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Mohit Saraf, Senior Partner Luthra and Luthra Law Offices <ul><li>Clause 49 of the Listing Agreement </li></ul><ul><li>-A ...
Outline  <ul><ul><li>Section  I   Conceptualizing Corporate Governance </li></ul></ul><ul><ul><li>Section  II  The Need fo...
Section I Conceptualizing Corporate Governance <ul><ul><li>Narrow Definition </li></ul></ul><ul><ul><ul><li>A set of relat...
Conceptualizing Corporate Governance (Contd.) <ul><li>OECD Definition </li></ul><ul><ul><li>System by which corporations a...
Conceptualizing Corporate Governance (Contd.) <ul><li>What constitutes shareholders’ interest? (sustainable profitability)...
Section II   The Need for Corporate Governance <ul><li>Responsibility to Stakeholders </li></ul><ul><li>Easier access to c...
Section III   The Evolution of Corporate Governance in India <ul><li>December 1995: CII sets up task force to  design volu...
Section III   The Evolution of Corporate Governance in India <ul><li>2002: Narayana Murthy Committee set up by SEBI  to re...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Concerned with Independent Directors, Audit Committees, Disclosure...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Definition of independent Director (…contd.) </li></ul><ul><ul><li...
-Section IV- Clause 49 of the Listing Agreement <ul><li>The Audit Committee </li></ul><ul><li>Company to constitute an aud...
-Section IV- Clause 49 of the Listing Agreement <ul><li>The Powers of the Audit Committee </li></ul><ul><li>Investigate al...
-Section IV- Clause 49 of the Listing Agreement <ul><li>The Role of the Audit Committee </li></ul><ul><li>Oversee financia...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Audit Committee to review following information </li></ul><ul><li>...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Disclosure </li></ul><ul><li>Related party transactions ~ Place be...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Disclosure </li></ul><ul><li>Disclose in the Annual Report all ele...
-Section IV- Clause 49 of the Listing Agreement <ul><li>CFO / CEO certification </li></ul><ul><li>CEO = MD or Manager Appo...
-Section IV- Clause 49 of the Listing Agreement <ul><li>CFO / CEO certification </li></ul><ul><li>CEO/ CFO to certify the ...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Non Mandatory requirements of Clause 49 </li></ul><ul><li>Only rep...
-Section IV- Clause 49 of the Listing Agreement <ul><li>Report and Compliance </li></ul><ul><li>Separate section in annual...
Clause 49 of the Listing Agreement - The pre and post Amendment positions compared- <ul><li>Independent director before th...
Clause 49 of the Listing Agreement - The pre and post Amendment positions compared- <ul><li>Independent director before th...
Clause 49 of the Listing Agreement - The pre and post Amendment positions compared- <ul><li>Audit Committee before the Ame...
-Section V- The Sarbanes Oxley Act, 2002 <ul><li>Concerned with Auditor independence, the Public Companies Accounting Over...
-Section V- The Sarbanes Oxley Act, 2002   <ul><li>Salient Features of the SOX Act </li></ul><ul><li>Primary concern- inte...
-Section V- The Sarbanes Oxley Act, 2002 <ul><li>Salient features of the SOX Act (…contd.) </li></ul><ul><li>Audit Committ...
-Section V- The Sarbanes Oxley Act, 2002 <ul><li>Independence of Board of Directors/ Committees </li></ul><ul><li>Enhanced...
-Section V- The Sarbanes Oxley Act, 2002 <ul><li>Audit Committee (…contd.) </li></ul><ul><ul><li>Responsible for appointme...
-Section V- The Sarbanes Oxley Act, 2002 <ul><li>Additional Disclosures  </li></ul><ul><ul><li>Off Balance Sheet Items & t...
Issues <ul><li>Rationale for deeming nominees of public financial institutions and corresponding new banks as independent ...
Issues <ul><li>Audit Committees  </li></ul><ul><li>Required to review various legal requirements  with  the management.  <...
Conclusion <ul><li>Good corporate governance –  means to the end of sustainable wealth creation </li></ul><ul><li>The posi...
