Corporate Governance - Companies Act Prospective

Corporate Governance - Companies Act Prospective.

N K JainB.Sc., LLB.,DCL,FCS,FCPS

Corporate Advisor Partner, Global FinServe LLP

Member , ASSOCHAM National Council for Corporate Affairs & CSRFormer Council Member and Secretary & CEO, ICSI

Cell: 09818348811Landline: 0120 - 4263965

E-mail: [email protected] January, 2016

mailto:[email protected]

Why Corporate Governance ? Illustrious business enterprises which

witnessed spectacular growth in boom time became disastrous failures later due to:-

Mismanagement; Lack of effective internal controls and

financial reporting; Poor governance standards.

[email protected] 9818348811 2

America’s Hall of Shame

WorldCom Enron Anderson Waste Management


England Catches Up Polly Peck Bank of Credit and Commerce International British & Commonwealth Robert Maxwell’s Mirror Group International


Series of Indian Scams

Harshad Mehta’s securities scam Preferential Allotment scam Vanishing Companies scam Plantation companies scam Non-banking finance companies scam Mutual fund scam Global Trust Bank scam Satyam scam


Why Corporate Governance ? The society, shareholders, MFs and large

institutional investors insisted that corporates adopt better governance practices.

It led to formation of several committees to study the issue and make recommendations, codes, guidelines on CG.

The society’s response to these frauds was reflected in the legislative & regulatory changes made by governments.


CG Developments in India CII’s Desirable CG Code, 1998 Kumar Mangalam Birla Committee, 2000 Task Force on Corporate Excellence, 2000 Naresh Chandra Committee, 2002 Narayan Murthy Committee, 2003 Dr. J J Irani Expert Committee, 2005 CG Voluntary Guidelines, 2009


CG Developments in India Guidelines issued by the Department of

Public Enterprises for Central Public Sector Undertakings, 2010

Adi Godrej Committee Report, 2012 The Companies Act, 2013 Revised Clause 49 of the Listing Agreement

by SEBI, 2014 SEBI Listing Regulations, 2015


Corporate Governance Issues Separation of Ownership from Management: Promoters/Shareholders should exercise

their ownership rights in the general meetings of the company and ought not to throw their weight in the Board meetings.

Boards should be allowed to function and decide with complete freedom what is good for the company and its various stakeholders.


Corporate Governance IssuesDistinguishing the roles of board and management: The business of a company is to be managed ‘by or under the direction of’ the board. The responsibility of managing the business is delegated by the board to the CEO, who in turn delegates the responsibility to other senior executives. Thus, the board occupies a key position between shareholders (owners) and company’s management.


Role of the Board

Establish Vision and Mission. Strategic direction, policy and advice. Overseeing implementation of its policies. Appointment & evaluating performance of

CEO and senior management staff. Ensuring stakeholder relationships. Risk mitigation. Procuring resources.


Strategic Board for better CG Optimum size: The optimum board size will

result in greater involvement of directors which will lead to more cohesive functioning and faster decisions.

Independence: Strategic board should have less insiders and more outsiders to maintain independence /objectivity in decision making.

Information: Timely, accurate and intelligent information to board enhances its efficiency and effectiveness.


Strategic Board for better CG

Diversity: The board should be composed of directors with varied expertise, experience & diverse professional qualifications and also of people with different ethnic and cultural backgrounds in tune with rapid globalisation of businesses.

Vision: The board should have a longer vision and broader responsibility than those of CEO and top management.


Duties of Directors Sec.166 ..act in accordance with articles of company; ..act in good faith to promote company’s

objects in interest of company, employees, shareholders, community & environment;

..exercise his duties with due and reasonable care, skill and diligence…;

.not to involve in conflict of interest with comp .not to achieve any undue gain or advantage; ..not to assign his office..


In re Caremark International, Inc.

The company provides health care services and products to patients referred to them by a physician. Since the business is based on referrals, companies such as Caremark compensate physicians.

A federal law, the Anti-Referral Payments Law (”ARPL”) prevents such a system.

In 1994, Caremark was indicted for violating the ARPL.


In re Caremark International, Inc.

The court held that a board’s sustained and systematic failure to monitor its corporation’s compliance with governing law would be evidence of an absence of good faith.

It was held that a lack of good faith could be demonstrated by a board’s failure to undertake a pre-existing duty—the statutory duty to monitor.


