Sep 4, 2013

Corporate Governance – Meeting Global Standards

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Corporate Governance, a concept the existence of which can be deciphered even from books as old as Kautilya?s Arthashastra, has never been more appropriate as it is in the present times in the wake of numerous scams that come to light almost regularly. Immaculate Corporate Governance at least in letter if not in spirit by the companies is what MCA has targeted by introducing many mandatory provisions in its Companies Act 2013.?

Though late, but in India also, it has now been realized that good Corporate Governance is one of the key to explore the real worth of an organization. The essence of its key ingredients such as Company?s Philosophy, Transparency & Disclosure, Board Framework, Stakeholder Interest Protection and Risk Management has largely been felt now. Unlike the six decades older previous law, in the new law various initiatives have been made to inculcate the features of good governance in the organization.

Salient features of new law

  • Initiatives towards Transparency & Disclosure
    • Financial Statement – A wider perspective has been given with respect to consolidation of Accounts. Now where a company has one or more subsidiaries, it shall, in addition to its financial statement prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the Company. Further the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed and the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed. Herein it is pertinent to note that the word ?subsidiary? shall include associate company and joint venture.
    • Financial Statement, Board's report, etc. – The disclosure requirement with reference to – Financial Statement, Board?s report has been enhanced.
    • Disclosure of interest by Directors – Disclosure of interest by every director has been made mandatory and not discretionary, as was there earlier. The disclosure shall be made at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made. Notice of interest under this section by Directors shall have to be given at the Board Meeting, as opposed to earlier case, where it can also be brought up and read at the Board meeting.
    • Annual Return ? Besides increasing the disclosure requirement in the Annual Return, extract of it is also required to be made part of Board Report.
    • Return to be filed with Registrar in case promoters' stake changes ? It is now required that every listed company shall file a return in the prescribed form with the Registrar with respect to change in the number of shares held by promoters and top ten shareholders of such company, within fifteen days of such change.
    • Statement to be annexed with notice ? The disclosure requirement with reference to the special business to be undertaken has been increased. Besides other disclosures, nature of concern or interest, financial or otherwise is required to be disclosed with respect to every director and the manager, every other key managerial personnel; and relatives of such persons
    • Report on annual general meeting – Every listed public company is required to prepare and file a report on each annual general meeting with would include a confirmation to the effect that the meeting was convened, held and conducted as per the provisions of this Act and the rules made there under and this report shall be filed within thirty days of the conclusion of the annual general meeting.
    • Related party transactions ? The procedure and disclosure with regard to related party transactions have been streamlined. The board needs to disclose all these transaction in its report along with necessary justification.
    • Contract of employment with managing or whole-time directors – Every company is now required to keep at its registered office, where a contract of service with a managing or whole-time director is in writing, a copy of the contract; or where such a contract is not in writing, a written memorandum setting out its terms, which shall be open for inspection by members of the company.
    • Power to compromise or make arrangements with creditors and members – It has been provided that a notice with respect to any arrangement or compromise shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice. It now provided for sending of Valuation Report with the Notice for more disclosure and putting of notice etc on website. Disclosure of effect of Compromise and Arrangement on Creditors, KMPs and Directors etc. have to be stated in the notice.
    • Merger and amalgamation of companies – Law now provides for circulating of supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme. Further every company in relation to which the order is made shall, until the completion of the scheme, file a statement in such form and within such time as may be prescribed with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not.
  • Strengthening Board Framework
    • Company to have Board of Directors ? Requirement of Independent Directors on the board of listed companies have been specified. Strict criteria with reference to appointment of independent director have been specified. The code of conduct (to be complied by the Independent Directors has also been specified. The term of independent director has been fixed to five consecutive years and thereafter he shall be eligible for re-appointment on passing of a special resolution by the Company for next five years. However, after such term of 10 years, minimum 3 years time gap would be required for such director to be again appointed on the Board.
    • Resident Director – Requirement of atleast one director, who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year, has been added.
    • Woman Director – Requirement of women director in listed companies has also been specified.
    • Duties of directors – The Act now prescribes the following duties of the directors towards the Company.
    • Resignation of director – Now the Act very clearly provides that the director who has resigned shall be liable even after his resignation but for the offences which occurred during his tenure. Intimation for resignation has to be forwarded by the Director as well as Company to the Registrar.
    • Audit Committee – It has been provided for constitution of Audit Committee with majority independent Directors. The Role and responsibility of Audit Committee has also been clearly defined.
    • Nomination and Remuneration Committee ? Act now provides for establishment and role of Nomination and Remuneration Committee also.
    • Stakeholders Relationship Committee ? The Act provides that every company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.
    • Appointment of key managerial personnel – It has been specifically provided that unless the articles of such 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.
  • Stakeholder interest protection
    • Class Action – Empowerment has been granted to prescribed number of members and Depositors for file application against the management or the Company if its affairs are conducted prejudicial to their interest or the interest of the Company and may call for specified orders in such respect. An application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the specified persons affected by any act or omission.
    • Variation in terms of contract or objects in prospectus ? Stringent procedure has been defined to be followed by Company intending to vary the objects as specified in the Prospectus. Specific provision have been formulated to provide exit opportunity by the promoters to the dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus.
    • Internal Audit – Now the Act provides for conduct of internal audit of certain companies.
    • Appointment of Auditors – The Act provides provision for rotation of auditors in the listed company & certain other class of companies, as may be prescribed. Further upon appointment of auditor the Company has to intimate both auditor and the registrar within 15 days of the appointment and the onus of intimation of appointment has been taken away from the shoulders of auditor.
    • Powers and duties of auditors and Auditing Standards – The powers and duties of auditors have been increased. It has also been provided that the duties casted on auditor under this section shall apply mutatis mutandis to both cost accountants for cost audit and company secretary in practice for secretarial audit.
    • Auditor not to render certain services – To ensure auditors independence services which the auditor cannot render, whether directly or indirectly to company, its holding company, subsidiary and associate company have been specified.
    • Appointment of Directors – Onus that an independent director fulfills the conditions specified in this Act for such an appointment has been casted on the Board to specify in the explanatory statement for such appointment.
    • Establishment of vigil mechanism – To enable their directors and employees to report genuine concerns has also been specified. The vigil mechanism as aforesaid shall provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases.
    • Restrictions on powers of Board – The certain powers which earlier can be exercised by board with the approval of general meeting only under the Companies Act 1956 are now applicable to all the companies instead of only public company & its subsidiary and special resolution of the members instead of ordinary resolution is sought for in such cases.
    • Restriction on non-cash transactions involving directors – It has been specifically provided that 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 assets for the consideration other than cash from the company & vice versa without the approval of company in general meeting
    • Prohibition on forward dealings in securities of company by a key managerial personnel – It has now been provided that no director of a company or any of its key managerial personnel shall buy in the company, or in its holding, subsidiary or associate Company a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or a right, as he may elect, to call for delivery, or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.
    • Prohibition on insider trading of securities – It has now been specifically provided that no person including any director or key managerial personnel shall enter into insider trading.
    • Establishment of Serious Fraud Investigation Office – It has been provided for establishment of an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a Company, by the Central Government
    • Voting through electronic means ? For a specified class of companies the members may exercise his right to vote by the electronic means.
    • Annual general meeting ? The time of calling of AGM has been specified to be in business hours, that is, between 9 a.m. and 6 p.m.
    • Notice of meeting ? Now besides sending notice of meeting to the members and auditors, even directors are required to be sent notice of the meetings.
    • Quorum for meetings ? Quorum of general meetings has been fixed as per the membership base of the Company instead of earlier requirement of specified number for all size companies.
    • Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot ? Now every Company is required to maintain the minutes of every meeting of any class of shareholders or creditors and every resolution passed by postal ballot and it is required to follow the Secretarial Standards while making such minutes.
    • Circulation of members? resolution – The exemption given to a Banking Company of not circulating any statement under this section, if, in the opinion of its Board of Directors, such circulation will injure the interest of the company, has been withdrawn. Further the eligibility for making requisition for circulation of resolution has been modified. Now in case of company having share capital, by members holding 1/10 th of share capital instead of 1/20th of voting power and in case of company not having share capital, by members holding not less than 1/10th of voting power instead of earlier 100 members, can requisition for circulation of resolution .
    • Maintenance and inspection of documents in electronic form – Any document, record, register, minute, etc required to be kept by a company; or allowed to be inspected or copies to be given to any person by a company, under this Act, may be kept or inspected or copies given in electronic form also.
    • Unpaid Dividend Account – Now any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed. Earlier this provision was missing and a new provisions has been introduced whereby when any company transfer any amount to the unpaid dividend account, than, within a period of ninety days of making such transfer, it is required to prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the web-site of the company, if any, and also on any other web-site approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed.
    • Investor Education and Protection Fund – Any person claiming to be entitled to the amount in the Unpaid Dividend Accounts of companies transferred to the Fund may apply to the authority for the payment of the money claimed.
    • Setting up of NCLT
    • Setting up of Special courts
    • Setting up of mediation and conciliation penal
    • Prescribing stringent punishment in case of fraud and covering more activities under fraud
  • Risk Management

