India has been ranked in the seventh place in terms of corporate governance score in Asia

Pacific region, says a report by global brokerage firm CLSA.

According to the CLSA Corporate Governance Watch 2012 list1, produced in

collaboration with the Asian Corporate Governance Association, India's corporate governance

score has improved by 3 percentage points but ranking has remained the same."This is not due to

a lack of awareness by the regulators, but rather a piecemeal approach to reform and a lame duck

government unable to do anything meaningful given infighting among its allies," ACGA

Research Director Sharmila Gopinath said in the report2.

ABSTRACT

Corporate governance is defined as “the system by which companies are directed and

controlled”.3The separation of ownership and control in corporations with dispersed ownership

structure highlights the agency issue due to conflict between agents (managers) and principals

(shareholders). The endeavor of the corporate governance mechanism in such a context is to

monitor the management and ensure that it functions to maximize shareholder wealth. Corporate

governance issues in India are, however, due to a different agency problem that arises on account

of the conflict between dominant and minority shareholders. Therefore, the corporate governance

mechanism in India should focus on safeguarding minority shareholders from expropriation by

dominant shareholders. Assessment of protection given to minority shareholders in India under

the current regulatory framework suggests that on this attribute country does not fare well. There

exist laws on minority shareholder protection, but either they are not efficacious or not well

enforced. Commensurately, there exists a significant gap in Indian corporate governance

regulatory framework, which warrants utmost safeguards of minority shareholder rights. Policy

makers possibly can do this by creating a favorable environment and promulgating laws for

protection of their rights. The issue has serious ramifications on Indian economy that is looking

for greater foreign capital and investment to boost its economic growth.

1 http://www.financialexpress.com/news/india-ranks-7th-in-corporate-governance-in-asiapacificreport/1006729/2 http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/india-ranks-7th-in-corporate-governance-in-asia-pacific-clsa/articleshow/16512858.cms3 Cadbury Report,“Report of the committee on the Financial Aspects of Corporate Governance”, Financial Reporting Council, GEE, London, 1992.

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INTRODUCTION

Corporate Governance is essentially all about how corporations are directed, managed,

controlled and held accountable to their shareholders. The objective of any corporate governance

system is to simultaneously improve corporate performance and accountability as a means of

attracting financial and human resources on the best possible terms and of preventing corporate

failure. With the rapid pace of globalization many companies have been forced to tap

international financial markets and consequently to face greater competition than before. Both

policymakers and business managers have become increasingly aware of the importance of

improved standards of Corporate Governance.

Corporate governance, in plain terms, refers to the rules, processes, or laws by which

businesses are operated, regulated, and controlled. The term can refer to internal factors defined

by the officers, stockholders or constitution of a corporation, as well as to external forces such as

consumer groups, clients, and government regulations. However, enforced corporate governance

provides a structure that, at least in theory, works for the benefit of everyone concerned by

ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to

formal laws. To that end, organizations have been formed at the regional, national, and global

levels.

In recent times, corporate governance has received increased attention because of high-

profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity

by corporate officers. An integral part of an effective corporate governance regime includes

provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in

the name of the enterprise.

It is said that good corporate governance helps an organization achieve several objectives and

some of the more important ones include4:

• Developing appropriate strategies that result in the achievement of stakeholder objectives

• Attracting, motivating and retaining talent

• Creating a secure and prosperous operating environment and improving operational

performance

• Managing and mitigating risk and protecting and enhancing the company’s reputation.

4 http://www.amchamindia.com/CG_Survey_Report.pdf

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Some aspects covered in the poll include:

• Corporate governance regulations in India

• Corporate governance concerns in India and role of independent directors and audit committees

in addressing these concerns

• Board practices, board oversight of risk management and the importance given to integrity and

ethical values

• Practices that are fundamental to improved corporate governance.

CORPORATE GOVERNANCE IN INDIA

Corporate governance and financial regulation in India was generally considered quite

poor until the economic reforms of the early 1990s. The Securities and Exchange Board of India

(SEBI) was established in 1992 by an act of Parliament, and SEBI was given the job of

regulating stock exchanges, brokers, fraudulent trade practices, and other areas of corporate

activity5. As its power grew over the decade, SEBI started to play a much more active role in

setting minimum standards for corporate behavior. In addition, a voluntary code of corporate

governance was developed by the Confederation of Indian Industry (CII), a group of well-

regarded Indian firms.