Union Carbide India Ltd.-Bhopal Gas Case Leak of poisonous gas from the plant on the

night of December 2–3, 1984 made its way in and around the shantytowns located near plant at Bhopal and destroyed & damaged thousands of lives, vegetation, etc.

The prosecution charged the company and its directors with not heeding the feedback on inadequate safety norms and other maintenance lapses.


Union Carbide India Ltd.-Bhopal Gas Case The court has held Keshub Mahindra guilty &

sentenced him to 2 years of imprisonment along with seven other accused. He attended only a few meetings in a year and took only macro view of the company’s developments.

A non-vigilant act of non-executive chairman, accounted for death of thousands.

“Ignorance” of the system by directors of the company is unacceptable. Role of directors in this case is questionable.


The Volkswagen emissions scandal Olaf Lies, a Volkswagen board director who

represents the state of Lower Saxony, which has a controlling stake in the carmaker, has said some staff acted criminally in cheating emissions tests.

CEO has quit after the firm admitted diesel cars were designed to cheat in tests.


The Volkswagen emissions scandal Lies told BBC “We only found out about the

problems in the last board meeting... So we need to find out why the board wasn’t informed earlier.. when they were known about over a year ago in the United States.”

Fines in the US alone could be about $12bn. Huge damage has been done as millions of

people have lost their faith in VW,” said Lies.


The Volkswagen emissions scandal

VW has admitted that 11m diesel cars worldwide have been fitted with a defeat device. VW has put aside €6.5bn (£4.8bn) to meet the costs of recalling the cars but also faces the threat of fines and legal action from shareholders and customers.


http://www.theguardian.com/business/2015/oct/15/vw-customers-demand-answers-and-compensation-over-emissions-scandal

Separation of the roles of Chairperson & CEO Chairperson leads the board. CEO leads the senior management team The board evaluates the performance of

senior executives including the CEO. Combining the role of both the CEO and the

Chairman removes an important check on senior management’s activities.

The Chairman should be an ID to provide the appropriate counterbalance and to check the power of the CEO.


Separation of the roles of Chairperson & CEO Sec.203 provides that an individual shall not

be appointed or re-appointed as Chairperson as well MD or CEO of the company at the same time after the date of commencement of the Act unless the:-

a. article of the company provide otherwise; orb. company does not carry multiple businesses Prescribed classes of companies engaged in

multiple businesses with CEO for each such business may be exempted by Govt.


Composition of Board Sec. 149 Minimum Number of Directors: a. Public Company : 3 directors b. Private Company : 2 directors c. One Person Company : 1 director Maximum number of directors restricted to 15 Maximum directorships: 20 companies

including 10 directorships in public companies

Listed public company to have at least 1/3rd of total directors as IDs.



Number of IDs in other Companies: Rule 4

Following companies shall have at least two directors as IDs:-

Public companies having:i. paid up share capital of 10 cr. +; or₹ii. turnover of 100 cr. +; or ₹iii. in aggregate, outstanding loans, debentures and

deposits exceeding 50 cr.₹ iv. Where a company ceases to fulfil any of three conditions

for 3 consecutive years, it shall not be required to comply with this requirement

Maximum tenure of Independent Directors

For a term up to 5 consecutive years & shall be eligible for reappointment for another term of up to 5 consecutive years on passing of a special resolution by the company.

Any tenure of an ID on the date of commencement of the Act not to be counted.


Cooling period for appointment of an ID

An independent director, who completes his term shall be eligible for appointment as independent director in the company only after the expiration of 3 years of ceasing to be an independent director in the company.



ID- Rewards IDs shall be entitled to receive:- sitting fee for attending meetings of the Board

or Committees thereof or for any other purpose as may be decided by the Board;

reimbursement of expenses for participation in such meetings; and

profit related commission as may be approved by the members.

IDs are not entitled to stock option.

Separate Meetings of the Independent Directors IDs shall hold at least one meeting in a year,

without non-IDs and management. IDs, in the meeting shall, review/assess: performance of non-IDs & Board as a whole; performance of the Chairperson, taking into

account the views of EDs and non-EDs; quality, quantity and timeliness of flow of

information between management & Board that is necessary for the Board effectiveness.


Familiarisation Programme for Independent Directors Familiarise IDs with the company, their roles,

rights, responsibilities, nature of industry, business model of the company etc.