Our Contact Details <ul><li>Luthra & Luthra Law Offices </li></ul><ul><li>Mumbai Office     Delhi Office   </li></ul><ul><...
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Outside CP knowledge presentation presentation on clause 49 at alliance india

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Outside CP knowledge presentation presentation on clause 49 at alliance india

  1. 1. Mohit Saraf, Senior Partner Luthra and Luthra Law Offices <ul><li>Clause 49 of the Listing Agreement </li></ul><ul><li>-A Comparative Analysis- </li></ul><ul><li>Presented to </li></ul><ul><li>Alliance India </li></ul><ul><li>12 th August 2005 </li></ul>
  2. 2. Outline <ul><ul><li>Section I Conceptualizing Corporate Governance </li></ul></ul><ul><ul><li>Section II The Need for Corporate Governance </li></ul></ul><ul><ul><li>Section III Evolution of Corporate Governance in India </li></ul></ul><ul><ul><li>Section IV Clause 49 of the Listing Agreement </li></ul></ul><ul><ul><li>Section V The Sarbanes Oxley Act, 2002 </li></ul></ul><ul><ul><li>Section VI The Eighth Council Directive </li></ul></ul>
  3. 3. Section I Conceptualizing Corporate Governance <ul><ul><li>Narrow Definition </li></ul></ul><ul><ul><ul><li>A set of relationships between the company and shareholders, directors and management. </li></ul></ul></ul><ul><ul><ul><li>Beneficiary of good governance- The Shareholder </li></ul></ul></ul><ul><ul><li>Broad Definition </li></ul></ul><ul><ul><ul><li>Looking to the implicit and explicit relationships of the company with employees, creditors, consumers, distributors, local communities. </li></ul></ul></ul><ul><ul><ul><li>Beneficiary of good governance- Every Stakeholder </li></ul></ul></ul>
  4. 4. Conceptualizing Corporate Governance (Contd.) <ul><li>OECD Definition </li></ul><ul><ul><li>System by which corporations are directed and controlled. </li></ul></ul><ul><ul><li>Spells out the rules / procedures for making decisions on corporate affairs. </li></ul></ul><ul><ul><li>Provide the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance </li></ul></ul><ul><ul><li>Specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders </li></ul></ul><ul><li>World Bank Definition </li></ul><ul><ul><li>Corporate governance is about promoting corporate fairness, transparency and accountability </li></ul></ul>
  5. 5. Conceptualizing Corporate Governance (Contd.) <ul><li>What constitutes shareholders’ interest? (sustainable profitability) </li></ul><ul><li>Need for external regulation </li></ul><ul><ul><li>FOR: </li></ul></ul><ul><ul><ul><li>Conflict of interest b/w Management/Promoters and other constituencies </li></ul></ul></ul><ul><ul><ul><li>To protect small investors </li></ul></ul></ul><ul><ul><ul><li>To account for Externalities </li></ul></ul></ul><ul><ul><li>AGAINST: </li></ul></ul><ul><ul><ul><li>Risk of excessive policing </li></ul></ul></ul><ul><ul><ul><li>Increase costs </li></ul></ul></ul>
  6. 6. Section II The Need for Corporate Governance <ul><li>Responsibility to Stakeholders </li></ul><ul><li>Easier access to capital (FII, VCF, Foreign Markets) </li></ul><ul><li>Efficiency (at the firm level) and Global Competitiveness </li></ul>
  7. 7. Section III The Evolution of Corporate Governance in India <ul><li>December 1995: CII sets up task force to design voluntary code of corporate governance </li></ul><ul><li>April 1998: CII releases “Desirable Corporate Governance: A Code” </li></ul><ul><li>May 1999: SEBI sets up the Kumar Mangalam Birla Committee </li></ul><ul><li>February 2000: Clause 49 introduced pursuant to KM Birla Report </li></ul><ul><li>2002: DCA sets up Naresh Chandra Committee- Report recommends financial and non-financial disclosures and independent auditing and board oversight of management (Draft Companies Bill) </li></ul>
  8. 8. Section III The Evolution of Corporate Governance in India <ul><li>2002: Narayana Murthy Committee set up by SEBI to review clause 49 </li></ul><ul><li>2003: Clause 49 modified to reflect some of Narayana Murthy’s recommendations </li></ul><ul><li>December, 2005: Deadline for compliance with modified Clause 49 </li></ul>
