Part 2 relates to laws and regulations by statutory authorities in India. This is continuation to Part 1.

1. 28.01.2016 Note byBala
Corporate Ethics, Corporate Governance &
Corporate Social Responsibility – Hand out 2
Note: To be read in conjunction with PPT slides and other material provided
1. Statutory provisions in India relating to Corporate Governance & Corporate Social
Responsibility
Background:
In handout 1, we could learn the fundamentals of business ethics, corporate governance and
corporate social responsibility. It should come as a pleasant surprise to many of us that Indian
systemdidnotlag behindthe westernsystem or the Japanese system in amending the regulations
for Indiancompaniesandenforcingthe same inrightearnest. The gap was hardly six to seven years
between Cadbury Committee of Great Britain & the Kumar Mangalam Birla Committee in India.
Thismeansthat Indianinstitutionsandregulatorybodieswere quicktoadoptthe requiredrules and
regulations in India, based more on the western model but also incorporating the essence of the
German and Japanese models. In this handout, we will learn about the following:
1. Statutory provisions in India relating to Corporate governance and CSR
It is quite possible that as regards implementation of the rules and regulations for corporate
governance and corporate social responsibility, Indian companies may be lagging behind to an
extent their western counterparts. However this deficit is not due to any slack on the part of
statutory authorities in India.
Statutory provisions in India
The precursor for statutory provisions in India relating to corporate governance & corporate social
responsibilityisthe Cadburycommitteerecommendationsof the GreatBritain adopted in 1992. This
is the very first attempt by the international community to lay down principles of business ethics.
The gist of the committee report is captured below. The full-fledged report is available in material
under the same heading.
Section I - Corporate ethics:
No specificstatutoryprovisions anywhere in the world. In order to ensure compliance with ethical
practicesby managementandall concernedincludingemployees,‘Corporate Governance’emerged.
There are specific rules and regulations for governance.
Section II: Corporate governance:
Cadbury Committee report:
1. Importance of auditing as a function

2. 2. Ways to increase the effectiveness and value of the audit
3. Internal control
4. Dealing with frauds
5. Other illegal acts
6. Auditors’ liability
7. Accountability of boards to shareholders
8. Institutional shareholders
9. Shareholder communications
10. The code of best practice
a. BOD should retain full and effective control of the organization and monitor the
executive management
b. There should be a balance between power and authority
c. There should be an independent element in the board through independent
directors.The boardshouldinclude non-executivedirectorsof sufficient calibre and
number
d. Reporting and control systems should be robust and reliable
11. Recommendations:
a. Restriction on duration of service of directors appointed to the board
b. Companies’ interim reports to include financial information and balance sheet
details
c. Listed companies to disclose compliance with statutory requirements
d. Institutionalinvestorsshoulddisclose their policies on the use of their voting rights
Kumar Mangalam Birla Committee report (1999):
1. Objective is enhancement of shareholder value, keeping in mind the interests of other
stakeholders.
2. The onus of achieving the objective lies more with the management of the organization
(within) rather than statutory requirements, rules and regulations (without).
3. There should be a code of conduct for the board of directors
4. Board should have a balance between executive and non-executive directors.
The Committeerecommendsthattheboard of a company havean optimumcombination
of executiveand non-executivedirectorswith notless than fifty percent of the board
comprising thenon-executivedirectors.Thenumberof independentdirectors
(independencebeing asdefined in the foregoing paragraph) would depend on thenature
of the chairman of the board.In casea company hasa non-executivechairman,atleast
one-third of board should compriseof independentdirectorsand in case a company has
an executive chairman,atleasthalf of board should beindependent.
This is a mandatory recommendation
5. Non-executive directors would again be in two categories, independent directors who are
professionals from outside and those from within the organization without executive
powers.
6. Independent directors have a great role in corporate governance.

3. 7. Independentdirectorsaredirectorswho apartfrom receiving director’s remuneration do not
have any other material pecuniary relationship or transactions with the company, its
promoters, its management or its subsidiaries, which in the judgement of the board may
affect their independence of judgement. Further, all pecuniary relationships or transactions
of the non-executive directors should be disclosed in the annual report.
The BOD should decide on the remuneration of non-executive directors.
8. Nominee directorsof institutionsare anothercategory of directors on the board. Once they
are appointedtothe board, they have the same responsibility as other executive and non-
executive directors. Further they should be able to maintain professional integrity and
discretionwhile dealingwithotherdepartmentsof the institution whom they represent on
the mattersof the companyas discussedinthe boardmeetings.The reportsthattheywould
generate for the institution should be strictly confidential.
Auditcommittee shouldbe appointed. This should actas a catalystfor effective financial
reporting. The Committeethereforerecommendsthata qualified and independentaudit
committeeshould be set up by theboard of a company.Thiswould go a long way in
enhancing thecredibility of thefinancial disclosuresof a company and promoting
transparency.
This is a mandatory recommendation.TheCommitteethereforerecommendsthat
 The auditcommittee should haveminimumthreemembers,all being non executive
directors,with the majority being independent,and with atleastone directorhaving
financialand accounting knowledge;
 The chairman of the committeeshould be an independentdirector;
 The chairman should bepresentat AnnualGeneralMeeting to answershareholder
queries;
 The auditcommittee should invitesuch of the executives,asit considersappropriate
(and particularly thehead of thefinancefunction) to be presentat themeetingsof
the Committeebuton occasionsit may also meet withoutthepresence of any
executivesof the company.Financedirectorand head of internalaudit and when
required,a representativeof the externalauditorshould bepresentasinvitees for
the meetingsof the auditcommittee;
 The Company Secretary should actasthesecretary to the committee.
9. There are mandatoryrecommendationsrelatingtofrequencyof auditcommittee meetings,
their functions and frequency of their meetings.
10. Non-mandatory requirement – Each board could have a remuneration committee.
11. The BOD should meet at least 4 times a year with a provision that the maximum gap
between any two board meetings should not exceed 4 months.
12. A director on the board should not be on more than 10 internal committees across all
companies where he is a director or be a chairman on more than 5 committees.
13. As a part of annual report,there shouldbe aseparate segment on ‘management discussion
and analysis’. This would include the following:
a. Industry structureand developments.
b. Opportunitiesand Threats
c. Segment-wiseorproduct-wiseperformance.
d. Outlook.
e. Risks and concerns

