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Corporate Governance - Initiatives and Accountability


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I gave a lecture at ICSI on GOVERNANCE - Initiative and Accountability.
I believe that Corporates are expected to use their Capacity, Knowledge and Resources towards Maximization of stakeholders' value and well-being and progress of humankind.

There are four parts of this presentation-
1. Strengthening Board Framework
2. Stakeholder Interest Protection
3. Transparency and Disclosure
4. Impact of Change

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Corporate Governance - Initiatives and Accountability

  1. 1. “NOWHERE” “Governance Initiatives & Accountability” 12/28/2013
  2. 2. Satyam Vada Dharmam Chara - Taittariya Upanishad 12/28/2013
  3. 3. “Forever speak the truth and follow the dharma” 12/28/2013
  4. 4. Truth : Disclosure of Actual State of Affairs (Transparency in operations and transactions) 12/28/2013
  5. 5. Dharma: “ Dharma is for the stability of society, the maintenance of social order and the general well being and progress of humankind.” -Karan Parva of the Mahabharata. Verse -58 in Chapter 69 12/28/2013
  6. 6. Corporates are also expected to use their Capacity, Knowledge and Resources TOWARDS Dharma Maximization of stakeholders’ value and well-being and progress of humankind THROUGH Truth Transparency, accountability and truthful disclosure of state of affairs 12/28/2013
  7. 7. Outline Part - A Strengthening Broad Framework Part - B Stakeholder Interest Protection Part - C Transparency and Disclosure Part - D Impact of Change 12/28/2013
  8. 8. Novelties Corporate Social Responsibility Auditing standards Secretarial Audit Related party Fraud Special courts & Conciliation panel Securities Code for ID’s KMP Listed Company Secretarial Standards 12/28/2013
  9. 9. Part - A Strengthening Board Framework 12/28/2013
  10. 10. Board of Directors and its Meeting 12/28/2013
  11. 11. Audit and Auditors Sec 141 Board Composition Audit and Auditors - Sec 143 Woman Director Resident Director 12/28/2013 Independent Director (ID) Small Shareholder Director
  12. 12. Audit and Auditors Sec 141 Bird’s eye view to Provisions Audit and Auditors - Sec 143 Candidate failed to be appointed as director by member shall not be appointed as Additional Director Alternate Director shall be appointed only if the original director is out of India for not less than 3 months Concept of Independent director introduced for the first time in Companies Act, 2013 Resigning Director shall be liable for the acts done by him during his tenure Nomination of Director by member has been made Costlier Rubber Stamp Directors: Absence in meeting for a consecutive Period of 12 months shall made his Office vacant. 12/28/2013
  13. 13. Directorship of directors –Section 165 Director in maximum 20 companies including Alternate Directorship Public Companies or Subsidiaries of Public Companies Maximum 10 No. of Directorships can be reduced by passing special resolution by members 12/28/2013
  14. 14. Meeting of Board –Section 173  Notice to be sent to all the directors, through electronic means or others  Board of Directors may participate through video conferencing  Presence of at least 1 ID required in the meeting called at shorter notice.  Else decision to be circulated to all the directors and to be valid only after ratification by at least one ID 12/28/2013
  15. 15. Meeting through Video Conferencing  Participation in meeting through video conferencing allowed  Confirmation of accuracy of draft minutes by every directors who attended meeting within 7 days of receipt of draft minutes Matters not to be dealt in meeting through video conferencing  To approve the annual financial statements; and  To approve the board’s report 12/28/2013
  16. 16. Quorum for Board Meeting –Section 174  Insufficient quorum shall now be not allowed as compliance a with Board meeting 12/28/2013 defense for frequency non of
  17. 17. Quorum for Board Meeting in case of Interested Director  Board Meeting where “Interested Director” ≥ 2/3 of the total strength of the Board of Directors Quorum = non interested Directors present at the meeting, being not less than 2 12/28/2013
  18. 18. New and Mandatory Committees 12/28/2013
  19. 19. Audit Committee –Section 177  In Every Listed Company  Public Company  Paid up capital of INR 100 Crores or more or;  Deposits / Loans / Debentures exceeding INR 200 Crores or more  Composition:- Min 3 directors with majority of ID  Provision of establishment of vigil mechanism 1 year transition period for constitution / reconstitution of Audit committee 12/28/2013