  9. 9. -Section IV- Clause 49 of the Listing Agreement <ul><li>Concerned with Independent Directors, Audit Committees, Disclosures, CEO/CFO Certification </li></ul><ul><li>Independent Directors </li></ul><ul><li>Half of Board with executive CM to be independent; third of board with non executive CM to be independent. </li></ul><ul><li>Definition of independent director </li></ul><ul><ul><li>Non executive </li></ul></ul><ul><ul><li>No Material pecuniary relationships or transactions with company, promoters, directors, senior management, holding company, subsidiaries or associates </li></ul></ul>
  10. 10. -Section IV- Clause 49 of the Listing Agreement <ul><li>Definition of independent Director (…contd.) </li></ul><ul><ul><li>Not related to promoters, to board members or to persons holding managerial positions one level below board </li></ul></ul><ul><ul><li>Has not been an executive in company in preceding three years </li></ul></ul><ul><ul><li>Has not been a partner or executive in statutory audit firm or internal audit firm </li></ul></ul><ul><ul><li>Has not been a partner or executive in law firm or consulting firm with material association to company </li></ul></ul><ul><ul><li>Is not a material supplier, service provider, customer, lessor or lessee of company </li></ul></ul><ul><ul><li>Does not hold more than 2% shares in company </li></ul></ul>
  11. 11. -Section IV- Clause 49 of the Listing Agreement <ul><li>The Audit Committee </li></ul><ul><li>Company to constitute an audit committee with terms of reference </li></ul><ul><li>At least three members- two thirds independent </li></ul><ul><li>CM to be independent- must attend every AGM </li></ul><ul><li>All members financially literate- at least 1 member to be expert- CS to be secretary </li></ul><ul><li>May meet with or without executives </li></ul><ul><li>To meet at least 4 times a year- quorum = greater of 2 members or 2/3 rd and at least 2 independent </li></ul>
  12. 12. -Section IV- Clause 49 of the Listing Agreement <ul><li>The Powers of the Audit Committee </li></ul><ul><li>Investigate all matter within its terms of reference </li></ul><ul><li>Seek information from any employee </li></ul><ul><li>Obtain outside legal/ professional advice </li></ul><ul><li>To invite outside experts </li></ul>
  13. 13. -Section IV- Clause 49 of the Listing Agreement <ul><li>The Role of the Audit Committee </li></ul><ul><li>Oversee financial reporting process </li></ul><ul><li>Recommend to the Board the hiring and firing of statutory auditors and the fixing of their fees </li></ul><ul><li>To review working of whistle blower mechanisms </li></ul><ul><li>Discussing significant findings and follow ups with internal auditors </li></ul><ul><li>Approval of payment to statutory auditors for any other services rendered </li></ul><ul><li>Reviewing with the management annual/ quarterly financial statements before they are vetted by board especially </li></ul><ul><li>Reviewing the adequacy of structures, staffing etc. of internal audit department </li></ul><ul><li>Other functions specified in terms of reference </li></ul>
  14. 14. -Section IV- Clause 49 of the Listing Agreement <ul><li>Audit Committee to review following information </li></ul><ul><li>Statement of significant related party transactions submitted by management </li></ul><ul><li>Management letters and letters of internal control weakness issued by the statutory auditors </li></ul><ul><li>Internal audit reports relating to internal control weakness </li></ul><ul><li>Review of appointment, removal and terms of remuneration of chief internal auditor </li></ul><ul><li>Management discussion and analysis of financial condition and result of operations </li></ul>