Near the turn of the century, SEBI commissioned a series of projects to improve Indian

corporate governance by building on CII’s code (and by converting the voluntary code into a

mandatory one). This work would eventually lead to the Clause 49 reforms. The first SEBI

committee, comprised of 17 prominent business leaders and chaired by Kumar Mangalam Birla,

advocated a variety of new governance requirements— including a minimum number of

independent directors, the creation of audit committees and shareholders’ grievance committees,

and additional management disclosures on firm performance.

These recommendations were soon adopted, but, importantly, they were not imposed on

every public company through legislation (in contrast with Sarbanes Oxley in the United States).

Instead, SEBI implemented the Birla Committee reforms by modifying the listing requirements

for firms seeking to go public on an Indian stock exchange. Thus was born Clause 49, a new

collection of corporate governance obligations that individual firms would agree to when they

5 http://www.isb.edu/faculty/upload/Doc9112009128.pdf

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signed listing contracts with any stock exchange in the country. As part of a gradual roll-out

process, the Birla Committee reforms were not imposed immediately on all public firms. Instead,

they were made mandatory in 2001 for the largest Indian companies (and for newly listing

firms), and then expanded to smaller public companies over the next few years.

All of this seemed fine until 20026, when fallout from Enron, WorldCom, and other

corporate governance catastrophes caused Indian regulators to wonder whether Clause 49 went

far enough. SEBI decided to sponsor a second corporate governance committee chaired by

Narayana Murthy, the renowned leader of Infosys Technologies. The Murthy Committee went to

work and released its additional recommendations in 2003. SEBI quickly adopted these

suggestions and issued a revised Clause 49 in 2004.

The Murthy Committee reforms expanded on the Birla Committee’s work in several

areas. One main focus related to the qualifications for independent director status: a number of

specific requirements were added to disqualify material suppliers and customers, recently

departed executives, relatives, and other closely-related parties. A second set of changes affected

the audit committee: it was now required to meet more frequently (four times per year), and

members had to satisfy new financial literacy requirements. A third important change mandated

CEO and CFO certification of financial reports and internal controls. And a number of additional

shareholder disclosures, including expanded discussion of financial results, were added to the

Clause 49 requirements. As before, these reforms were phased in gradually; all public firms were

not required to comply with the Murthy Committee rules until January 1, 2006.

The fruits of this labor were generally well-received7, and Clause 49 seems to have

improved the overall state of Indian corporate governance. For example, a recent study by

Bernard Black and Vikramaditya Khanna argues that stock prices of imminently affected firms

jumped almost four percent when SEBI announced its decision to pursue the initial Clause 49

reforms. Similarly, the World Bank as part of its 2005 standards and codes initiative

benchmarked India’s regulatory framework to the OECD principles of corporate governance. It

announced that India has indeed come a long way over the past decade, reporting that “a series of

legal and regulatory reforms have transformed the Indian corporate governance framework and

6 http://www.ijcem.org/papers012012/ijcem_012012_03.pdf7 http://www.acga-asia.org/public/files/ACGA_India_White_Paper_Final_Jan19_2010.pdf

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improved the level of responsibility/accountability of insiders, fairness in the treatment of

minority shareholders and stakeholders, board practices, and transparency.”

Clause 49 of the Listing Agreement to the Indian stock exchange came into effect from

31 December 2005. It was formulated for the improvement of corporate governance in all listed

companies. Clause 49 of Listing Agreements, as currently in effect, includes the following key

requirements:

• Board Independence: Boards of directors of listed companies must have a minimum

number of independent directors. Where the Chairman is an executive or a promoter or related to

a promoter or a senior official, then at least one-half the board should comprise independent

directors. In other cases, independent directors should constitute at least one third of the board

size.

• Audit Committees: Listed companies must have audit committees of the board with a

minimum of three directors, two-thirds of whom must be independent. In addition, the roles and

responsibilities of the audit committee are to be specified in detail.

• Disclosure: Listed companies must periodically make various disclosures regarding

financial and other matters to ensure transparency.

• CEO/CFO certification of internal controls: The CEO and CFO of listed companies

must (a) certify that the financial statements are fair and (b) accept responsibility for internal

controls.

• Annual Reports: Annual reports of listed companies must carry status reports.