4. f. Internalcontrolsystemsand their adequacy.
g. Discussion on financial performancewith respectto operationalperformance.
h. Material developmentsin Human Resources/IndustrialRelationsfront,including
numberof peopleemployed.
14. The BOD shouldprovide the shareholderswiththe followinginformationregarding any new
director being appointed to the board:
1. A brief resumeof the director;
2. Natureof his expertisein specific functionalareas;and
3. Namesof companiesin which the person also holdsthe directorship and the
membership of Committeesof theboard.
This is a mandatory recommendation
15. Shareholders’ rights:
The Committee therefore recommendsthatasshareholdershave arightto participate in,
and be sufficiently informedondecisionsconcerningfundamentalcorporate changes,they
shouldnotonlybe providedinformationasunderthe CompaniesAct,butalsoinrespectof
otherdecisionsrelatingtomaterial changessuchastakeovers,sale of assetsordivisionsof
the companyand changesincapital structure whichwill leadtochange incontrol or may
resultincertainshareholdersobtainingcontrol disproportionate tothe equityownership.
The Committeerecommendsthatinformation likequarterly results,presentation madeby
companiesto analystsmay beputon company’sweb-siteormay be sentin such a formso as
to enablethe stockexchangeon which the company islisted to putit on its own web-site.
This is a mandatory recommendation.
16. In orderto encourage more andmore shareholdersparticipating in general body meetings,
postal ballotsystemhastobe introduced.Thishassince beenintroducedthrough a suitable
amendment to ‘The Companies Act’.
17. The Committee recommends that a board committee under the chairmanship of a non-
executive director should be formed to specifically look into the redressing of shareholder
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared
dividendsetc. The Committeebelievesthat theformation of such a committee will help focus
the attention of thecompany on shareholders’ grievances and sensitise the management to
redressal of their grievances.
This is a mandatory recommendation
18. The Committeefurtherrecommendsthatto expeditethe processof sharetransferstheboard
of the company should delegatethe power of share transfer to an officer, or a committee or
to the registrar and share transfer agents. The delegated authority should attend to share
transfer formalities at least once in a fortnight.
This is a mandatory recommendation.
19. There should be stringent action against non-compliance with corporate governance by
listed companies at least to begin with. To this effect, the statutory provisions should be
strengthened in The Companies Act, the listing agreement with stock exchanges, the SEBI
regulationsetc.There shouldbe a monetary penalty imposed on listed companies for non-
compliance. To this effect, the stock exchanges should be given more powers. To make

5. compliance mandatory in this behalf, the following mandatory recommendation has been
made.
The Committeerecommendsthatthereshould bea separatesection on Corporate
Governancein theannualreportsof companies,with a detailed compliancereport on
CorporateGovernance.Non-complianceof any mandatory recommendation with reasons
thereof and the extentto which the non-mandatory recommendationshavebeen adopted
should bespecifically highlighted.This will enablethe shareholdersand thesecuritiesmarket
to assessforthemselvesthestandardsof corporategovernancefollowed by a company.
20. The Committee also recommends that the company should arrange to obtain a certificate
fromthe auditorsof thecompany regarding complianceof mandatory recommendationsand
annexe the certificate with the directors’ report, which is sent annually to all the
shareholders of the company. The same certificate should also be sent to the stock
exchanges along with the annual returns filed by the company.
This is a mandatory recommendation
21. Suggested contents of the CG report that would be an integral part of Annual report:
a. A brief statementoncompany’sphilosophyoncode of governance.
b. Board of Directors:
i. Compositionandcategoryof directorsforexample promoter,executive,non-
executive,independentnon-executive,nominee director,whichinstitution
representedasLenderoras equityinvestor.
ii. Attendance of eachdirectorat the BOD meetingsandthe lastAGM.
iii. Numberof BOD meetingsheld,datesonwhichheld.
c. AuditCommittee.
i. Brief descriptionof termsof reference
ii. Composition,name of membersandChairperson
iii. Meetingsandattendance duringthe year
d. RemunerationCommittee.
i. Brief descriptionof termsof reference
ii. Composition,name of membersandChairperson
iii. Attendance duringthe year
iv. Remunerationpolicy
v. Detailsof remunerationtoall the directors,asperformatinmain report.
e. ShareholdersCommittee.
i. Name of non-executivedirectorheadingthe committee
ii. Name and designationof compliance officer
iii. Numberof shareholderscomplaintsreceivedsofar
iv. Numbernotsolvedtothe satisfactionof shareholders
v. Numberof pendingshare transfers
f. General Bodymeetings.
I. Locationand time,where lastthree AGMsheld.
II. Whetherspecial resolutions
A. Were put throughpostal ballotlastyear,detailsof votingpattern
B.Personwhoconductedthe postal ballotexercise
C.Are proposedtobe conductedthroughpostal ballot
D. Procedure forpostal ballot
g. Disclosures.
I. Disclosuresonmateriallysignificantrelatedpartytransactionsi.e.transactions
of the companyof material nature,withitspromoters,the directorsorthe
management,theirsubsidiariesorrelativesetc.thatmay have potential conflict
withthe interestsof companyatlarge.

6. II. Detailsof non-compliance bythe company,penalties, andstrictures imposedon
the companyby Stock Exchange orSEBI or anystatutoryauthority,onany
matterrelatedtocapital markets,duringthe lastthree years.
h. Means of communication.
I. Half-yearlyreportsenttoeachhouseholdof shareholders.
II. Quarterlyresults
A. Whichnewspapersnormallypublished in?
B. Anywebsite,where displayed
C. Whetheritalsodisplaysofficial newsreleases;and
D. The presentationsmade toinstitutionalinvestorsortothe analysts.
I. WhetherMD&A isa part of annual reportor not
i. General Shareholderinformation
I. AGM : Date,time andvenue
II. Financial Calendar
III. Date of Book closure
IV. DividendPaymentDate
V. ListingonStock Exchanges
VI. Stock Code
VII. Market Price Data : High.,Low duringeachmonthin lastfinancial year
VIII. Performance incomparisontobroad-basedindicessuchasBSE Sensex,CRISIL
index etc.
IX. Registrarand TransferAgents
X. Share TransferSystem
XI. Distributionof shareholding
XII. Dematerializationof sharesandliquidity
XIII. OutstandingGDRs/ADRs/WarrantsoranyConvertibleinstruments,conversion
date and likelyimpactonequity
XIV. PlantLocations
XV. Addressforcorrespondence
The Companies Act provisions relating to Corporate governance
 CA 2013 introducessignificantchangestothe compositionof the boardsof directors.
 Everycompanyis requiredtoappoint1 (one) residentdirectoronitsboard.
 Nominee directorsshall nolongerbe treatedasindependentdirectors.
 Listedcompaniesandspecifiedclassesof publiccompaniesare requiredtoappoint
independentdirectorsandwomendirectorsontheirboards.
 CA 2013 forthe firsttime codifiesthe dutiesof directors.
 SEBI amendsthe ListingAgreement(withprospective effectfromOctober01, 2014) to align
it withCA 2013.
The Governmentof IndiahasrecentlynotifiedCompaniesAct,2013 ("CA 2013"), whichreplacesthe
erstwhile CompaniesAct,1956 ("CA1956"). In our seriesof updatesonthe CA 2013 ("NDA CA 2013
Series"),we are analyzingthe keychangesandtheirmajorimplicationsforstakeholders,bysetting
out the practical impactof the changesintroducedbyCA 2013. For a quicklookat our analysissofar
on the changesbroughtforthby the CA 2013, please refertoourprevioushotlinesinthisseries
available throughthis link.