  15. 15. -Section IV- Clause 49 of the Listing Agreement <ul><li>Disclosure </li></ul><ul><li>Related party transactions ~ Place before the audit committee: </li></ul><ul><li>- summary of transactions in the ordinary course of business </li></ul><ul><li>- details of transactions not in the ordinary course of business </li></ul><ul><li>- details of transactions, with related parties or others, not on arms length basis </li></ul><ul><li>If financial statements are prepared in a manner other than that prescribed in an accounting standard has been used, the same has to be disclosed in them. </li></ul><ul><li>Disclose in the Annual Report all pecuniary relationship or transactions of the non-executive directors with the company; criteria for making payments to such directors and number of shares and convertible instruments held by them. </li></ul>
  16. 16. -Section IV- Clause 49 of the Listing Agreement <ul><li>Disclosure </li></ul><ul><li>Disclose in the Annual Report all elements of remuneration package of independent directors; service contracts, notice period, severance fee and stock options details </li></ul><ul><li>Senior Management shall make disclosures to the Board relating to all material financial and commercial transactions, where they have a personal interest that may have a potential to conflict with the interests of the Company </li></ul><ul><li>On appointment of a new director or re-appointment of a director, provide information to the shareholders with respect to his expertise, about his membership/directorship in other companies and his shareholding in case he is a non-executive director. </li></ul><ul><li>Quarterly results and presentations made by the Company to analysts shall be put on company’s website. </li></ul>
  17. 17. -Section IV- Clause 49 of the Listing Agreement <ul><li>CFO / CEO certification </li></ul><ul><li>CEO = MD or Manager Appointed Under Companies Act </li></ul><ul><li>CFO = Whole Time Finance Director or Other Person Heading the Finance Function </li></ul><ul><li>CEO and CFO to certify to the board </li></ul><ul><li>that they have reviewed financial statements and the cash flow statements and to the best of their knowledge and belief: </li></ul><ul><ul><li>No materially untrue statement/ omission of material fact/ misleading statement </li></ul></ul><ul><ul><li>Statements together present true and fair picture of company’s affairs and are in compliance with existing accounting standards, laws and regulations </li></ul></ul>
  18. 18. -Section IV- Clause 49 of the Listing Agreement <ul><li>CFO / CEO certification </li></ul><ul><li>CEO/ CFO to certify the following </li></ul><ul><ul><li>No transactions entered into by company during the year which are fraudulent, illegal or violative of the company’s code of conduct </li></ul></ul><ul><ul><li>Accept responsibility for internal control systems, have evaluated the effectiveness of the systems. </li></ul></ul><ul><ul><li>Have indicated to auditors and audit committee </li></ul></ul><ul><ul><li>Significant changes in internal control during the year </li></ul></ul><ul><ul><li>Significant changes in accounting policies </li></ul></ul><ul><ul><li>Instances of significant fraud of which they have become aware </li></ul></ul>
  19. 19. -Section IV- Clause 49 of the Listing Agreement <ul><li>Non Mandatory requirements of Clause 49 </li></ul><ul><li>Only reporting required- compliance discretionary </li></ul><ul><ul><li>Whistle Blower Policy: mechanism to prevent victimization and provide direct access to CM of audit committee </li></ul></ul><ul><ul><li>Independent directors may have tenure in aggregate of 9 years </li></ul></ul><ul><ul><li>Half yearly declaration of performance to be sent to each shareholder household </li></ul></ul><ul><ul><li>Move towards unqualified financial statements </li></ul></ul>
  20. 20. -Section IV- Clause 49 of the Listing Agreement <ul><li>Report and Compliance </li></ul><ul><li>Separate section in annual report on compliance with corporate governance </li></ul><ul><li>Quarterly compliance report to stock exchange signed by Compliance Officer or CEO </li></ul><ul><li>Company to disclose compliance with non-mandatory requirements in annual reports </li></ul>