  20. 20. Nomination and Remuneration Committee –Section 178  In Every Listed Company  Public Company  Paid up capital of INR 100 Crores or more or;  Deposits / Loans / Debentures exceeding INR 200 Crores or more  Composition:- Min 3 Non executive directors. ≥ ½ comprising IDs.  Mandate of the Committee:• Identification of qualified Directors and senior management personnel • • 12/28/2013 Performance evaluation of directors Recommend to the Board policy for remuneration of Directors, KMPs and other employees
  21. 21. Stakeholders Relationship Committee –Section 178  In Every Company having more that 1,000 debenture / deposit / security holders.  Composition:- to be decided by BoD. Chairperson to be an NED.  Mandate of the Committee:• Consider and resolve the grievances of Securities holders. 12/28/2013
  22. 22. Appointment and Qualification of Directors 12/28/2013
  23. 23. Audit and Auditors Sec 141 Independent Director Sec 149 & 150 Audit and Auditors - Sec 143 Applicability • Every Listed Company to have at least 1/3 of board consisting of independent directors • Prescribed classes of unlisted Companies also to have independent directors on its board Term • Can be Appointed for a term of 5 years in 1st Instance • Can be re-Appointed for another term of 5 years • Cooling off period of 3 years for after 2 consecutive terms 12/28/2013 Criteria • Criteria for independence similar to existing clause 49 of LA • Nominee director not considered as independent • Independent director to furnish declaration of independence on yearly basis Others • No Stock Option • Separate meeting of ID • Appointment to be approved at a general meeting with explanatory statement justifying appointment • Liability only in respect of omission & commission with the knowledge of ID For the first time code of conduct prescribed for Independent Directors (Schedule IV)
  24. 24. Enhanced Duties, Responsibilities 12/28/2013
  25. 25. Duties of Director –Section 166 To act in accordance with the company’s Articles To act in good faith in order to promote the objects of the company Exercise his duties with due and reasonable care, skill and diligence. Not to have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. Director shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates. Shall not assign his office and any assignment so made shall be void 12/28/2013
  26. 26. Powers of Board 12/28/2013
  27. 27. Matters to be considered only at meeting of the Board  Following powers shall be exercised by the Board only at their meeting:• Issue of Securities – Equity, Preference, Debentures • Give guarantee or provide security in respect of loans • Approve financial statements and Director’s report • • To fill a casual vacancy in the board • To commence a new business • 12/28/2013 To make political contribution To appoint internal auditor
  28. 28. Restrictions on powers of Board 12/28/2013
  29. 29. Restrictions on powers of Board –Section 180 (Notified)  Restriction for sale of undertaking applicable to all classes of companies  Term “Undertaking” and “Substantial Undertaking” has now been defined  Borrowing in excess of the paid –up capital & free reserves A special resolution is required to be passed resolution 12/28/2013 instead of Ordinary
  30. 30. Restrictions on Non-Cash Transactions - Section 192 (Notified)  Director of a company or of its holding/ subsidiary/Associate company or any connected person can not acquire assets for consideration other than cash from the company & vice versa.  Approval at a general meeting is required  If the Director or connected person is director of holding company then approval of holding company in general meeting is also required  Valuation of the assets by registered valuer 12/28/2013
  31. 31. Prohibition on Forward Dealing / Insider Trading - Section 194 (Notified)  Forward dealing in the shares and debentures of a company, its holding, subsidiary or associate by Directors and KMPs is prohibited  Banned contracts include both forward contracts and option contracts  Securities acquired in violation to be surrendered to company  Restriction on Directors, KMP and any order person for indulging in Insider trading  Communication required in ordinary course of exempted 12/28/2013 business or under law
  32. 32. Appointment and Removal of Managerial Personnel 12/28/2013
  33. 33. Definitions Key Managerial Personnel -2(51) (Notified) CEO OR Managing Director OR Whole time Director + Company Secretary + CFO 12/28/2013 OR Manager
  34. 34. Appointment of MD/WTD/Manager - Section 196 & 203 • Now applicable to Private Company also • Minimum age 21 years (25 years) and maximum 70 years • Notice of BM/GM – T&C of appointment, remuneration and other matters to be included • Consent for appointment to be filed by directors of private company to the ROC 12/28/2013