7. In thishotline,we shallanalyse the importantchangesintroducedbyCA 2013 withrespectto
managementandadministrationof companies.The changesinlaw are aimedat ensuringhigher
standardsof transparencyandaccountability,andseektoalignthe corporate governance practices
inIndiawithglobal bestpractices.
KEY CHANGESINTRODUCED BY CA 2013
I. BOARD COMPOSITION
CA 2013 hasintroducedsignificantchangesinthe compositionof the boardof directorsof a
company.The keychangesintroducedare setout below:
NUMBER OF DIRECTORS: The followingkeychangeshave beenintroducedregardingcompositionof
the board:
 A one personcompanyshall have aminimumof 1 (one) director;
 CA 1956 permittedacompanytodetermine the maximumnumberof directorsonitsboard
by wayof itsarticlesof association.CA 2013, however,specificallyprovidesthatacompany
may have a maximumof 15 (fifteen)directors.
 CA 1956 requiredpubliccompaniestoobtainCentral Government'sapproval forincreasing
the numberof its directorsabove the limitprescribedinitsarticlesorif suchincrease would
leadto the total numberof directorson the boardexceeding12(twelve)directors.CA 2013
however,permitseverycompanytoappointdirectorsabove the prescribedlimitof 15
(fifteen) byauthorizingsuchincrease throughaspecial resolution.
Key takeaway: Allowing companiesto increase the maximumnumberof directorson their boardsby
way of a special resolution would ensuregreaterflexibility to companies.
CA 2013 requirescompaniesto have the followingclassesofdirectors:
RESIDENT DIRECTOR: CA 2013 introducesthe requirementof appointingaresidentdirector,i.e.,a
personwhohas stayedinIndia fora total periodof notlessthan182 (one hundredandeightytwo)
daysin the previouscalendaryear.
Key Takeaway: The requirementto havea residentdirector on theboard of companieshasbeen
viewed as a moveto ensure thatboardsof Indian companiesdo notcompriseentirely of non-resident
directors.This provision hascaused significantdifficultiesto companies,sinceit has been brought
into forcewith immediateeffect,requiring companiesto restructure their boardsimmediately to
ensurecompliancewith CA 2013.

8. IndependentDirectors
CA 1956 didnotrequire companiestoappointanindependentdirectoronitsboard.Provisions
relatedtoindependentdirectorswere setoutinClause 49 of the ListingAgreement("Listing
Agreement").
a. Numberof independentdirectors:Asperthe ListingAgreement,onlylistedcompanies
were requiredtoappointindependentdirectors.The numberof independentdirectorson
the board of a listedcompanywasrequiredtobe equal to(I) one thirdof the board, where
the chairmanof the board isa non-executive director;or(ii) one half of the board,where
the chairmanis an executivedirector.However,underCA 2013, the followingcompaniesare
requiredtoappointindependentdirectors:
I. Public listed company:Atleastone thirdof the board to be comprisedof
independentdirectors;and
II. Certainspecifiedcompaniesthatmeetthe criterialistedbelow are requiredtohave
at least2 (two) independentdirectors:
 Publiccompanieswhichhave paidupshare capital of INR100,000,000
(Rupeesone hundredmilliononly);
 Publiccompanieswhichhave aturnoverof 1,000,000,000 (Rupeesone
billiononly);and
 Publiccompanieswhichhave,inthe aggregate,outstandingloans,
debenturesanddepositsexceedingINR500,000,000 (Rupeesfivehundred
milliononly)
b. Qualificationcriteria:
I. CA 2013 prescribesdetailedqualificationsforthe appointmentof anindependent
directoron the boardof a company.Some importantqualificationsinclude:
 he / she shouldbe a personof integrity,relevantexpertise andexperience;
 he / she is notor wasnot a promoterof,or relatedtothe promoteror
directorof the companyor itsholding,subsidiaryorassociate company;
 he / she has or had no pecuniaryrelationshipwiththe company,itsholding,
subsidiaryorassociate company,ortheirpromoters,ordirectorsduringthe
2 (two) immediatelyprecedingfinancial yearsorduringthe currentfinancial
year;
 a person,none of whose relativeshave orhadpecuniaryrelationshipor
transactionwiththe company,itsholding,subsidiaryorassociate company,
or theirpromoters,ordirectorsamountingto2 (two) percentormore of its
gross turnoverortotal income orINR 5,000,000 (Rupeesfive milliononly),
whicheverislower,duringthe 2(two) immediatelyprecedingfinancial years
or duringthe current financial year.
II. CA 2013 alsosetsforthstringentprovisionswithrespecttothe relativesof the
independentdirector.
Key Takeaways: It is evidentfromprovisionsof CA 2013 thatmuch emphasishasbeen placed on
ensuring greaterindependenceof independentdirectors.Theoverallintent behind theseprovisionsis
to ensurethatan independentdirectorhasno pecuniary relationship with,noris he provided any
incentives(otherthan the sitting feefor board meetings) by it in any manner,which may compromise
his / her independence.In viewof the additionalcriteria prescribed in CA 2013, many listed
companiesmay need to revisit the criteria used in appointing theirindependentdirectors.

9. Observations:CA 2013 proposes tosignificantlyescalate the independencerequirementsof
independentdirectors,whencomparedtothe ListingAgreement:
I. The CA 2013 requiresanindependentdirectortobe a personof integrity,relevant
expertiseandexperience;itfailstoelaborate on the requisite standardsfordetermining
whetherapersonmeetssuchcriteria.Companies(actingthroughtheirrespective
nominationandremunerationcommittees) wouldbe able toexercisetheirown
judgmentinthe appointmentof independentdirectors,dilutingthe "independence"
criteria.
II. While the ListingAgreementprovidedthatanindependentdirectormustnothave any
material pecuniary relationship ortransactionwiththe company,CA 2013 statesthat an
independentdirectormustnothave had any pecuniary relationship withthe company.
Further,the ListingAgreementstipulatedearlierthatanindependentdirectorshould
not have hadsuch transactionswiththe company,itsholdingcompanyetc., atthetime
of appointmentasan independentdirector,while CA 2013 extendsthisrestrictionto the
currentfinancial yearor the immediately preceding two financialyears.However,this
provisioninthe ListingAgreementhasbeenalignedwiththe CA 2013 by meansof the
circularissuedbythe SecuritiesandExchange Boardof India("SEBI") datedApril 17,
2014 titledCorporate Governance inListedEntities- AmendmentstoClauses35Band 49
of the EquityListingAgreement.
III. The SEBI Circularhas broughtthe provisionsof the ListingAgreementinline withthe
provisionsof CA 2013, and wouldbe applicable fromOctober01,2014. Further,the
disqualificationarisingfromanypecuniaryrelationshipinthe previous2(two) financial
yearsunderCA 2013 maybe unreasonablyrestrictive,asthere maybe situationswhere
a pecuniarytransactionof the proposedindependentdirectormaysafelybe considered
to be of a nature whichdoesnot affectthe director'sindependence,forinstance,a
personproposedtobe appointedasan independentdirectormaybe the promoteror
directorof a supplier(oracounter-partytoan arm's lengthtransaction) whichhasinthe
past (eitherduringorfora periodpriorto the twoimmediatelyprecedingfinancial
years) beenselectedbythe companythroughanindependenttenderprocess.
Dutiesof independentdirectors:Neitherthe ListingAgreementnorthe CA 1956 prescribedthe
scope of dutiesof independentdirectors.CA 2013 includesaguide toprofessionalconductfor
independentdirectors,whichcrystallizesthe role of independentdirectors byprescribingfacilitative
roles,suchas offeringindependentjudgmentonissuesof strategy,performanceandkey
appointments,andtakinganobjectiveviewonperformance evaluationof the board.Independent
directorsare additionallyrequiredtosatisfythemselvesonthe integrityof financial information,to
balance the conflictinginterestsof all stakeholdersand,inparticular,toprotectthe rightsof the
minorityshareholders.The SEBICircularhowever,statesthatthe boardisrequiredtolaydowna
code of conductwhichwouldincorporate the dutiesof independentdirectorsassetoutinCA 2013.
Key Takeaways: CA 2013 imposessignificantly onerousdutieson independentdirectors,with a view
to ensuring enhanced managementand administration.Whilea list of specific dutieshasbeen
introduced underCA 2013, it should by no meansbeconsidered to be exhaustive.Independent
directors areunlikely to be exemptfromliability merely becausethey havefulfilled the duties
specified in CA 2013, and should beprudentand carry out all duties required foreffective functioning
of the company.