  21. 21. Clause 49 of the Listing Agreement - The pre and post Amendment positions compared- <ul><li>Independent director before the amendment </li></ul><ul><li>Pecuniary relationship with company, promoters, management and subsidiaries </li></ul><ul><li>Board to determine whether director independent. </li></ul><ul><li>Could be related to anyone in the company </li></ul><ul><li>Silent about nominee directors </li></ul><ul><li>Independent director after the amendment </li></ul><ul><li>“ management” substituted with “directors and senior management”; prohibition extended to cover holding company and associates </li></ul><ul><li>Reference to Board’s judgment in this matter omitted </li></ul><ul><li>Cannot be related to promoters, persons occupying management positions in board or at one level below the board </li></ul><ul><li>Nominees of public financial institutions and corresponding new banks deemed independent </li></ul>
  22. 22. Clause 49 of the Listing Agreement - The pre and post Amendment positions compared- <ul><li>Independent director before the amendment </li></ul><ul><li>Could have been an executive of the company in the previous years </li></ul><ul><li>Could have been executive of professional firms associated with company </li></ul><ul><li>Other interested parties could have qualified </li></ul><ul><li>Could have been interested as a shareholder </li></ul><ul><li>Independent director after the amendment </li></ul><ul><li>Can not have been an executive in company in the immediately preceding 3 years </li></ul><ul><li>Cannot be (have been) an executive in internal or external auditor firm </li></ul><ul><li>Can’t be a “material supplier, service provider or customer or a lessor or a lessee of the company </li></ul><ul><li>Cannot hold 2% or more of the voting shares </li></ul>
  23. 23. Clause 49 of the Listing Agreement - The pre and post Amendment positions compared- <ul><li>Audit Committee before the Amendment to Clause 49 </li></ul><ul><li>At least 3 directors </li></ul><ul><li>All directors non-executive </li></ul><ul><li>Majority have to be independent </li></ul><ul><li>At least one member to have financial and accounting knowledge </li></ul><ul><li>Meet at least thrice a year </li></ul><ul><li>Audit Committee after the Amendment to Clause 49 </li></ul><ul><li>At least 3 directors </li></ul><ul><li>No such requirement </li></ul><ul><li>Two-thirds have to be independent </li></ul><ul><li>All members to be “financially literate”; At least one member to be an expert </li></ul><ul><li>Meet at least four times a year </li></ul>
  24. 24. -Section V- The Sarbanes Oxley Act, 2002 <ul><li>Concerned with Auditor independence, the Public Companies Accounting Oversight Board, Disclosures and corporate fraud </li></ul><ul><li>Applies to : </li></ul><ul><li>Companies listed or traded in the U.S (including non U.S Companies) </li></ul><ul><li>Subsidiaries of U.S Companies in India (provided they have a business connection in the U.S) </li></ul><ul><li>Foreign accounting firms that prepare or furnish audit report for an issuer must comply with SOX </li></ul><ul><li>Compliance usually expected by U.S Companies from business partners in India (implications for BPO sector) </li></ul>
  25. 25. -Section V- The Sarbanes Oxley Act, 2002 <ul><li>Salient Features of the SOX Act </li></ul><ul><li>Primary concern- integrity of audit reports- issue in Enron and Worldcom debacles- requirement of independent directors comes from outside SOX </li></ul><ul><li>Inroad into Attorney Client privilege </li></ul><ul><li>Protects Whistleblower- restitution and penalties for victimization </li></ul><ul><li>CEO-CFO certification of compliance </li></ul>
  26. 26. -Section V- The Sarbanes Oxley Act, 2002 <ul><li>Salient features of the SOX Act (…contd.) </li></ul><ul><li>Audit Committee to be composed entirely of independent directors </li></ul><ul><li>Ban on loans to executive officers and directors </li></ul><ul><li>Accelerated filings of periodic reports </li></ul><ul><li>Filing of change of beneficial ownership within 2 days </li></ul><ul><li>Reimbursement by CEO/CFO upon restatement of financial statements due to misconduct </li></ul><ul><ul><li>Bonus/other incentive based compensation </li></ul></ul><ul><ul><li>Profits from sale of securities </li></ul></ul>
