees.
iii. Identifying a person who can be appointed in senior management or as Director. Recommending to board their appointment and removal and evaluation criteria in AR.
11. Subsidiary company
i. At least one ID of holding company should be on the board of Material non listed Indian subsidiary co.
ii. AC should review Financial statements of subs specially investments made by unlisted subs
iii. Minutes of the board meeting of unlisted subs should be placed in board meeting of holding company and all significant transaction entered by such subs should be brought to notice of board of holding co.
iv. Should formulate policy of identifying material subs and such policy should be on company website with link in AR.
v. A subs is material, if investment in subs is more than 20% of consol Networth or if subs has generated 20% or more of consol income as per latest audited consol financial statements.
vi. An company can not loose control over a material subs by way of divestment without shareholder approval except where divestment is court approved.
vii. If a material subs sells, leases or disposes assets of more than 20% of its assets, than it requires special resolution of holding company’s shareholders unless done under court approval.
12. Risk management:
1. Company should frame procedure to inform board about risk assessment and minimization procedure and board should frame risk management plan.
2. Company should make risk management committee and board should define role and responsibilities of committee which should have majority of members from board specially chairperson of committee.
13. Related party transactions (RPT):
i. Related party as defined in companies act 2(76) or under Accounting standards.
ii. Company should have policy on materiality of RPT and dealing with them.
iii. A transaction is considered material if a transaction to be entered together with previous similar transaction if any entered during the year exceeds 10% of total Turnover of the company as per consol audited financials of previous year.
iv. All RPT required prior approval of AC however AC may grant omnibus approval also subject to following:
v. AC should set criteria of such omnibus approval and that can be for only transactions of repetitive in nature. Such omnibus approval’s need and interest of company should be established.
vi. Such omnibus approval should specify: name of related party, nature of transactions, time period, max amount, indicative price, current price and other information. If such need can not be foreseen and such details are not available than omnibus approval can be for Max Rs 1 cr per transaction.
vii. AC should review every quarter transactions entered against such omnibus approval and such approval can be valid for max one year from the date of approval.
viii. Companies act states that all RPT which are (i) between Company and its WOS or (ii) transactions which are in ordinary course of business which are at arms length, such transactions does not require board approval.
ix. The transactions which are not with WOS, which are not at arms length or which are not in ordinary course of business, those transactions require prior approval of board. If value of transactions excess certain limit than additionally approval of shareholders is also required.
14. Other disclosures
i. All RPT should be disclosed in compliance report on corporate governance.
ii. Policy of RPT should be disclosed on website and link in AR.
iii. If company has not followed accounting standard than management should give explanations.
iv. All pecuniary transactions with NED should be disclosed in AR. Complete details of remuneration paid to all directors including fixed and variable component should be disclosed.
v. It should disclose criteria for remuneration to NEDs, no of shares and convertible instrument held by them. NEDs are also required to disclose their holding before appointment.
vi. Management discussion analysis (MDA) should be part of AR. MDA contains details about past performance, out look, industry, SWOT analysis, adequacy of internal control system and other developments.
vii. Senior management should disclose to board their conflict or potential conflict to material financial and commercial transactions.
viii. Code of conduct of BOD and senior management should be disclosed on website.
15. Shareholders:
i. When a director is appointed or re appointed shareholder should be provided with his resume, places where he is director or in committees, and shareholding of NEDs. Disclosure of relationship with other directors.
ii. Qtly results and presentations sent to analyst should be on website and also with stock exchanges where it is listed.
iii. Stakeholders’ relationship committee should be formed with chairman as NED. Process of share transfer should be smooth.
iv. When money is raised through IPO a quarterly report of uses and application of such funds should be presented to AC. Company should also disclose if any money is used in other than specified purpose for which it was raised till all money is utilized.
16. CEO/CFO certification:
i. CEO/MD/Manager or WTD and CFO should certify to board that they have reviewed financials statements and they represent true and fair view and not misleading.
ii. No fraud, illegal transactions. They have evaluated effectiveness of internal control systems.
iii. They have informed to AC and auditors abut significant changes in accounting polices, frauds and where employees are involved,.
17. Report on corporate governance:
There has to be separate section in AR on Corporate governance and its compliances. Company should submit to respective stock exchanges compliance report on corporate governance within 15 days from close of the quarter.
Company should obtain certificate from auditors or from practicing company secretary about compliance of corporate governance and this certificate should also be attached with Directors report. Non mandatory requirements which are given in Annexure VIII of clause 49 may be implemented by company.
Disclaimer: Above requirements have been compiled from listing agreement available on BSE website. This is just for reference and academic purpose. There might be mis-interpretation my part . Hence for making necessary compliances, one should go through each and every clause of the listing agreement signed by company.
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