THE SECOND PHASE: CORPORATE GOVERNANCE AFTER SATYAM

India‘s corporate community experienced a significant shock in January 2009 with damaging

revelations about board failure and colossal fraud in the financials of Satyam. The Satyam

scandal also served as a catalyst for the Indian government to rethink the corporate governance,

disclosure, accountability and enforcement mechanisms in place. As described below, Indian

regulators and industry groups have advocated for a number of corporate governance reforms to

address some of the concerns raised by the Satyam scandal. Industry response shortly after news

of the scandal broke; the CII began examining the corporate governance issues arising out of the

Satyam scandal. Other industry groups also formed corporate governance and ethics committees

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to study the impact and lessons of the scandal. In late 2009, a CII task force put forth corporate

governance reform recommendations. In its report the CII emphasized the unique nature of the

Satyam scandal, noting that ―Satyam is a one-off incident . . . The overwhelming majority of

corporate India is well run, well regulated and does business in a sound and legal manner.

In addition to the CII, the National Association of Software and Services Companies

(NASSCOM, self-described as ―the premier trade body and the chamber of commerce of the

IT-BPO industries in India)8 also formed a Corporate Governance and Ethics Committee, chaired

by N. R. Narayana Murthy, one of the founders of Infosys and a leading figure in Indian

corporate governance reforms. The Committee issued its recommendations in mid-2010,

focusing on stakeholders in the company. The report emphasizes recommendations related to the

audit committee and a whistleblower policy. The report also addresses improving shareholder

rights. The Institute of Company Secretaries of India (ICSI) has also put forth a series of

corporate governance recommendations. Government response Satyam prompted quick action by

both SEBI and the MCA.

In September 2009 the SEBI Committee on Disclosure and Accounting Standards issued

a discussion paper that considered proposals for:

• Appointment of the chief financial officer (CFO) by the audit committee after assessing the

qualifications, experience and background of the candidate;

• Rotation of audit partners every five years;

• Voluntary adoption of International Financial Reporting Standards (IFRS);

• Interim disclosure of balance sheets (audited figures of major heads) on a half-yearly basis; and

• streamlining of timelines for submission of various financial statements by listed entities as

required under the Listing Agreement

In early 20109, SEBI amended the Listing Agreement to add provisions related to the

appointment of the CFO by the audit committee and other matters related to financial

disclosures. However, other proposals such as rotation of audit partners were not included in the

amendment of the Listing Agreement. MCA actions inspired by industry recommendations,

including the influential CII recommendations, in late 2009 the MCA released a set of voluntary

guidelines for corporate governance. The Voluntary Guidelines address a myriad of corporate

governance matters including: independence of the boards of directors; responsibilities of the

8 http://www.ijcem.org/papers012012/ijcem_012012_03.pdf9 http://www.acga-asia.org/public/files/ACGA_India_White_Paper_Final_Jan19_2010.pdf

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board, the audit committee, auditors, secretarial audits; and mechanisms to encourage and protect

whistle blowing.

Important provisions include:

Issuance of a formal appointment letter to directors.

Separation of the office of chairman and the CEO. Institution of a nomination committee

for selection of directors.

Limiting the number of companies in which an individual can become a director.

Tenure and remuneration of directors.

Training of directors.

Performance evaluation of directors.

Additional provisions for statutory auditors.

In discussing the voluntary nature of the guidelines, Corporate Affairs Secretary, R.

Bandyopadhyay, stated that the MCA did not want to enact a rigid, mandatory law. However, the

MCA also indicated that the guidelines are a first step and that the option remains open to

perhaps move to something more mandatory. In fact, certain voluntary aspects of the guidelines,

such as the separation of the office of chairman and CEO, have now been recommended for

enactment in amendments to the Companies Bill pending in Parliament.

In recent years, more and more Indian companies have been raising capital overseas by

getting themselves listed on international stock exchanges. These efforts have been accompanied

by the Indian government's drive to attract more Foreign Direct Investment (FDI). Both factors

have gone hand in hand with the realization that if Indian companies want more access to global

capital markets, they will need to make their operations and financial results more transparent. In

other words, they will need to improve their standards of corporate governance. The Securities

and Exchange Board of India (SEBI), which regulates India's stock markets, took a major step in

this direction a year ago. It asked Indian firms above a certain size to implement Clause 49, a

regulation that strengthens the role of independent directors serving on corporate boards.