Details of such familiarisation programmes shall be disclosed on the company's website and a web link shall also be given in the Annual Report.


Woman DirectorSec.149(1)

The following companies shall appoint at least one WD :-

i. every listed company;ii. every other public company having: - paid-up share capital of 100 crs or more; or ₹ turnover of 300 crs or more. ₹


Woman Director

Women are responsible for more than 75 percent of all buying decisions.

A diverse board leads to a smarter company. Savvy women on board help to find business

solutions encompassing new perspectives from the female population.

Gender diversity at the top accounts for 36% better stock price growth and 46% better return on equity.


Vacation of Office of Director Sec. 167(1),(3)

The office of a director shall become vacant in case he absents himself from all the board meetings held during a period of 12 months with or without seeking leave of absence of the Board.

Key Managerial Personnel Sec. 203 & Rule 8

Board of every listed company and every other public company having a paid-up share capital of 10 crs or more ₹ shall appoint the following whole time KMPs :-

Managing Director or Chief Executive Officer or Manager and in their absence a Whole Time Director;

a Company Secretary; and a Chief Financial Officer.


National Financial Reporting Authority ( NFRA) - Sec. 132 The CG may constitute a NFRA to provide for matters

relating to accounting/auditing standards which shall:-a) make recommendations to CG on the formulation of

accounting and auditing policies and standards for adoption by companies and their auditors;

b) monitor and enforce compliance with accounting and auditing standards;

c) oversee the quality of service of professionals;d) perform such others functions as may be prescribed.

[This section not yet notified]


National Financial Reporting Authority ( NFRA) - Sec. 132 NFRA shall have power to investigate into

matters of professional or other misconduct committed by any member or firm of CAs.

Where professional or other misconduct is proved, NFRA shall have the power to make order for imposing penalty of not less than

10 lac but which may extend to 10 times of ₹the fees received in case of firms. [This section not yet notified]


Rotation of Auditors Sec. 139 & Rule 6 No listed company or prescribed classes of

companies, excluding small and one person companies, shall appoint/ re-appoint:-

i. an individual as an auditor for more than 1 term of 5 consecutive years; and

ii. an audit firm as an auditor for more than 2 terms of 5 consecutive years.

Period for which individual/firm has been auditor prior to commencement of the Act shall be taken into account for calculating period of 5/10 years.


Rotation of Auditors- Class of Companies Rule 5a. Listed company;b. Unlisted public companies having paid up

share capital of 10 crs or more;₹c. Private limited companies having paid up

share capital of 20 crs or more;₹d. Companies having paid up share capital of

below threshold limit mentioned in (b) & (c) above, but having public borrowings from FIs, banks or public deposits of 50 crs or ^₹


Rotation of Auditors Sec.139 Rule 6 An auditor/ audit firm which has completed its

term shall not be eligible for re-appointment as an auditor in same company for 5 years.

A period of 3 years from the commencement of the Act has been provided to every company existing on or before such commencement to comply with this provision.


Auditor not to render certain services - Sec. 144

An Auditor appointed under the new law shall provide to the company only such services as are approved by the BOD or the Audit Committee but which shall not include any of the following services:-

Accounting and book keeping services; Internal audit; Design & implementation of any financial

information system;[email protected] 9818348811 40

Auditor not to render certain services - Sec. 144 Actuarial services; Investment advisory and banking services; Outsourced financial services; and Management services.



Secretarial Audit Sec. 204 & Rule 9 Every listed and every public company

having a paid-up share capital of 50 crs or ₹more or turnover of 250 crs or more shall ₹annex with its Board’s Report, a Secretarial Audit Report given by a PCS.

The BOD in its report shall explain in full any qualification or observation or other remarks made by the PCS in his report.

Secretarial Audit Sec. 143(12),(15) & 204 If a PCS conducting SA, has reason to

believe that an offence involving fraud is being or has been committed against the company by its officers/employees, he shall immediately report the matter to the Central Government.

If a PCS does not comply with the above provision, he shall be punishable with fine of minimum 1 lac and may extend to 25 lac₹ ₹ .