10. Liabilityof independentdirectors
Under CA 1956, independentdirectorswere notconsideredtobe "officersindefault"and
consequentlywere notliable forthe actionsof the board.CA 2013 however,providesthatthe
liabilityof independentdirectorswouldbe limitedtoactsof omissionorcommissionbya
company which occurred withtheir knowledge,attributablethrough board processes,andwiththeir
consentandconnivance orwhere theyhave notacted diligently.
Key Takeaways: CA 2013 proposesto empowerindependentdirectorswith a view to increase
accountabilityand transparency.Further,itseeksto hold independentdirectorsliable for actsor
omissionsorcommission by a company thatoccurred with their knowledgeand attributablethrough
board processes.While CA 2013 introducestheseprovisionswith a view of increase accountability in
the board thismay discouragea lot of personswho could potentially havebeen appointed as
independentdirectorsfromaccepting such a position as they would be exposed to greaterliabilities
while having very limited control overthe board.
Positionof Nominee Directors
 While the ListingAgreementstatedthatthe nominee directorsappointedbyaninstitutionthat
has investedinorlenttothe companyare deemedtobe independentdirectors,CA 2013 states
that a nominee directorcannotbe anindependentdirector.However,the SEBICircularinline
withthe provisionsof CA 2013 has excludednomineedirectorsfrombeingconsideredas
independentdirectors.
 CA 2013 definesnominee directorasa directornominatedbyanyfinancial institutionin
pursuance of the provisionsof anylaw for the time beinginforce,orof anyagreement,or
appointedbythe Governmentoranyotherpersonto representitsinterests.
Key Takeaways: The conceptof independentdirectorwasintroduced aspartof the CA 2013 with a
view to bring in independentjudgementon theboard.A director,once appointed,hasto servethe
interest of the shareholdersasa whole.Directors appointed by privateequity investorsshall also be
covered underthe definition of nomineedirectors,and would no longer be eligible forappointment
as independentdirectors.
Woman Director
 Listedcompaniesandcertainotherpubliccompaniesshall be requiredtoappointat least1
(one) womandirectoronitsboard.
 CompaniesincorporatedunderCA 2013 shall be requiredtocomplywiththisprovisionwithin6
(six) monthsfromdate of incorporation.Incase of companiesincorporatedunderCA 1956,
companiesare requiredtocomplywiththe provisionwithinaperiodof 1 (one) yearfromthe
commencementof the act.
Key Takeaway: While the mandatory requirementforappointmentof women directorsisexpected
to bring diversityon to theboards,companiesmay find itdifficult to be in compliancewith CA 2013
unlessthey havealready identified or internally groomed women candidatesthatarequalified to be
appointed to theboard.
Duties of directors
CA 1956 didnotcontainany provisionsthatspecificallyidentifiedthe dutiesof directors.CA 2013
has setout the followingdutiesof directors:

11.  To act inaccordance withcompany'sarticles;
 To act ingoodfaithto promote the objectsof the companyfor benefitof the membersasa
whole,andthe bestinterestof the company,itsemployees,shareholders,communityandfor
protectionof the environment;
 Exercise dutieswithreasonable care,skill anddiligence,andexerciseof independentjudgment;
The directoris notpermittedto:
 Be involvedinasituationinwhichhe mayhave director indirectinterestthatconflicts,ormay
conflict,withthe interestof the company;
 Achieve orattempttoachieve anyundue gainor advantage,eitherto himself orhisrelatives,
partnersor associates.
Key Takeaways: CA 2013 seeksto bring aboutgreaterstandardsof corporategovernance,by
imposing higherdutiesand liabilities for directors.While the actsets outspecific duties,it doesnot
clarify whethertheduties of directors listed therein are exhaustive.Therefore,itwould beprudentfor
directors to comply with all dutiesrequired for the effectivefunctioning of thecompany and notbe
merely be directed by the specified duties which are at bestvery broadly phrased principlesthat
should guidetheir behavior.
Further,every director should takecare to ensurethatit actsin thebest interested of all the
shareholdersasa whole.These provisionsbecomeparticularly significantin caseof nominee
directors appointed by privateequityinvestors,who havebeen known to representtheinterestsof
the investorsappointing themin direct contravention of theirdutiesto the shareholdersasa whole.
II. COMMITTEES OF THE BOARD
CA 2013 envisages4(four) typesof committeestobe constitutedbythe board:
a. AUDIT COMMITTEE: UnderCA 1956, publiccompanieswithapaidup capital inexcessof INR
50,000,000 (Rupeesfiftymilliononly) were requiredtosetupan auditcommittee comprisingof
not lessthan 3 (three) directors.At leastone thirdhadto be comprisedof directorsotherthan
Managing Directorsor Whole Time Directors.CA 2013 however,requiresthe boardof every
listedcompanyandcertainotherpubliccompaniestoconstitute the auditcommittee consisting
of a minimumof 3 (three) directors,withthe independentdirectorsformingamajority.It
prescribesthata majorityof members,includingitsChairman,have tobe personswiththe
abilitytoreadand understandfinancialstatements.The audit committee hasbeenentrusted
withthe task of providingrecommendationsforappointmentandremunerationof auditors,
reviewof independenceof auditors,providingapprovalof relatedpartytransactionsand
scrutinyoverotherfinancial mechanismsof the company.