CRITICAL ANALYSIS

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In May 2011, the Supreme Court has given a very fair judgment, with far-reaching

implications both for the government and India Inc., in the Reliance Industries Limited (RIL) vs

RNRL10 gas pricing case. It has established unequivocally that the production sharing contract

between the government and RIL overrides any private memorandum of understanding arrived at

between two individuals. In short, it refused to give sanctity to the Memorandum of

Understanding (MoU) signed between the two Ambani brothers. This principle had to be

established in the interest of corporate governance or it would have created havoc in the

corporate world with promoters of public limited, quoted companies coming together and

signing MoUs without a care for the shareholders and other stake holders in the company. Till

today the shareholders have not okayed the MoU entered into between Mukesh and Anil Ambani

when they divided between themselves the empire created by their father, Dhirubhai

Ambani.The second important aspect of the judgment is that the natural resources of a country

belong to the government and the government has the right to price it and prioritize the

beneficiaries. While it is a well known fact, even internationally, that natural resources belong to

the government, the government as a monopoly has the sacred responsibility to put the interest of

the nation before everything else when deciding on its use and sale price. This is where the

judgment has implications that go beyond the Ambani brothers. The petroleum minister has

expressed his happiness that the apex court has upheld his contention that the gas in this case

belongs to the government and RIL is only a contractor who can market the product. But it will

be the government that will decide at what price it should market it, and to whom it should

market it. This is a double-edged sword.

The problem in the Indian corporate sector (be it the public sector, the multinationals or

the Indian private sector) is that of disciplining the dominant shareholder and protecting the

minority shareholders. Aboard which is accountable to the owners would only be one which is

accountable to the dominant shareholder; it would not make the governance problem any easier

to solve. Clearly, the problem of corporate governance abuses by the dominant shareholder can

be solved only by forces outside the company itself.

Corporate governance abuses perpetrated by a dominant shareholder pose a difficult

regulatory dilemma in that regulatory intervention would often imply a micro-management of

10 [2010]156CompCas455(SC)

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routine business decisions. The regulator is forced to confine himself to broad proscriptions

which leave little room for discretionary action. Many corporate governance problems are ill

suited to this style of regulation.

The capital market on the other hand lacks the coercive power of the regulator. What it

has however is the ability to make business judgments and to distinguish between what is in the

best interests of the company as a whole as against what is merely in the best interests of the

dominant shareholders. The only effective sanction that the market can impose against an

offender is to restrict his ability to raise money from the market once again. Denial of market

access is a very powerful sanction except where the company is cash rich and has little future

needs for funds.

The past few years have witnessed a silent revolution in Indian corporate governance

where managements have woken up to the power of minority shareholders who vote with their

wallets. In response to this power, the more progressive companies are voluntarily accepting

tougher accounting standards and more stringent disclosure norms than are mandated by law.

They are also adopting more healthy governance practices. It is evident that these tendencies

would be strengthened by a variety of forces that are acting today and would become stronger in

years to come:

Economic reforms have not only increased growth prospects, but they have also

made markets more competitive. This means that in order to survive companies will

need to invest continuously on a large scale.

Meanwhile, financial sector reforms have made it imperative for firms to rely on

capital markets to a greater degree for their needs of additional capital.

Simultaneously, the increasing institutionalization of the capital markets has

tremendously enhanced the disciplining power of the market.

Globalization of our financial markets has exposed issuers, investors and

intermediaries to the higher standards of disclosure and corporate governance that

prevail in more developed capital markets.

Tax reforms coupled with deregulation and competition have tilted the balance away

from black money transactions. This makes the worst forms of mis-governance less

attractive than in the past.

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While these factors will make the capital markets more effective in disciplining the

dominant shareholder, there are many things that the government and the regulators can do to

enhance this ability:

Disclosure of information is the pre-requisite for the minority shareholders or for the

capital market to act against errant managements. The regulator can enhance the

scope, frequency, quality and reliability of the information that is disclosed.

Regulatory measures that promote an efficient market for corporate control would

create an effective threat to some classes of dominant shareholders as discussed

earlier

Reforms in bankruptcy and related laws would bring the disciplining power of the

debt holders to bear upon recalcitrant managements.

Large blocks of shares in corporate India are held by public sector financial

institutions who have proved to be passive spectators. These shareholdings could be

transferred to other investors who could exercise more effective discipline on the

company managements.

Alternatively, these institutions could be restructured and privatized to make them more

vigilant guardians of the wealth that they control.