  35. 35. Appointment of KMP • KMP not to hold office in > 1 Company except in Subsidiary Company at the same time  KMP can be director with permission of BOD • KMP vacancy to be filled up by BOD within 6 months at BM • To appoint or remove managerial personnel 12/28/2013 any key
  36. 36. Vacation of office of directors –Section 167  When Director fails to attend all Board Meetings for consecutive period of 12 months. This even when the leave of absence has been granted  When Director is disqualified by an order of court or Tribunal under any Act not only the Companies Act.  When all directors have vacated the office:  the promoter shall appoint minimum number of members  Central Directors Government till may appoint company makes appointment in General Meeting 12/28/2013
  37. 37. Part - B Stakeholder Interest Protection 12/28/2013
  38. 38. Prospectus & Allotment of Securities 12/28/2013
  39. 39. Public Issues Liability for Mis-statements Liability Mis-statement Civil - Sec 34 Untrue Statement Misleading Statement Compensate those who have suffered loss or damage Civil Liability for Mis-statements 12/28/2013 Criminal -Sec 35 Min 6 mths Max 10 Yrs Min Amt Involved Max 3x Amt Involved Withdrawal of consent after issue but before allotment now not a defense In case of a fraud every person involved personally liable without limitation of liability
  40. 40. Public Issues Impersonation – Sec 38 (Notified) Impersonation Fictitious Name Multiple Applications Different Names Different Combination Consequences:• For the first time, provisions introduced for disgorgement of gains made by convicted • Amount received from disgorgement of gains to be credited to IEPF 12/28/2013
  41. 41. Public Issues Fraudulent Inducement for Investing money -Sec 36 (N) • Scope of section extended to obtaining credit facilities from banks or financial institutions • The offence made non compoundable • Stringent punishment prescribed under section 447 Allotment of Securities – Sec 39 (Partially Notified) • Return of allotment to be filed for issue of any kind of security • Power given to SEBI to modify the minimum amount to be paid on application which shall not be less that 5% of the nominal amount • Minimum subscription to be received in 30 days as against earlier 120 days. Power to SEBI to modify the same 12/28/2013
  42. 42. Public Issues Variation in terms of Contracts or Objects – Sec 27 Its easy pass a ordinary resolution in general meeting I want to change the terms of contracts referred to in prospectus or objects of the Issue ? Its no longer easy Revised Process Approval of members by Special Resolution 12/28/2013 Notice of GM to be published in newspapers giving justification for variation Dissenting Shareholders to be given an exit offer by promoters/ controlling shareholders Amount raised in IPO cannot be used for buying, trading or dealing in equity shares of another listed Company
  43. 43. Acceptance of deposits 12/28/2013
  44. 44. Public Deposits – Tougher… Section 73 Accepting Deposits Repayment • All companies can accept deposits only from members (Directors & their relatives excluded) • All the outstanding deposits on commencement of the Act have to be repaid within 1 year from date of maturity or 1 year from commencement if already matured • Prior approval of members required for Conditions accepting deposits • Deposit to be invited by issue of circular to • Only prescribed classes of companies having members • Where deposits are unsecured it has to be specifically quoted in every document inviting deposit net worth of INR100 crore or turnover of INR 500 crore are allowed to raise deposits from public • Credit rating of deposits compulsory Accepting deposit from public no longer easy. Strict requirements to ensure protection of depositor’s interests 12/28/2013 • Compulsory creation of charge on the assets of the company within 30 days of acceptance, if deposits are secured
  45. 45. Management & Administration 12/28/2013
  46. 46. Quorum of General Meeting – Sec 103 (Notified) Quorum (Members to be personally present) in pub co No. of members on the day of meeting 5 ≤ 1000 15 > 1000 ≤ 5000 30 > 5000 3 days notice (either individually or in newspaper), in case of adjournment of GM due to lack of quorum or change in day, time or place of adjourned meeting  Single person not to be proxy for more than 50 members  Proxy cannot vote by show of hands  Member of Private Limited company cannot appoint more than 1 proxy to attend on same occasion 12/28/2013
  47. 47. Unpaid Dividend & Shares - IEPF 12/28/2013