    • Compliance of all laws ? Onus to ensure compliance of all laws has been casted on the Board of Directors of the Company.
    • Secretarial Audit for bigger companies – The requirement of getting the Secretarial Audit done for specific class of companies has been specified. It has been provided that 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 the prescribed form.
  • Corporate Social Responsibility
    • Corporate Social Responsibility – The Act now provides provisions related to Corporate Social Responsibility (CSR). 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 and the amount of expenditure to be incurred on the activities provided in the policy. The Board after approving the Corporate Social Responsibility Policy shall ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company and at least two per cent. of average net profits of the company made during three immediately preceding financial years is spent in every financial year on such policy. In case board fails to do so, that it should specify the reasons for the same in its report. While spending the amount earmarked for Corporate Social Responsibility activities the company shall give preference to the local area and areas around it where it operates
Rationale behind change

Till date the trust and confidence of Indian Stakeholders has largely been shaken through various instances being Satyam, Global Trust Bank, Vishal Retail and many more. The stakeholders in such cases have not only borne financial losses but also faced a harsh blow on their sentiments. To strengthen the positions of such stakeholders by empowering them and on the other hand enhancing the governance and regulation on Company, initiatives towards Corporate Governance were essential now.

Industry Impact

With the introduction of such initiatives towards Corporate Governance it is most likely that the Stakeholders Interest is taken care at long run. The move should also be welcomed by the Industry as ultimately, the benefit of good governance, are likely to depict in the value enhancement of the Company itself.

 

AUTHORED BY

Mr. Ankit Singhi

Head of Corporate Affairs & Compliances

ACS, LLB

ankit@indiacp.com

+91 9910888952

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