12. b. NOMINATIONAND REMUNERATION COMMITTEE: While CA 1956 didnot require companiesto
setup nominationandremunerationcommittee,the ListingAgreementprovidedcompanies
withthe option to constitute aremunerationcommittee.However,CA 2013 requiresthe board
of everylistedcompanytoconstitutethe NominationandRemunerationCommittee consisting
of 3 (three) ormore non-executivedirectorsoutof whichnotlessthanone half are requiredto
be independentdirectors.The committeehasthe taskof identifyingpersonswhoare qualified
to become directorsandprovide recommendationstothe boardregardingtheirappointment
and removal,aswell ascarry out theirperformance evaluation
c. STAKEHOLDERS RELATIONSHIP COMMITTEE: CA 1956 didnot require acompanyto set upa
stakeholder'srelationshipcommittee.The ListingAgreementrequiredlistedcompaniestosetup
a shareholders/investorsgrievance committeetoexaminecomplaintsandissuesof
shareholders.CA 2013 requireseverycompanyhavingmore than1000 (one thousand)
shareholders,debenture holders,depositholdersandanyothersecurityholdersatanytime
duringa financial yeartoconstitute astakeholdersrelationshipcommittee toresolvethe
grievancesof securityholdersof the company.
d. CORPORATE SOCIAL RESPONSIBILITY COMMITTEE ("CSRCommittee"):CA 1956 didnot impose
any requirementoncompaniesrelatingtocorporate social responsibility("CSR").CA 2013
however,requirescertaincompaniestoconstitute aCSRCommittee,whichwouldbe
responsible todevise,recommendandmonitorCSRinitiativesof the company.The committeeis
alsorequiredtoprepare a reportdetailingthe CSRactivitiesundertakenandif not,the reasons
for failure tocomply.
Key Takeaways: CA 2013 setsout an advanced frameworkforboard functioning by division of core
board functionsand theirdelegation to committeesof theboard.While the auditcommittee and the
nomination and remuneration committeeprovidethebackend infrastructureforboards,the
stakeholder'srelationship committeeand CSRCommitteehavebeen entrusted with the taskof
interaction with key stakeholders.Irrespectiveof their function,each of thecommittees would actas
a "checkand balance"on thepowersof the board,by ensuring greatertransparency and
accountabilityin its functioning.
III. BOARD MEETINGSAND PROCESSES
The keychangesintroducedbyCA 2013 withrespectto boardmeetingsandprocessesare asunder:
 Firstboard meetingof acompanyto be heldwithin30(thirty) daysof incorporation;
 Notice of minimum7(seven) daysmustbe givenforeachboardmeeting.Notice forboard
meetingsmaybe givenbyelectronicmeans.However,boardmeetingsmaybe calledatshorter
notice to transact"urgentbusiness"providedsuchmeetingsare eitherattendedbyatleast1
(one) independentdirectorordecisionstakenatsuchmeetingsonsubsequentcirculationare
ratifiedbyat least1 (one) independentdirector.
 CA 2013 haspermitteddirectorstoparticipate inboardmeetingsthroughvideoconferencingor
otheraudiovisual meanswhichare capable of recordingandrecognisingthe participationof
directors.Participationof directorsbyaudiovisual meanswouldalsobe countedtowards
quorum.
 Requirementforholdingboardmeetingeveryquarterhasbeendiscontinued.Now atleast4
(four) meetingshave tobe heldeachyear,witha gap of not more than 120 (one hundredand
twenty) daysbetween2(two) boardmeetings.

13.  Certainnewactionshave beenidentified,thatrequire approvalbydirectorsinaboard meeting.
These include issuance of securities,grantof loans,guarantee orsecurity,approval of financial
statementandboard'sreport,diversificationof businessetc.
 Approval of circularresolutionwill be byamajorityof directorsor memberswhoare entitledto
vote on the resolution,irrespective of whethertheyare presentinIndiaorotherwise.
Key Takeaways: In the backdrop of globalcorporatetransactions,thechangesrelating to
participation of directors by audio visualand electronic meansare a welcomestep, aimed at keeping
pace withtechnologicaladvancements.
CONCLUSION
CA 2013 hasintroducedsignificantchangesregardingthe boardcompositionandhasa renewed
focuson board processes.Whilstcertainof these changesmayseemoverly prescriptive,acloser
analysisleadstoa compellingconclusionthatthe emphasisisonboardprocesses,whichovera
periodof time wouldinstitutionalizegoodcorporate governance andnotmake governance over-
dependentonthe presence of certainindividualsonthe board.
Footnote
1. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.pdf
The contentof this article is intended to providea general guideto the subjectmatter.Specialist
adviceshould be soughtaboutyourspecificcircumstances.
Provisions Related to Corporate Governance
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:
1. Section 217(2AA) dealing with Directors’ Responsibility Statement [DRS] to be included in the
Directors’ Report
2. Section 292A bringing in constitution of Audit Committee
3. 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
4. Section 275 providing for appointment of a person as a Director in a maximum of 15 companies
5. Clause 49 of the Listing Agreement of the Stock Exchanges providing for promoting and raising
the standards of CG in respect of listed companies.
6. Corporate Governance Voluntary Guidelines, 2009 released in December, 2009 by the Ministry of
Corporate Affairs for voluntary adoption by the Corporate Sector
Directors’ Responsibility Statement [DRS] [Section 217 (2AA)]
The Directors’ Report is required to include a DRS on the following aspects:
1. Applicable accounting standards have been followed in preparation of the annual accounts along
with proper reasons/explanations for material departures.
2. Accounting policies as selected are consistently applied.

14. 3. Judgments and estimates are made in a reasonable and prudent manner to ensure true and fair
view of the state of affairs at the end of financial year and of the profit or loss for that period.
4. Adequate accounting records are maintained in accordance with the provisions of the Companies
Act, 1956 for safeguarding the assets of the company and for preventing and detecting frauds and
other irregularities.
5. Annual accounts have been prepared on a Going Concern basis.
Constitution of Audit Committee [Section 292A]
It is provided that every public company having paid-up capital of ` 5 crores or more to constitute a
Committee of the Board known as the Audit Committee. The following are the salient features:
1. The Audit Committee to consist of a minimum of 3 Directors such that 2/3rd of the strength to be
other than managing/whole-time Directors.
2. Functions of an Audit Committee to be in accordance with the terms of reference specified in
writing by the Board.
3. The members of the Audit Committee to appoint Chairman of the Audit Committee.
4. Annual Report of the Company to disclose the composition of the Audit Committee.
5. The auditors, internal auditors and the finance director to attend/participate Audit Committee
meetings without any right to vote.
6. The Audit Committee to have periodical discussions with the auditors regarding internal control
systems, scope of audit, observations of auditors, review of half-yearly annual financial statements
and to ensure compliance of internal control systems.
7. The Audit Committee to have authority to investigate on any matter referred to by the Board of
Directors and have full access to information contained in the records of the company and also
have power to seek external professional advice as expedient.
8. All recommendations of the Audit Committee on any matter relating to financial management and
audit reporting to be binding on the Board. If the Board does not accept any recommendations, it
is required record its reasons in writing and communicate the same to the shareholders.
9. The Chairman of the Audit Committee to attend every AGM to provide clarifications on matters
relating to audit.
10. Default in compliance with Audit Committee provisions to render the company/every officer in
default liable to imprisonment up to 1 year and fine up to ` 50,000/- or both.
Disqualification of Directors [Section 274(1)(g)]
The Companies (Amendment) Act, 2000 has inserted clause (g) to section 274(1) of the Companies
Act, 1956 providing for the following:
A person would not be eligible to be appointed as a Director if such person is a Director of a public
company which:
1. has not filed its annual returns/accounts for continuous 3 years commencing on/after 1-4-1999; or