COMPANIES BILL 2011

The new bill for the laws related to various company affairs of our nation. This new bill

was enacted by the parliament in its 62nd year GENERAL: An attempt was made to bring out

the most of republic after a important points into sharp relief through the new notification of such

is Companies Bill, 2011. The various mechanics involved like formation, management &made

by the Central administration, accounts, audits etc within the limits of a company will be

analyzed and governed on the Government.

The Bill has 470 clauses and 7 schedules as against 658 Sections and 15 schedules in the

existing Companies Act, 1956. The entire bill has been divided into 29 chapters.

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The Bill empowers Central Government to make rules, etc. through delegated legislation

after having detailed consultative process (clause 470 and others). The Bill provides for self-

regulatory process and stringent compliance regime.

The essential features of the bill:

Concept of One Person Company (OPC limited) introduced by Companies Bill, 2011

through Clause 2(62).

In Clause 2(85) of Companies Bill, 2011, Small companies have been defined by

fixing maximum paid-up share capital not exceeding Rs. 50 Lakhs and such

companies will be required to follow less stringent regulatory provisions.

In Clause 18 of Companies Bill, 2011, the proper provision for Conversion of

Companies already registered has been introduced.

In Clause 7(1)(b) of Companies Bill, 2011, A provision has been made regarding

declaration to the effect that all the requirements of the Act in respect of registration

and matters precedent or incidental thereto have been complied with.

Company Secretaries continue to be recognized for the purpose of giving this

declaration.

Introduction of e-governance: Another important feature added by Companies Bill,

2011 in corporate practice is formal introduction of much awaited concept of E-

Governance. E-Governance proposed for various company processes like

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. After the introduction of E-Governance

companies can maintain its statutory registers in electronic mode and hold its board

meetings through video conferencing.

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Board and governance : Appointment of Key Managerial Personnel [Clause 203(1)]

As per clause 203 of Companies Bill, 2011 the Company Secretaries are recognized

as whole-time key managerial personnel. Also Companies Bill, 2011 has made the

appointment of Company Secretary mandatory. As per clause 203 of Companies Bill,

2011, every company belonging to such class or classes of companies as may be

prescribed shall have the following whole-time key managerial personnel,—

Managing director, or Chief Executive Officer or manager and in their absence, a

whole-time director; and Company Secretary. Unless the articles of a company

provide otherwise, an individual shall not be the chairperson of the company as well

as the managing director or Chief Executive Officer of the company at the same time

[Proviso to Clause 203(1)]. Bill 2011, also provides the definition of Key Managerial

Personnel under Clause 2(51) of the Bill, which is as follows: “Key Managerial

Personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the Company Secretary;

(iii) the Chief Financial Officer if the Board of Directors appoints him; and

(iv) such other officer as may be prescribed; Every Company Secretary being a

KMP shall be appointed by a resolution of the Board which shall contain the

terms and conditions of appointment including the remuneration. If any

vacancy in the office of KMP is created, the same shall be filled up by the

Board at a meeting of the Board within a period of six months from the date of

such vacancy [Clause 203 (2) & (4)] If a company does not appoint a

Company Secretary, the penalty proposed is: On company – one lakh rupees

which may extend to five lakh rupees. On every director and KMP who is in

default – 50,000 rupees and 1,000 rupees per day if contravention continues.

Minimum period prescribed for at least one director on board to stay in India: This

kind of provision also prescribed for the very first time. Every company shall have at

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least one director who has stayed in India for a total period of not less than 182 days

in previous calendar year [Clause 149(2)].

Concept of independent directors: The concept of independent directors has also been

touched upon for the very first time under clause 149. All listed companies are

required to appoint independent directors. Such other public companies as may be

prescribed by the Central Government shall also be required to appoint independent

directors. At least one-third of the Board of such companies should comprise

independent directors. Nominee director appointed by any institution, or in pursuance

of any agreement, or appointed by any Government to represent its shareholding

shall not be deemed to be an independent director. As per first proviso to Clause

161(2) only an independent director can be appointed as alternate director to an

independent director. The Independent directors shall abide by a code provided in

Schedule IV to the Bill. Independent directors shall hold office up to two consecutive

terms. One term is upto five consecutive years.

Board meetings through video-conferencing allowed now: Another master change

proposed in Companies Bill, 2011 under clause 173(2) is participation of directors at

Board Meetings has been permitted through video-conferencing or other audio visual

means, provided such participation is capable of recording and recognizing. Also, the

recording and storing of the proceedings of such meetings should be carried out.