  48. 48. Unpaid Dividends - Sec 124  Information relating to unclaimed dividends to be uploaded on the website of the company and CG within 90 days of transfer to unpaid dividend account  Along with the unclaimed amounts, the shares in respect to which they relate are to transferred to IEPF  The claimants can now apply to IEPF for claiming unpaid amounts/share due/belonging to them  Shares transferred to IEPF shall not have voting rights- Draft Rules 12/28/2013
  49. 49. Introduction to CSR 12/28/2013
  50. 50. CSR – Sec 135   Turnover ≥ 1000 Crs or   Networth ≥ 500 Crs or Net Profits ≥ 5 Crs CSR spend of at least 2% of avg. net profits made during 3 immediately preceding FYs COMPLY OR EXPLAIN 12/28/2013  Committee shall formulate and recommend CSR policy and amount of expenditure as well as monitor CSR activities (CSR policy on web) Preference to local areas in which the company operates  To promote welfare Initiatives CSR Committee to be constituted (3+ Dir incl. at least 1 ID)    Areas specified in Schedule VII
  51. 51. CSR – Promoting Welfare Initiatives • Applicable to all types of companies including private companies • Net profits before tax to be considered • Applicable from F/Y 14-15 • Income tax Act does not provide any deduction so far • Surplus Income generated out of CSR activities not part of business profits of company • No penalty for noncompliance of the provision 12/28/2013
  52. 52. CSR – Promoting Welfare Initiatives • CSR Activities to be undertaken as projects or programmes • Excluding activities undertaken in pursuance of the normal course of business of a company • In the area nearby the operations of the company • May implement the same through trust/society set up by company or otherwise having track record of three years • Activities to be undertaken within India • Activities not exclusively for the benefit of employees or their family members • Nature of projects/programmes to be covered for eradicating extreme hunger and Poverty, for promotion of education…..etc as given in schedule VII 12/28/2013
  53. 53. Prevention of Oppression and Mismanagement 12/28/2013
  54. 54. Class Action Suit –Section 245 Who Can File • 100 Members or 10% of the total number of members or depositors (whichever is less) Where to File • NCLT Why to File • To protect the interest of minority shareholders Against Whom • Company or its Auditors, Experts, Advisors or Consultants 12/28/2013
  55. 55. Part - C Transparency and Disclosures 12/28/2013
  56. 56. Transparency and Disclosures 12/28/2013
  57. 57. Annual Return – Section 92 Additional information required to be provided in Annual Return Principal business activity with particulars of holding, subsidiary and associate company Info up to FY closure only Details about other securities issued by company Details of Foreign Institutional Investors if shares held by them or on their behalf Remuneration of Directors and KMP Details of Promoters/KMP along with changes since closure of last FY 12/28/2013 Details of meetings of members/class thereof/BOD/various committee along with attendance details Details related to certification of compliance, disclosures, etc Such other matters as may be prescribed Details of penalties/punishment on Co/ directors/ officers/ compounding of offence/ appeals
  58. 58. Return to be filed with Registrar in case Promoter’s stake changes – Sec 93 Listed company to file Return in prescribed form with RoC within 15 days in case of change in number of shares held by the Promoters or top 10 shareholders 12/28/2013
  59. 59. General Meeting – Sec 100 (Notified)  OPC not required to hold AGM  First AGM to be held within 9 months from closure of first FY  AGM to be held on between business hours i.e. 9 AM to 6 PM  Notice of GM may be sent through electronic mode  To be sent to all Directors  21 clear days notice to be given  In case of AGM Shorter notice can be given by consent of 95% of members who are entitled to vote (like for EGM)  Secretarial Standards mandated  Report of AGM, prepared in prescribed manner, to be filed with RoC 12/28/2013
  60. 60. Statement to be annexed with Notice – Sec 102 (Notified) Explanatory Statement in case of special business to specify Liability in case of non-disclosure or insufficient disclosure in Explanatory Statement Nondisclosure /insufficient disclosure Nature of interest/ concern Financial Interest Director and Manager Other Interest KMP Relatives Explanatory statement to specify shareholding % of Promoters/directors/manager/KMP whose shareholding is not less than 2% of paid up capital, incase the special business transacted is to affect other Company 12/28/2013 Benefit Promoter Profit Director and Manager KMP Liable to compensate to Company to the extent of such profit/benefit Default in sending or providing disclosure in explanatory statement shall attract fine extending up to Rs. 50000 or 5 times of profit or benefit, whichever is more