Internal Audit- Companies to appoint IA-Sec.138a) Every listed company;b) Every unlisted public company having,

during the preceding financial year, :-i. paid up share capital of 50 crs or more; or₹ii. turnover of 200 crs or more; or₹iii. outstanding loan or borrowing from banks or

public FIs exceeding 100 crs or more ; or₹iv. outstanding deposits of 25 crs or more. ₹


Internal Audit-Class of Companies to appoint IA

c) Every private company having:-i. turnover of 200 crs or more during the ₹

preceding financial year; orii. outstanding loans or borrowing from banks

or public FIs exceeding 100 crs or more at ₹any point of time during the preceding FY ;

Statutory or Cost Auditor can not be the Internal Auditor


Audit Committee Sec.177 & Rule 6 Class of companies to constitute AC: Every listed company; All public companies: with a paid up capital of 10 crs or more;₹ having turnover of 100 crs or more;₹ having in aggregate, outstanding loans or

borrowings or debentures or deposits exceeding 50 crs or more.₹


Audit Committee A qualified & independent AC shall be set up. AC shall have minimum 3 directors as

members with at least 2/3rd IDs. All members of AC shall be financially literate At least 1 member shall have accounting or

related financial management expertise; Chairman of the AC shall be an ID and shall

be present at AGM to answer shareholder queries.


Terms of Reference Appointment of Auditors Monitor Auditor’s independence Effectiveness of Audit process Examination of FSs/audit report Approval of Related Party Transactions Scrutiny of inter-corporate loans Valuation of undertakings/assets of company Monitoring end use of funds raised through

public [email protected] 9818348811 48

Nomination & Remuneration Committee- Sec.178 Composition: at least 3 NEDs out of which

not less than ½ shall be IDs. Chairperson of the company may be a

member but shall not chair the NRC. The NRC shall formulate and recommend to

Board a policy, relating to remuneration for the Directors/KMPs/other employees which shall be disclosed in the Board’s Report.

The Chairman of NRC shall attend General Meetings of the company.


Board Evaluation NRC shall carry out evaluation of every

director’s performance. IDs in their separate meetings shall review

the performance of non-IDs, the Chairman of the Board and the Board as a whole.

The performance evaluation of IDs shall be done by the entire Board, excluding the director being evaluated.

Report of performance evaluation shall determine extension of term of appointment.



Functions of Company Secretary Sec. 205 The functions of a CS shall include:-a. To report to the Board about compliance

with the provisions of the Act/ Rules and other laws applicable to the company;

b. To ensure that the company complies with the applicable secretarial standards;

c. To discharge such other duties as may be prescribed.

Duties of Company Secretary1. To provide such guidance to the directors,

as they may require, about their responsibilities, duties and powers;

2. To assist the Board in the conduct of the affairs of the company;

3. To assist and advise the Board in ensuring good corporate governance;



Secretarial Standards Sec. 118(10) Every company shall observe Secretarial

Standards with respect to General and Board meetings specified by ICSI and approved by the Central Government.

Secretarial Standard-1 on Board Meetings and Secretarial Standard-2 on General Meetings have come into force wef. 1st July, 2015.

Vigil Mechanism Sec. 177(9) & Rule 7 Following classes of companies shall

establish a vigil mechanism :-i. Every listed company;ii. Companies which accept deposits from the

public; andiii. Companies which have borrowed money

from banks and public financial institutions in excess of 50 crs.₹


Vigil Mechanism Sec. 177 Directors and employees to report concerns

about unethical behaviour, fraud or violation of the company’s code of conduct or ethics policy

Adequate safeguards shall be provided against victimisation of employees/directors.

Suitable action against repeated frivolous complaints including reprimand.


Related Party Transactions-Sec.188 Approval of the Audit Committee Consent of the Board by a resolution at a

meeting of the Board Prior approval of the company by a resolution


Related Party Transactions Exceptions:A. Transactions entered into by the company in

its ordinary course of business and on an arm’s length basis.

B. Transactions between:- two government companies; a holding company and its wholly owned

subsidiary whose accounts are consolidated and placed before shareholders at GBM for approval


Non cash transactions involving directors Sec. 192

A company shall not enter into any arrangement by which a director of the company or of its holding company or any person connected with him can acquire company’s assets for consideration other than cash & vice versa without the approval of company in GBM.

Where the director or connected person is a director of its holding company, then resolution from holding company will also be required.


Prohibition on Forward Dealings Sec.194 Sec.194(1) imposes a prohibition on forward

dealings in securities of the company, or in its holding, subsidiary or associate company by any director or KMP of a company.