Resignation of directors (clause 168): For the very first time something has been

proposed regarding resignation of directors through clause. Earlier there was no

section regarding this. A director may resign from his office by giving notice in

writing. The Board shall, on receipt of such notice, intimate the Registrar and also

place such resignation in the subsequent general meeting of the company [Clause

168(1)]. The notice shall become effective from the date on which the notice is

received by the company or the date, if any, specified by the director in the notice,

whichever is later [Clause 168(2)]. If all the directors of a company resign from their

office or vacate their office, the promoter or in his absence the Central Government

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shall appoint the required number of directors to hold office till the directors are

appointed by the company in General Meeting [Clause 168(3)].

Secretarial standards introduced and provided statutory recognition: Another major

proposal is for the first time, the Secretarial Standards has been introduced and

provided statutory recognition [refer Clause 118(10) & 205]. Clause 118(10) reads

as; “Every company shall observe Secretarial Standards with respect General and

Board Meetings specified by the Institute of Company Secretaries of India

constituted under section 3 of the Company Secretaries Act, 1980 and approved by

the Central Government.” Clause 205 casts duty on the Company Secretary to ensure

that the company complies with the applicable Secretarial Standards. It is the

beginning of a new era where non financial standards have been given importance

and statutory recognition besides Financial Standards.

Secretarial audit (clause 204): In December 2009, the Ministry of Corporate Affairs

introduced Voluntary Guidelines on Corporate Governance which inter-alia

prescribed Secretarial Audit. The Parliamentary Standing Committee in its report

recommended introducing Secretarial Audit. For the first time Secretarial Audit as

been included in the Bill. The provisions of the clause relating to Secretarial Audit

are as follows: Every listed company and a company belonging to other class of

companies as may be prescribed shall annex with its Board’s report a Secretarial

Audit Report, given by a Company Secretary in Practice, in such form as may be

prescribed. It shall be the duty of the company to give all assistance and facilities to

the Company Secretary in Practice, for auditing the secretarial and related records of

the company. The Board of Directors, in their report shall explain in full any

qualification or observation or other remarks made by the Company Secretary in

Practice in his report. If a company or any officer of the company or the Company

Secretary in Practice, contravenes the provisions of this section, the company, every

officer of the company or the Company Secretary in Practice, who is in default, shall

be punishable with fine which shall not be less than one lakh rupees but which may

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extend to five lakh rupees.

Duties of directors [clause 166]: For the first time duties of directors have been

defined in the Bill. A director of a company shall:

i. Act in accordance with the articles of the company.

ii. Act in good faith in order to promote the objects of the company for the

benefit of its members as a whole, and in the best interests of the company, its

employees, the shareholders, the community and for the protection of

environment.

iii. Exercise his duties with due and reasonable care, skill and diligence and shall

exercise independent judgment.

iv. Not involve in a situation in which he may have a direct or indirect interest

that conflicts, or possibly may conflict, with the interest of the company.

v. Not achieve or attempt to achieve any undue gain or advantage either to

himself or to his relatives, partners, or associates and if such director is found

guilty of making any undue gain under sub-section (7),

vi. He shall be liable to pay an amount equal to that gain to the company.

vii. Not assign his office and any assignment so made shall be void. Penalty:

viii. If a director of the company contravenes the provisions of this section such

director shall be punishable with fine which shall not be less than one lakh

rupees but which may extend to five lakh rupees.

Managerial remuneration (clause 197): Provisions relating to limits on remuneration

provided in the existing Act being included in the Bill. Maximum limit of 11% (of

net profits) being retained. For companies with no profits or inadequate profits

remuneration shall be payable in accordance with new Schedule of Remuneration

and in case a company is not able to comply with such Schedule, approval of Central

Government would be necessary.

Board meetings (clause 173) :First time length of Notice of board meeting along with

shorter notice provisions has been proposed via clause 173 (3). At least seven days’

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notice is required to be given for a Board meeting. The notice may be sent by

electronic means to every director at his address registered with the company [Clause

173(3)]. A Board Meeting may be called at shorter notice subject to the condition

that at least one independent director, if any, shall be present at the meeting.

However, in the absence of any independent director from such a meeting, the

decisions taken at such meeting shall be final only on ratification thereof by at least

one independent director [1st & 2nd Proviso to clause 173].

One person companies (OPC) - option to hold AGM [clause 122]: One person

companies have been given the option to dispense with the requirement of holding an

AGM.

