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CORPORATE GOVERNANCE |
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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 :
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).
Corporate Governance Voluntary Guidelines 2009
The ‘Corporate Governance -Voluntary Guidelines 2009’, has been released in December 2009 for voluntary adoption by the Corporate Sector have taken into account the recommendations of the Task Force set up by Confederation of Indian Industry (CII) under chairmanship of Shri Naresh Chandra in February, 2009 to recommend ways to further improve corporate governance standards and practices. The voluntary guidelines address a number of current concerns in the area of corporate governance. These guidelines do not substitute any extant Law or regulation but are essentially for voluntary adoption by the corporates. While it is expected that more and more corporates should make sincere efforts to consider adoption of these guidelines, there may be genuine reasons for some companies in not being able to adopt them completely. In such a case it is expected that such companies should inform their shareholders about the guidelines which the companies have not been able to apply either fully or partially.
Over a period of time these guidelines will progressively converge towards a framework of best corporate governance standards and practices. After considering the experience of adoption of these guidelines by Indian corporate sector and consideration of relevant feedback and other related issues, the Government may initiate the exercise for review of these guidelines for further improvement after one year.
[Note: A copy of the ‘Corporate Governance -Voluntary Guidelines 2009’ is included in the CD]
Clause 49 of the Listing Agreement
The SEBI inserted Clause 49 in the Listing Agreement in January, 2000 to enforce compliance with Corporate Governance standards as amended in 2004 and further amended in 2008 and again in 2010. The highlights are:
A. Composition of Board
i. Non-executive directors should not be less than 50% of the total board.
ii. Independent directors
i. Where the Chairman is a non-executive director, at least one-third of the Board should comprise of independent directors
ii. Where the Non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least 50% of the Board of the company shall consist of independent directors.
iii. Where the Chairman is an executive director, at least 50% of the Board should comprise of independent directors.
B. Non-executive directors’ compensation and disclosures
i. All fees/compensation, if any paid to Non-executive directors, including independent directors, to be fixed by the Board of Directors with previous approval of shareholders in general meeting.
ii. The shareholders’ resolution to specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate.
iii. Prior approval of shareholders in general meeting not to apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 1956 for payment of sitting fees without approval of the Central Government.
C. Other provisions as to Board and Committees
i. The board shall meet at least four times a year, with a maximum time gap of four months between any two meetings. The minimum information to be made available to the board is given in Annexure– I A.
ii. A director not to be a member in more than 10 committees or act as Chairman of more than 5 committees across all companies in which he is a director.
iii. Every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.
iv. The Board to periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.
v. An independent director who resigns or is removed from the Board of the Company to be replaced by a new independent director within a period of not more than 180 days.
vi. The Board to lay down a code of conduct for all Board members and senior management of the company and post the same on the website of the company.
D. Qualified and Independent Audit Committee
i. Minimum 3 directors to be members with two-thirds being independent directors.
ii. All members to be financially literate and at least one member having accounting or related financial management expertise.
iii. The Chairman of the Audit Committee to be an independent director and to remain present at the AGM to answer shareholders’ queries.
iv. The powers of the Audit Committee to include:
· To investigate any activity within its terms of reference
· To seek information from any employee
· To obtain outside legal or other professional advice
· To secure attendance of outsiders with relevant expertise, if necessary
v. A very elaborate role is prescribed for the Audit Committee in Clause 49.
E. Subsidiary Companies
i. At least one independent director of the holding company to be a director on the Board of a material non-listed Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company.
iii. The minutes of the Board meetings of the unlisted subsidiary company to be placed at the Board meeting of the listed holding company and the management to periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.
F. Disclosures
The following disclosure requirements are specified:
i. Basis of related party transactions
ii. Disclosure of Accounting Treatment
iii. Risk assessment and minimization procedures to the Board
iv. Proceeds from public issues, rights issues, preferential issues etc.
v. Remuneration of Directors
vi. Management Discussion and Analysis report
vii. Brief resume of the Director and other specified particulars at the time of his appointment or re-appointment
viii. Disclosure of relationships between directors inter-se
ix. Quarterly results and presentations to analysts to be put on company’s web-site
x. Annual Report on Corporate Governance to the Shareholders, suggested List of Items to Be Included in Annexure I C, and Quarterly compliance report to the Stock Exchange within 15 days from close of the quarter as per the format given in Annexure I B.
G. Shareholders/Investors Grievance Committee
i. This Committee is be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc.
ii. To expedite the process of share transfers, the Board to delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority to attend to share transfer formalities at least once in a fortnight.
H. CEO/CFO certification, CFO appointment
The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function to certify to the Board specified particulars.
In order to ensure that the CFO has adequate accounting and financial management expertise to review and certify the financial statements as required under Clause 49 of the Listing Agreement, it has been decided that the appointment of the CFO is approved by the Audit Committee before finalization of the same by the management. The Audit Committee, while approving the appointment, shall assess the qualifications, experience & background etc. of the candidate.
I. Non-Mandatory Requirements
The non-mandatory requirements are specified in Annexure I D to Clause 49 that includes:
i. 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.
ii. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company.
iii. The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment.
iv. A half-yearly declaration of financial performance including summary of the significant events in last six-months, may be sent to each household of shareholders.
v. Company may move towards a regime of unqualified financial statements.
vi. A company may train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.
vii. The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend /continue the terms of appointment of non-executive directors.
viii. The company may establish a Whistle Blower Policy. |
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