15. 2. has failed to repay its deposits/interest/debenture redemption on due date or failed to pay dividend
and such failure continues for more than 1 year.
Such a Director not to 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 is not being applicable to:
1. a special Director appointed by BIFR under section 10(4) of SICA.
2. Default of privately placed bonds/debentures of Public Financial Institutions (Circular No. 5/2003
dt. 14-1-2003).
Clause 49 of the Listing Agreement
The SEBI inserted Clause 49 in the Listing Agreement in January, 2000 to enforce compliance with
Corporate Governance standards as amended in 2004 and further amended in 2008 and again in
2010. The highlights are:
I. Board of Directors
A. Composition of Board
1. Non-executive directors not to be less than 50% of the total board.
2. Independent directors
1. Where the Chairman is a non-promoter, non-executive director, at least one-third of
the Board to comprise of independent directors
2. 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 to consist of
independent directors.
3. Where the Chairman is an executive director, at least 50% of the Board to comprise
of independent directors.
B. Non-executive directors’ compensation and disclosures
1. 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.
2. 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.
3. Prior approval of shareholders in general meeting to not 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
1. The board to 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 to clause 49.

16. 2. A director to not 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.
3. Every director to inform the company about the committee positions he occupies in other
companies and notify changes as and when they take place.
4. 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.
5. 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.
D. Code of Conduct
1. 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.
2. All Board members and senior management personnel to affirm compliance with the code on an
annual basis. The Annual Report of the company to contain a declaration to this effect signed by
the CEO.
II. AUDIT COMMITTEE
A. Qualified and Independent Audit Committee
1. Minimum 3 directors to be members with two-thirds being independent directors.
2. All members to be financially literate and at least one member having accounting or related
financial management expertise.
3. The Chairman of the Audit Committee to be an independent director and to remain present at the
AGM to answer shareholders’ queries.
4. The Chairman of the Audit Committee to be present at Annual General Meeting to answer
shareholder queries.
5. The Audit Committee may invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the committee, but
on occasions it may also meet without the presence of any executives of the company.
6. The Company Secretary to act as the secretary to the committee.
B. Meeting of Audit Committee
The Audit Committee to meet at least four times in a year with gap of not more than four months
between two meetings. The quorum to be higher of two members or one-third with minimum of two
independent members present.
C. Powers of Audit Committee
The powers of the Audit Committee to include:
1. To investigate any activity within its terms of reference
2. To seek information from any employee

17. 3. To obtain outside legal or other professional advice
4. To secure attendance of outsiders with relevant expertise, if necessary
5. A very elaborate role is prescribed for the Audit Committee in Clause 49.
D. Role of Audit Committee
The role of the Audit Committee to include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or
removal of the statutory auditor and the fixation of audit fees.
3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors.
4. Reviewing, with the management, the annual financial statements before submission to the board
for approval, with particular reference specified particulars.
5. Reviewing, with the management, the quarterly financial statements before submission to the
board for approval.
6. Reviewing, with the management, the statement of uses/application of funds raised through an
issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for
purposes other than those stated in the offer document/prospectus/notice and the report submitted
by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and
making appropriate recommendations to the Board to take up steps in this matter.
7. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the
internal control systems.
8. Reviewing the adequacy of internal audit function, if any, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting structure
coverage and frequency of internal audit.
9. Discussion with internal auditors, any significant findings and follow up thereon.
10. Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board.
11. Discussion with statutory auditors before the audit commences, about the nature and scope of
audit as well as post-audit discussion to ascertain any area of concern.
12. To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non-payment of declared dividends) and creditors.
13. To review the functioning of the Whistle Blower mechanism, in case the same is existing.
14. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person
heading the finance function or discharging that function) after assessing the qualifications,
experience and background, etc. of the candidate.
15. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

18. E. Review of information by Audit Committee
The Audit Committee to mandatorily review the following information:
1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the Audit Committee), submitted
by management;
3. Management letters/letters of internal control weaknesses issued by the statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor to be subject to
review by the Audit Committee.
III. Subsidiary Companies
1. At least one independent director of the holding company to be a director on the Board of a
material non-listed Indian subsidiary company.
2. The Audit Committee of the listed holding company to also review the financial statements, in
particular, the investments made by the unlisted subsidiary company.
3. The minutes of the Board meetings of the unlisted subsidiary company and a statement of all
significant transactions and arrangements entered into by the unlisted subsidiary company to be
placed at the Board meeting of the listed holding company.
IV. Disclosures
A. Disclosures
The following disclosure requirements are specified:
1. Basis of related party transactions
2. Disclosure of Accounting Treatment
3. Risk assessment and minimization procedures to the Board
4. Proceeds from public issues, rights issues, preferential issues, etc.
5. Remuneration of Directors
6. Management Discussion and Analysis report
7. Brief resume of the Director and other specified particulars at the time of his appointment or re-
appointment
8. Disclosure of relationships between directors inter se
9. Quarterly results and presentations to analysts to be put on company’s web-site
10. 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 IB.
B. Shareholders/Investors Grievance Committee

19. 1. This Committee is be formed to specifically look into the redressal of shareholders and investors
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends,
etc.
2. 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.
V. 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.
VI. Report on Corporate Governance
1. A separate section on Corporate Governance to be included in the Annual Reports of company,
with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory
requirement of this clause with reasons thereof and the extent to which the non-mandatory
requirements have been adopted to be specifically highlighted. The suggested list of items to be
included in this report is given in Annexure IC and list of non-mandatory requirements is given in
Annexure ID to clause 49.
2. The companies to submit a quarterly compliance report to the stock exchanges within 15 days
from the close of quarter as per the format given in Annexure IB. The report to be signed either by
the Compliance Officer or the Chief Executive Officer of the company.
VII. Compliance
1. The company to obtain a certificate from either the auditors or practising company secretaries
regarding compliance of conditions of corporate governance as stipulated and annex the
certificate with the directors’ report sent annually to all the shareholders of the company and the
Stock Exchanges.
2. The non-mandatory requirements given in Annexure ID may be implemented as per the discretion
of the company. However, the disclosures of the compliance with mandatory requirements and
adoption (and compliance)/non-adoption of the non-mandatory requirements to be made in the
section on corporate governance of the Annual Report.
VIII. Non-Mandatory Requirements
The non-mandatory requirements are specified in Annexure ID to Clause 49 that include:
1. 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.
2. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years,
on the Board of a company.
3. 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.