A director/KMP shall be liable to surrender the securities acquired in contravention of Sec, 194(1) which shall continue to remain in the name of the transferor.

Punishment: Imprisonment up to 2 years or fine of 1lac to 5 lac or with both. ₹ ₹


By: N K Jain 60

No person including any director or KMP of a company shall enter into insider trading in respect of securities of the company.

Punishment for contravention: Imprisonment up to 5 years or with fine of 5 ₹lac to 25 crs₹ or 3 times the amount of profit made out of insider trading, whichever is higher or with both.

Prohibition on Insider Trading Sec.195

Rajat Gupta fined $13.9 million in insider trading case Rajat Gupta, convicted of insider trading has

been fined $13.9 million to settle related civil charges of feeding inside information to his friend Raj Rajaratnam.

Gupta was sentenced to two years in prison for passing confidential information gained from his position as a Goldman Sachs director to Raj Rajaratnam, founder of the Galleon group of 14 hedge funds.


http://businesstoday.intoday.in/story/insider-trading-rajat-gupta-questions-use-of-wiretaps/1/195213.html

http://businesstoday.intoday.in/story/insider-trading-rajat-gupta-questions-use-of-wiretaps/1/195213.html

http://businesstoday.intoday.in/story/rajat-gupta-seeks-re-trial-over-insider-trading-case/1/195202.html

http://businesstoday.intoday.in/story/rajat-gupta-seeks-re-trial-over-insider-trading-case/1/195202.html


Class Action Sec. 245 Class action is a collective action filed by the

plaintiff on behalf of a class of shareholders or users of goods or services or in relation to matters of public interest, seeking collective remedy.

Requisite number of members or depositors may file an application before NCLT, if they are of the opinion, that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interest of the company or its members or depositors.


Class Action Sec. 245 The application for class action may claim

damages or compensation or demand any other suitable action from :-

i. the company or its directors;ii. the auditor including audit firm of the co;iii. any expert or advisor or consultant or any

other person for any incorrect or misleading statement made to the company etc.

Disclosures Additional disclosures in:- Prospectus u/s 26 & Annual Return u/s 92; Promoters’ Stake Changes u/s 93; Statement with AGM Notice u/s 102; Report on AGM u/s 121; Board’s Report and DRS u/s 134; Failure to spend requisite amount on CSR; RPTs u/s 188; Merger & Amalgamation u/s 232.

[email protected] 98 18348811 64

E-Governance for various company processes Maintenance and inspection of documents in

electronic form; Option of keeping of books of accounts in

electronic form; Financial statements to be placed on

company's website; Holding of board meetings through video

conferencing/other electronic mode; Voting through electronic means etc.


E-Governance Online services would reduce the need for

hard copy paper forms and have a positive impact on the environment.

It will substantially improve the standards of disclosure and transparency, involve more and more stakeholders in the company processes and provide real time information and service to the shareholders and other stakeholders.


McKINSEY Survey on CG There has been a continuing debate among

those who hold divergent positions on CG practices whether there is any quantifiable connection between good CG and the market valuation of the company. McKinsey, carried out a survey of 188 companies from India, Malaysia, Mexico, South Korea, Taiwan and Turkey to determine the correlation between good CG and market valuation of company.


McKINSEY Survey on CG The results of the survey pointed out to a

positive correlation between the two and brought out that good CG increases market valuation of the company in following ways:-

Increases financial performance; Transparency of dealings, thereby reducing

the risk that boards will serve their own self interest;

Increasing investor confidence.


McKINSEY Survey on CG-Findings

Investors are willing to pay premium of as much as 28% for share of a well managed and well governed company.

Studies of 6 emerging markets show that investors world over look for high standards of good governance.


Other Advantages of Good CG Easy/ cost effective finance from Banks & FIs Better price for their products & services Attract and retain talent Global market access Confidence of governments & regulators Brand equity Reputation & Credibility Sustainability


THANK YOUN K Jain

B.Sc, LLB.,DCL,FCS,FCPS Corporate Advisor

Managing Partner, Global FinServe LLPMember , ASSOCHAM National Council for Corporate Affairs & CSR

Former Council Member and Secretary & CEO, ICSI

Cell: 09818348811Landline: 0120 - 4263965

E-mail: [email protected]

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Corporate Governance - Companies Act Prospective