Statutory auditors (clause 139):The provisions of Rotation of auditors and audit firms

are as follows: No listed company or a company belonging to such class or classes of

companies as may be prescribed, shall appoint or re-appoint—

(a) An individual as auditor for more than one term of five consecutive years; and

(b) An audit firm as auditor for more than two terms of five consecutive years:

Provided that—

(i) An individual auditor who has completed his term under clause (a) shall not be

eligible for re-appointment as auditor in the same company for five years from the

completion of his term;

(ii) an audit firm which has completed its term under clause (b), shall not be eligible

for re-appointment as auditor in the same company for five years from the completion

of such term: Provided further that as on the date of appointment no audit firm having

a common partner or partners to the other audit firm, whose tenure has expired in a

company immediately preceding the financial year, shall be appointed as auditor of

the same company for a period of five years:

Board’s report (clause 134) : Board’s Report has been made more informative and

includes extensive disclosures like –

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(i) extract of annual return

(ii) number of meetings of Board

(iii) report of the committee on directors’ remuneration

(iv) a declaration by independent directors wherever they are appointed

(v) particulars of loans, guarantees, or investments made

(vi) particulars of contracts or arrangements entered into

Explanation or comments on every qualification, reservation made –

a) By auditor in his report

b) By the Company Secretary in his Secretarial Audit Report

The Boards’ Report is to be signed by the Chairman if he is authorized by the

Board and where he is not so authorized, it shall be signed by at least two

directors, one of whom shall be a managing director, or where there is only one

director, by such director (Clause 134).

Woman director (clause 149): At least one woman director being made mandatory in the

prescribed class or classes of companies.

Corporate social responsibility (clause 135): Every company having net worth of rupees

five hundred crore or more, or turnover of rupees one thousand crore or more or a net

profit of rupees five crore or more during any financial year shall constitute a Corporate

Social Responsibility Committee of the Board consisting of three or more directors, out

of which at least one director shall be an independent director.

The Corporate Social Responsibility Committee shall formulate and recommend

to the Board, a Corporate Social Responsibility Policy which shall indicate the activities

to be undertaken by the company as specified in Schedule VII (b) recommend the amount

of expenditure to be incurred on the activities referred to in clause (a); and The Board of

every company referred to in sub-section (1), shall make every endeavor to ensure that

the company spends, in every financial year, at least two per cent of the average net

profits of the company made during the three immediately preceding financial years, in

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pursuance of its Corporate Social Responsibility Policy. If the company fails to spend

such amount, the Board shall, in its report made under clause (o) of sub-section (3) of

section 134, specify the reasons for not spending the amount.

Share capital and debentures: Equity share capital has now been defined as: Equity share

capital, with reference to any company limited by shares, means all share capital which is

not preference share capital and Preference share capital with reference to any company

limited by shares, means that part of the issued share capital of the company which

carries or would carry a preferential right with respect to— payment of dividend, either

as a fixed amount or an amount calculated at a fixed rate, which may either be free of or

subject to income-tax; and repayment, in the case of a winding up or repayment of

capital, of the amount of the share capital paid-up or deemed to have been paid-up,

whether or not, there is a preferential right to the payment of any fixed premium or

premium on any fixed scale, specified in the memorandum or articles of the company

[clause 43].

If a company with intent to defraud, issues a duplicate certificate of shares, the

company shall be punishable with fine which shall not be less than five times the face

value of the shares involved in the issue of the duplicate certificate but which may extend

to ten times the face value of such shares or Rs.10 crore whichever is higher. Stringent

penalties have also been imposed for defaulting officers of the company [Clause 46(5)]

Prohibition on issue of share on discount: A company cannot issue share at a discount.

Any share issued by a company at a discounted price shall be void [Clause (53)]

Concept of ‘dormant companies’ are being introduced. This would allow a company to

remain on the Register of Companies with minimal compliance requirements even

without carrying on any operations.

COMPANIES BILL 2011 AND ITS IMPACT ON CORPORATE GOVERNANCE

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The Companies Bill, 2011, is contemporary in concept and broad in its sweep. It should

stimulate business to gain critical mass and efficiency. Financial or corporate restructuring,

takeover of companies, merger inter-se foreign companies and Indian companies are covered.

Where public interest is involved, greater transparency is prescribed. The process has been

simplified for small companies. It still makes no provisions for migration of companies. The

NCLT, a specialized body, will both sanction and supervise implementation. It will truly be a

change agent.