20. 4. 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.
5. Company may move towards a regime of unqualified financial statements.
6. 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.
7. 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.
8. The company may establish a Whistle Blower Policy.
Corporate Governance – Voluntary Guidelines 2009
The ‘Corporate Governance – Voluntary Guidelines 2009’, has been released in December 2009 for
voluntary adoption by the Corporate Sector have taken into account the recommendations of the Task
Force set up by Confederation of Indian Industry (CII) under Chairmanship of Shri Naresh Chandra in
February, 2009 to recommend ways to further improve corporate governance standards and
practices. The voluntary guidelines address a number of current concerns in the area of corporate
governance. These guidelines do not substitute any extant Law or regulation but are essentially for
voluntary adoption by the corporates.
While it is expected that more and more corporates should make sincere efforts to consider adoption
of these guidelines, there may be genuine reasons for some companies in not being able to adopt
them completely. In such a case it is expected that such companies should inform their shareholders
about the guidelines which the companies have not been able to apply either fully or partially.
Over a period of time these guidelines will progressively converge towards a framework of best
corporate governance standards and practices. After considering the experience of adoption of these
guidelines by Indian corporate sector and consideration of relevant feedback and other related issues,
the Government may initiate the exercise for review of these guidelines for further improvement after
one year.
[Note: A copy of the ‘Corporate Governance – Voluntary Guidelines, 2009’ can be accessed at the
following link] – Corporate Governance Voluntary Guidelines 2009
- See more at: http://taxguru.in/company-law/provisions-related-corporate-
governance.html#sthash.OU3b2iv8.dpuf
Clause 49 of the ‘Listing Agreement’ with Stock Exchanges – all listed companies have to
enter into this agreement before listing – Main provisions and not a detailed one
The company agrees to comply with the following provisions:
1. Optimum composition of board of directors with not less than 50% of the directors being
non-executive directors
2. Independent director would mean a ‘non-executive director’
3. Non-executive directors’ compensation and disclosures
4. Other provisions relating to BOD and various committees

21. 5. Code of conduct compliance
6. Audit committee:
a. Qualified and independent audit committee
b. Meeting of audit committee
c. Powers of audit committee
d. Role of audit committee
e. Review of information by audit committee
7. Subsidiary companies:
a. Holding company director being on the board of subsidiary companies
8. Disclosures:
a. Basis of related party transactions
b. Disclosure of accounting treatment
c. Board disclosures relating to risk management
d. Proceeds from public issues, rights issues, preferential issues etc.
e. Remuneration of directors
f. Management
g. Shareholders
9. CEO/CFO certification
10. Report on corporate governance
11. Compliance certificate from auditors or independent practicing company secretaries
12. Information to be placed before the BOD
13. Format of quarterly compliance report on CG
14. Non-mandatory requirements
Section III – Corporate Social Responsibility
Section135 of the CompaniesAct
(1) Everycompanyhavingnetworthof rupeesfive hundred crores ormore,or
turnoverof rupeesone thousand crores or more or a net profitof rupeesfive crores ormore
duringany financial yearshall constitute aCorporate Social ResponsibilityCommittee of the
Board consistingof three ormore directors,outof whichat leastone directorshall be an
independentdirector.
(2) The Board's reportundersub-section(3) of section134 shall disclose the
compositionof the Corporate Social ResponsibilityCommittee.
(3) The Corporate Social ResponsibilityCommittee shall,—
(a) formulate andrecommendtothe Board,a Corporate Social Responsibility
Policywhichshall indicatethe activitiestobe undertakenbythe companyas
specifiedinScheduleVII;
(b) recommendthe amountof expendituretobe incurredonthe activitiesreferred
to inclause (a);and
(c) monitorthe Corporate Social ResponsibilityPolicyof the companyfromtime
to time.
(4) The Board of everycompanyreferredtoinsub-section(1) shall,—
(a) aftertakingintoaccount the recommendationsmade bythe Corporate Social
ResponsibilityCommittee,approvethe Corporate Social ResponsibilityPolicyforthe

22. companyand disclose contentsof suchPolicyinitsreportandalsoplace it onthe
company'swebsite,if any,insuchmannerasmay be prescribed;and
(b) ensure thatthe activitiesasare includedinCorporate Social Responsibility
Policyof the companyare undertaken bythe company.
(5) The Board of everycompanyreferredtoinsub-section(1),shall ensure thatthe
companyspends,ineveryfinancialyear,atleasttwopercent.of the average netprofitsof
the companymade duringthe three immediatelyprecedingfinancial years,inpursuance of
itsCorporate Social ResponsibilityPolicy:
Providedthatthe companyshall give preference tothe local areaandareas aroundit
where itoperates,forspendingthe amountearmarkedforCorporate Social Responsibility
activities:
Providedfurtherthatif the companyfailstospendsuchamount,the Board shall,inits
reportmade underclause (o) of sub-section(3) of section134, specifythe reasonsfornot
spendingthe amount.
Explanation.—Forthe purposesof thissection“average netprofit”shall be calculated
inaccordance withthe provisionsof section198.
Source: Handbook of CII on ‘Corporate Social Responsibility’
The global context
While there maybe no single universallyaccepteddefinitionof CSR,eachdefinitionthatcurrently
existsunderpinsthe impactthatbusinesseshave onsocietyatlarge andthe societal expectationsof
them.Althoughthe rootsof CSR lie inphilanthropicactivities(suchasdonations,charity,relief work,
etc.) of corporations,globally,the conceptof CSRhasevolvedandnow encompassesall related
conceptssuch as triple bottomline,corporate citizenship,philanthropy,strategicphilanthropy,
sharedvalue,corporate sustainability andbusinessresponsibility.Thisisevidentinsome of the
definitionspresentedbelow:
The EC1 definesCSRas“the responsibility of enterprisesfor their impactson society”. To completely
meettheirsocial responsibility,enterprises “should havein placea processto integratesocial,
environmental,ethicalhuman rightsand consumerconcernsinto theirbusinessoperationsand core
strategy in close collaboration withtheir stakeholders”
The WBCSD definesCSRas2 “the continuing commitmentby businessto contributeto economic
developmentwhileimproving thequality of life of theworkforceand their familiesas well asof the
communityand societyatlarge.”
Accordingto the UNIDO3, “Corporatesocialresponsibility is a managementconceptwhereby
companiesintegratesocialand environmentalconcernsin their businessoperationsand interactions
with their stakeholders.CSRisgenerally understood asbeing theway through which a company
achievesa balanceof economic,environmentaland socialimperatives(Triple-Bottom-Line
Approach),whileatthesame time addressing theexpectationsof shareholdersand stakeholders.In
this senseit is importantto drawa distinction between CSR,which can be a strategicbusiness
managementconcept,and charity,sponsorshipsorphilanthropy.Even though thelattercan also