  27. 27. -Section V- The Sarbanes Oxley Act, 2002 <ul><li>Independence of Board of Directors/ Committees </li></ul><ul><li>Enhanced Criminal Penalties (upto $5 million fine for individuals, $25 million for entities, prison terms upto 20 years) </li></ul><ul><li>Strict Reporting of illegal or unethical behavior </li></ul><ul><li>Audit Committee </li></ul><ul><ul><li>Independent </li></ul></ul><ul><ul><li>Financial Literacy of members </li></ul></ul><ul><ul><li>At least one financial expert </li></ul></ul>
  28. 28. -Section V- The Sarbanes Oxley Act, 2002 <ul><li>Audit Committee (…contd.) </li></ul><ul><ul><li>Responsible for appointment, compensation & oversight of auditor & approval of audit/non audit services </li></ul></ul><ul><ul><li>Create compliant mechanism regarding accounting and auditing </li></ul></ul><ul><ul><li>Approve all related party transactions </li></ul></ul><ul><ul><li>Implementation of a ‘Whistleblower’ policy </li></ul></ul>
  29. 29. -Section V- The Sarbanes Oxley Act, 2002 <ul><li>Additional Disclosures </li></ul><ul><ul><li>Off Balance Sheet Items & transactions that may have material current/future effect on financial condition/results of operations </li></ul></ul><ul><ul><li>Pro forma Information must conform to financials prepared under GAAP - No untruth/omission </li></ul></ul><ul><ul><li>All fees billed by auditors in annual report </li></ul></ul><ul><ul><li>Audit Partner Rotation </li></ul></ul><ul><ul><li>Registration with Public Company Accounting Oversight Board (including foreign audit firms that audit Issuers) </li></ul></ul>
  30. 30. Issues <ul><li>Rationale for deeming nominees of public financial institutions and corresponding new banks as independent directors unclear- conflict of interest ? </li></ul><ul><li>Shareholders not sole beneficiary of corporate governance norms- other stakeholders need protection too </li></ul><ul><ul><li>Mr. Rahul Bajaj- Indian companies being promoter controlled need no outside monitoring - NASDAQ and NYSE Listing Manual exempt companies with 50% holding in one group from requirement of independent directors </li></ul></ul><ul><ul><li>Clause 49 disqualifies holder of more than 2% stake from being independent director </li></ul></ul>
  31. 31. Issues <ul><li>Audit Committees </li></ul><ul><li>Required to review various legal requirements with the management. </li></ul><ul><li>Required to ensure adequacy of internal control systems </li></ul><ul><li>Efficacy? </li></ul><ul><ul><li>Chairman of Enron’s audit committee was a Stanford professor with 30 years experience in auditing and accounts </li></ul></ul><ul><ul><li>Requirement of financial literacy only just been introduced </li></ul></ul><ul><ul><li>Is remuneration of members an issue? </li></ul></ul>
  32. 32. Conclusion <ul><li>Good corporate governance – means to the end of sustainable wealth creation </li></ul><ul><li>The positive side of adherence to most rigorous standards in governance for corporations: </li></ul><ul><ul><ul><li>Increased importance of corporate governance as an investment criteria among large investors </li></ul></ul></ul><ul><ul><ul><li>Improved Equity Price Performance </li></ul></ul></ul><ul><ul><ul><li>Higher Valuations </li></ul></ul></ul><ul><ul><ul><li>Access to global markets </li></ul></ul></ul><ul><ul><ul><li>Increased investor goodwill & confidence </li></ul></ul></ul><ul><li>Balance between ‘enterprise’ and ‘constraints’ </li></ul>
  33. 33. Our Contact Details <ul><li>Luthra & Luthra Law Offices </li></ul><ul><li>Mumbai Office Delhi Office </li></ul><ul><li>704-706, 7 th Floor, 103, Ashoka Estate, </li></ul><ul><li>Embassy Center, Nariman Point, 24, Barakhamba Road, </li></ul><ul><li>Mumbai – 400 021 New Delhi - 110 001. </li></ul><ul><li>Tel : (91) (22) 5630 3600 Tel: (91) (11) 51215100 </li></ul><ul><li>Fax: (91) (22) 2287 3700 Fax: (91) (11) 2372 3909 </li></ul><ul><li>Email - msaraf @ luthra .com </li></ul><ul><li>Mobile: 9810266448 </li></ul>

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