Some critical residual areas deserve further consideration. The present law allows bodies

corporate, including partnerships, to merge; but not in the new law. The need now is greater for

mergers and demergers both ways between association of persons, firms, LLPs and companies,

as also inter-se between such bodies. The powers of the regional director for enabling merger or

demerger of small companies, etc, should be extended to other forms of organizations. It will fill

a vacuum under various laws, e.g., Partnership Act, Societies Registration Act, etc, for such

laws. Today, a charitable trust cannot merge into a charitable company or a simple firm into a

company or into another firm. This procedural law under a specialized body should enable

smooth transition of any operating enterprise from one legal entity to another.

The Bill provides, with RBI approval, the merger of foreign companies from prescribed

countries with companies in India (or vice versa). It should be amended to cover demerger. Laws

for migration of companies are also needed. Both are international practices and relevant to

globalization.

A bold new measure is the share takeover process, whether under a scheme or by

contract. The director of the transferor company has to circulate and file their recommendation

and other prescribed information. If approved by shareholders (90% in value), then, after a due

process of offer to other shareholders, the acquirer can notify the tribunal about the abstaining

shareholders. The tribunal can then order transfer of the shares and pay them directly. It will

declare the acquirer as the shareholder. This will facilitate delisting of shares as also takeover of

non-listed companies. If any non-disclosed higher-price transaction takes place with the majority

shareholder, the latter has to share the surplus price with minority.

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A company can, thus, adopt the international practice of making target company its

subsidiary but not a merger.

Merger, demerger and takeover of shares should all be covered under Section 232 by

appropriate redrafting. Small companies’ inter-se subsidiary company with holding company and

such other classes of prescribed companies can now merge by the sanction of the regional

director. A small company is one with net worth of less than 50 lakh and turnover below 2 crore.

The long-drawn-out court processes are not required. Prescribed information reports,

including liquidity report, to be filed and circulated; the RoC and OL are to file their objections

to the regional director who shall either register the merger or refer to NCLT for due process.

These companies also have the option to go directly to NCLT.

In all matters, the NCLT orders can now specifically prescribe measures for dissenting

persons; for allotment in tune with the FDI policy; adjustment of past capital registration fee

paid; and for abatement of any charges on assets. A non-obstante clause to order for transfer of

tenancies and leases held by the transferor company; as also order for a reasonable uniform

stamp duty throughout India to be paid to the state governments is urgently needed.

CONCLUSION

In short, the key to better corporate governance in India today lies in a more efficient and

vibrant capital market. Over a period of time, it is possible that Indian corporate structures may

approach the Anglo-American pattern of near complete separation of management and

ownership. At that stage, India too would have to grapple with governance issues like

empowerment of the board. Until then, these issues which dominate the Anglo-American

literature on corporate governance are of peripheral relevance to India.

BIBLIOGRAPHY

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Websites Referred:

www.oecd.org

www.cipe.org

www.worldbank.org

www.legallyindia.com

www.sebi.gov.in

www.acga-asia.org

www.hidustantimes.com

www.pcaobus.org

www.prsindia.org

www.nfcg.india.org

Articles Referred:

Corporate Governance: The Foundation for Corporate Citizenship & Sustainable

Business, Global corporate Governance Forum, International Finance Corporation, World

Bank Group.

Santosh Pande, Kshama V Kaushik, Study on the State of Corporate Governance in

India- Evolution, Issues and Challenges for the Future, IICA, Though Arbitrage Research

Institute, IIM-C.

Real World Corporate Governance- A Programme for Profit Enhancing Stewardship,

F.T. Pitman, 1998

Reports Referred:

Irani Jamshed J., Report of the Expert Committee to Advise the Government on the New

Company Law, 2005.

Securities and Exchange Board of India, Report of the SEBI Committee on Corporate

Governance (February 2003).

Report of the CII Task Force on Corporate Governance, Confederation of Indian

Industry, Chaired by Naresh Chandra, November 2009.

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Vikramaditya Khanna; report on “The Economic History of the Corporate Form in

Ancient India”

Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi; Corporate Governance in India: A

legal Analysis.

Report of Asian Corporate Governance Association (ACGA) Hong Kong on “ACGA

White Paper on Corporate Governance in India”

Jayanth Rama Varma, Corporate Governance in India: Disciplining the Dominant

Shareholder.

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