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Corporate Governance

CA.Tarun Maheshwari 
on 19 February 2009

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The Companies (Amendment) Act, 2000 has inducted good corporate governance [CG] leading to more transparent, ethical and fair business practice to be adopted by corporates at large. The following are the provisions which have brought good CG :

  1. Section 217(2AA) dealing with Directors’ Responsibility Statement [DRS] to be included in the Directors’ Report

  2. Section 292A bringing in constitution of Audit Committee [AudComm]

  3. Section 274(1)(g) debarring a person to act as a Director of a company if default in filing Annual Return/Accounts or repayment of deposits/interest/debentures/dividend has taken place

  4. Section 275 providing for appointment of a person as a Director in a maximum of 15 companies

  5. Clause 49 of the Listing Agreement of the Stock Exchanges providing for promoting and raising the standards of CG in respect of listed companies.

Directors’ Responsibility Statement [DRS] [Section 217(2AA)]

The Directors’ Report shall now include a DRS on the following aspects:

  1. Applicable accounting standards have been followed in preparation of financial statements along with proper reasons/explanations for material departures.

  2. Accounting policies as selected are consistently applied.

  3. Judgments and estimates are made in a reasonable and prudent manner to ensure true and fair view of the state of affairs and of the P & L account.

  4. Adequate accounting records are maintained in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the company and for preventing and detecting frauds and other irregularities.

  5. Financial statements have been drawn up on a Going Concern basis.

Constitution of Audit Committees (AudComm) [Section 292A]

It is provided that every public company having paid-up capital of Rs. 5 crores or more shall constitute a Committee of the Board known as the Audit Committee. The following are the salient features of an AudComm :

  1. The AudComm shall consist of a minimum of 3 Directors such that 2/3rd of the strength shall be other than managing/whole-time Directors.

  2. Functions of an AudComm shall be in accordance with the terms of reference specified in writing by the Board.

  3. The members of the AudComm shall appoint Chairman of the AudComm.

  4. Annual Report of the Company shall disclose the composition of the AudComm.

  5. The auditors, internal auditors and the finance director shall attend/participate AudComm meetings without any right to vote.

  6. The AudComm shall have periodical discussions with the auditors regarding internal control systems, scope of audit, observations of auditors, review of half-yearly annual financial statements and to ensure compliance of internal control systems.

  7. The AudComm will have authority to investigate on any matter referred to by the Board of Directors and shall have full access to information contained in the records of the company as also in seeking external professional advice as expedient.

  8. All recommendations of the AudComm on any matter relating to financial management and audit reporting shall be binding on the Board. If the Board does not accept any recommendations, it shall record its reasons in writing and communicate the same to the shareholders.

  9. The Chairman of the AudComm shall attend every AGM to provide clarifications on matters relating to audit.

  10. Default in compliance with AudComm provisions will render the company/every officer in default liable to imprisonment up to 1 year and fine up to Rs. 50,000/- or both.

Disqualification of Directors [Section 274(1)(g)]

The Companies (Amendment) Act, 2000 has inserted clause (g) to section 274(1) of the Companies Act, 1956 providing for the following :

A person would not be eligible to be appointed as a Director if such person is a Director of a public company which

  1. has not filed its annual returns/accounts for continuous 3 years commencing on/after 1-4-1999; or

  2. has failed to repay its deposits/interest/debenture redemption on due date or failed to pay dividend and such failure continues for more than 1 year.

Such a Director shall not be eligible to be appointed as a Director of any other public company for a period of 5 years from the date of the above referred default.

This restrictive provision shall not be applicable to:

  1. a special Director appointed by BIFR under section 10(4) of SICA.

  2. Default of privately placed bonds/debentures of Public Financial Institutions (Circular No. 5/2003 dt. 14-1-2003).

Clause 49 of the Listing Agreement

Vide Circular No. SEBI/CFD/DIL/CG/1/2008/08/04 dated 8-4-2008, SEBI has decided to modify the existing Clause 49 by including the following provisions:

Mandatory provisions

  1. If the non-executive Chairman is a promoter or is related to promoters or persons occupying management positions at the board level or at one level below the board, at least one-half of the board of the company should consist of independent directors.

  2. Disclosures of relationships between directors inter se shall be made in specified documents/filings.

  3. The gap between resignation/removal of an independent director and appointment of another independent director in his place shall not exceed 180 days. However, this provision would not apply in case a company fulfils the minimum requirement of independent directors in its Board, i.e., one-third or one-half as the case may be, even without filling the vacancy created by such resignation/removal.

  4. The minimum age for independent directors shall be 21 years.

Non-mandatory provisions

  1. A non-executive Chairman may be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties.

  2. Independent directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company.

  3. The company shall ensure that the person who is being appointed as an independent director has the requisite qualifications and experience which would be of use to the company and which, in the opinion of the company, would enable him to contribute effectively to the company in his capacity as an independent director.




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