23. makea valuablecontribution to povertyreduction,will directly enhancethereputation of a company
and strengthen itsbrand,theconceptof CSRclearly goesbeyond that.”
From the above definitions,itisclearthat:
• The CSR approach isholisticandintegratedwiththe core businessstrategyforaddressingsocial
and environmental impactsof businesses.
• CSRneedsto addressthe well-beingof all stakeholdersandnotjustthe company’sshareholders.
• Philanthropicactivitiesare onlyapart of CSR, whichotherwiseconstitutesamuchlargersetof
activitiesentailingstrategicbusinessbenefits.
CSR in India
CSR inIndiahas traditionallybeenseenasa philanthropicactivity.Andinkeepingwiththe Indian
tradition,itwas an activitythatwas performedbutnotdeliberated.Asaresult,there islimited
documentationonspecificactivitiesrelated tothisconcept.However,whatwasclearlyevidentthat
much of thishad a national characterencapsulatedwithinit,whether itwasendowinginstitutions
to activelyparticipatinginIndia’sfreedommovement,andembeddedinthe ideaof trusteeship.
As some observershave pointedout,the practice of CSRinIndiastill remainswithinthe
philanthropicspace,buthasmovedfrominstitutionalbuilding(educational,researchandcultural)
to communitydevelopmentthroughvariousprojects.Also,withglobalinfluencesandwith
communitiesbecomingmore active anddemanding,thereappearstobe a discernibletrend,that
while CSRremainslargelyrestrictedtocommunitydevelopment,itisgettingmore strategicin
nature (thatis, gettinglinkedwithbusiness) thanphilanthropic,andalarge numberof companies
are reportingthe activitiestheyare undertakinginthisspace intheirofficial websites,annual
reports,sustainabilityreportsandevenpublishingCSRreports.The CompaniesAct,2013 has
introducedthe ideaof CSRto the forefrontandthroughitsdisclose-or-explainmandate,is
promotinggreatertransparencyanddisclosure.Schedule VIIof the Act,whichlistsoutthe CSR
activities,suggestscommunitiestobe the focal point.Onthe otherhand,by discussingacompany’s
relationshiptoitsstakeholdersandintegratingCSRintoitscore operations,the draftrulessuggest
that CSR needstogo beyondcommunitiesandbeyondthe conceptof philanthropy.Itwill be
interestingtoobserve the waysinwhichthiswill translate intoactionatthe groundlevel,andhow
the understandingof CSRissetto undergoa change.
CSR and sustainability
Sustainability(corporate sustainability) isderivedfromthe conceptof sustainable development
whichisdefinedbythe BrundtlandCommissionas“developmentthatmeetstheneedsof the
presentwithoutcompromising theability of futuregenerationsto meettheir own needs” 4.
Corporate sustainabilityessentiallyreferstothe role thatcompaniescanplayinmeetingthe agenda
of sustainabledevelopmentandentailsabalancedapproachtoeconomicprogress,social progress
and environmental stewardship.CSRinIndiatendstofocuson whatisdone withprofits afterthey
are made.Onthe otherhand,sustainabilityisaboutfactoringthe social andenvironmental impacts
of conductingbusiness,thatis, how profitsare made.
Hence,muchof the Indianpractice of CSR is an importantcomponentof sustainabilityorresponsible
business,whichisalargeridea,afact that is evidentfromvarioussustainabilityframeworks.An
interestingcase inpointisthe NVGsfor social,environmental andeconomicresponsibilitiesof
businessissuedbythe Ministryof Corporate AffairsinJune 2011. Principle eightrelatingtoinclusive
developmentencompassesmostof the aspectscoveredbythe CSRclause of the CompaniesAct,
2013. However,the remainingeightprinciplesrelate tootheraspectsof the business.The UN Global
Compact,a widelyusedsustainabilityframeworkhas10 principlescoveringsocial,environmental,

24. humanrightsand governance issues,andwhatisdescribedasCSRisimplicitratherthanexplicitin
these principles.
Globally,the notionof CSRand sustainabilityseemstobe converging,as isevidentfromthe various
definitionsof CSRputforthby global organisations.The genesisof thisconvergence canbe observed
fromthe preamble tothe recentlyreleased draftrulesrelatingtothe CSR clause within the
CompaniesAct,2013 whichtalks aboutstakeholdersandintegratingitwith the social,
environmental andeconomicobjectives,all of whichconstitute the ideaof atriple bottomline
approach.It is alsoacknowledgedinthe Guidelines onCorporate Social Responsibilityand
SustainabilityforCentral PublicSector Enterprisesissuedbythe DPEin April 2013.
The newguidelines,whichhave replaced twoexistingseparateguidelinesonCSR and sustainable
development,issuedin 2010 and2011 respectively,mentionsthe following:
“Since corporatesocial responsibilityand sustainability areso closely entwined,it can
be said that corporatesocialresponsibility and sustainability is a company’scommitment
to its stakeholdersto conductbusinessin an economically,socially and environmentally
sustainablemannerthatistransparentand ethical.”
Why is the CSR clause of the new Companies Act, 2013 so critical for SMEs?
By requiring companies, with a minimum turnover of 5 crores INR, to spend on CSR activities,the
Companies Act, 2013 is likely to bring in many SMEs into the CSR fold. This will usher in a fresh set of
challenges to a sector that is increasingly being asked by its B2B customers to comply with environmental
and social standards, while remaining competitive in terms of price and quality.Thus, SMEs will have to
quickly learn to be compliant with these diverse set of requirements and it is hoped that this handbook will
facilitate their ability to comply with the CSR clause of the Companies Act, 2013.
Sustainability reporting in India for the top 100 listed companies (known as ‘BRR’):
Business responsibility reporting (BRR)
The other reporting requirement mandated by the government of India, including CSR is by the SEBI
which issued a circular on 13 August 2012 mandating the top 100 listed companies to report their ESG
initiatives.These are to be reported in the form of a BRR as a part of the annual report. SEBI has provided a
template for filing the BRR. Business responsibility reporting is in line with the NVG published by the
Ministry of Corporate Affairs in July 2011. Provisions have also been made in the listing agreement to
incorporate the submission of BRR by the relevant companies. The listing agreement also provides the format
of the BRR. The BRR requires companiesto report their performance on the nine NVG principles. Other
listed companies have also been encouraged by SEBI to voluntarily disclose information on their ESG
performance in the BRR format.
Role of the board and the CSR committee:
Applicable tolistedcompaniesconformingtoone of the followingconditions:
Networth> 500 CroresINR
Turnover> 1000 Crores INR
Net profit > 5 Crores INR

25. Role of the board:
1. Form a CSR committee
2. Approve the CSR policy
3. Ensure implementation of the activities under CSR policy
4. Ensure 2% spend as per statutory requirements
5. Disclose the reasons for not spending the prescribed amount (if applicable)
Role of CSR committee:
1. Three or more directors with at least one independent director
2. Formulate and recommend CSR policy to the board
3. Recommend activities and the amount of expenditure to be incurred
4. Monitor the CSR policy from time to time
CSR processes:
1.
I. Developing a CSR strategy and policy
II. Operationalising the institutional mechanism
2.
I. Due diligence of the implementation partner
II. Project development
3.
I. Project approval
II. Finalising the arrangement with the project implementation agency
Project implementation
4. Project monitoring and reporting
5.
I. Impact measurement
II. Report consolidation and communication