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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 :
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Section 217(2AA) dealing with Directors’
Responsibility Statement [DRS] to be included in the Directors’ Report
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Section 292A bringing in constitution of
Audit Committee [AudComm]
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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
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Section 275 providing for appointment of a
person as a Director in a maximum of 15 companies
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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:
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Applicable accounting standards have been
followed in preparation of financial statements along with proper
reasons/explanations for material departures.
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Accounting policies as selected are
consistently applied.
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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.
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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.
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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 :
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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.
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Functions of an AudComm shall be in
accordance with the terms of reference specified in writing by the
Board.
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The members of the AudComm shall appoint
Chairman of the AudComm.
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Annual Report of the Company shall
disclose the composition of the AudComm.
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The auditors, internal auditors and the
finance director shall attend/participate AudComm meetings without any
right to vote.
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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.
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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.
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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.
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The Chairman of the AudComm shall attend
every AGM to provide clarifications on matters relating to audit.
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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
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has not filed its annual returns/accounts
for continuous 3 years commencing on/after 1-4-1999; or
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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:
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a special Director appointed by BIFR under
section 10(4) of SICA.
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Default of privately placed
bonds/debentures of Public Financial Institutions (Circular No. 5/2003
dt. 14-1-2003).
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. The highlights are:
(A) Composition of
Board
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Non-executive directors should not be less
than 50% of the total board.
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Independent directors
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Where the Chairman is a non-executive
director, at least one-third of the Board should comprise of
independent directors
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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.
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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
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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.
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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.
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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
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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.
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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.
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Every director to inform the company about
the committee positions he occupies in other companies and notify
changes as and when they take place.
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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.
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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.
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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
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Minimum 3 directors to be members with
two-thirds being independent directors.
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All members to be financially literate and
at least one member having accounting or related financial management
expertise.
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The Chairman of the Audit Committee to be
an independent director and to remain present at the AGM to answer
shareholders’ queries.
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The powers of the Audit Committee to
include:
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To investigate any activity within its
terms of reference
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To seek information from any employee
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To obtain outside legal or other
professional advice
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To secure attendance of outsiders with
relevant expertise, if necessary
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A very elaborate role
is prescribed for the Audit Committee in Clause 49.
(E) Subsidiary
Companies
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At least one independent director of the
holding company to be a director on the Board of a material non-listed
Indian subsidiary company.
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The Audit Committee of the listed holding
company shall also review the financial statements, in particular, the
investments made by the unlisted subsidiary company.
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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:
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Basis of related party transactions
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Disclosure of Accounting Treatment
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Risk assessment and minimization
procedures to the Board
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Proceeds from public issues, rights
issues, preferential issues etc.
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Remuneration of Directors
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Management Discussion and Analysis report
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Brief resume of the Director and other
specified particulars at the time of his appointment or re-appointment
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Disclosure of relationships between
directors inter-se
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Quarterly results and presentations to
analysts to be put on company’s web-site
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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
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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.
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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
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.
(I) Non-Mandatory
Requirements
The non-mandatory
requirements are specified in Annexure I D to Clause 49 that includes:
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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.
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Independent Directors may have a tenure
not exceeding, in the aggregate, a period of nine years, on the Board of
a company.
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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.
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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.
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Company may move towards a regime of
unqualified financial statements.
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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.
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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.
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The company may establish a Whistle Blower
Policy.
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