  61. 61. Accounts of Company 12/28/2013
  62. 62. Consolidation of Accounts – Sec 129  Mandatory consolidation of accounts in case of subsidiary, Associate and Joint Venture  Every company to place separate audited accounts for each subsidiary on its website, if any Subsidiary to include associates and joint ventures 12/28/2013
  63. 63. Audit and Auditors 12/28/2013
  64. 64. Definitions Financial Statement – Section 2(40) (Notified) Includes Balance Sheet 12/28/2013 Profit & Loss Account Cashflow Statement Statement of changes in Equity explanatory notes
  65. 65. Definitions Financial Year – Section 2(41) Incorporated before 1st Jan Yes 31st March of Current Year • • No 31st March of next Year Transition period of 2 years for existing Cos Cos having foreign holding or subsidiary cos can follow different year with prior approval of tribunal 12/28/2013
  66. 66. Audit and Auditors Appointment of Auditor – Sec 139  Every Company to appoint auditor for a term of 5 years provided the same shall be ratified by members at every AGM  Listed company shall not appoint or re-appoint individual or firm as a auditor for more than 5 or 10 consecutive years respectively  Rotation of audit partner & team at such intervals as may be prescribed  Cooling period for re-appointment as auditor is 5 years  Transition period of 3 years provided from commencement of the Act  Special resolution required for appointing auditor other than the retiring auditor or not reappointing auditor  Company to intimate RoC and Auditor within 15 days of the appointment 12/28/2013 Rotation of auditors including audit firms is being considered for introduction in EU, US, UK and Malaysia.
  67. 67. Restrictions for the Auditors – Section 144 Restriction for the auditors to undertake following specialized services by himself or his subsidiary or associate company or any other form of entity Accounting and book keeping services Internal Audit Investment advisory services Actuarial services Rendering of outsourced financial services Design and implementation of any financial information system Investment banking services Whether following services may be undertaken ? o Tax consultancy and representation o Project 12/28/2013 financing assignment o Restructuring assignment Management services
  68. 68. Mandatory Internal Audit – Section 138 Every Listed Company Every public company having paid-share capital of Rs. 10 crores or more Any other public company having borrowings from banks/financial institutions/ deposits of Rs. 25 crores or more 12/28/2013
  69. 69. Inter Group Financing 12/28/2013
  70. 70. Loan to Directors & persons in whom director is interested – Section 185 (Notified)  No Company can give loan/ security/ guarantee in favour of • Directors • Any person in whom director is interested  Now also applicable to private Companies  There is no facility of seeking approval of Central Government 12/28/2013
  71. 71. Related Party Transactions 12/28/2013
  72. 72. Definitions Related Party – Section 2 (76) (Notified) Company Director or his Relative KMP or his Relative Holding Company Subsidiary & Associate Fellow Subsidiaries Director, manager or his Relative Partnership Firm in which partner Private Company in which member or director Public Company in which member or director Body Corporate Advised Directed or instructed Related Parties under various legislations 12/28/2013 Person who Advises Directs or instructs
  73. 73. Related Party Transactions – Section 188  Prior approval of CG for any RPT or appointment to any office or place or profit NOT required  Transaction related to any kind of property are also covered  Exemption granted to transactions in ordinary course of business made at arm’s length price  Member who is a related party shall not vote on the resolution 12/28/2013
  74. 74. Related Party Transactions  Transactions to be Approval by Special Resolution :  RPTs for companies having paid up capital of 1crore rupees; or  If Transaction exceeds 5% of annual turnover or 20% of net worth of company which ever is higher; or  Transaction relates to appointment to any office or place of profit at a monthly remuneration exceeding 1 lakh rupees; or  Remuneration of underwriting of subscription exceeding 10 lakh rupees. 12/28/2013
  75. 75. Disclosures of related party transaction  Disclosure in explanatory statement to be annexed to the notice  name of the related party ;  name of the director or key managerial personnel who is related, if any;  nature of relationship;  nature, material terms, monetary value and particulars of the contract or arrangement;  any other information relevant or important for the members to take a decision on the proposed resolution.  Every RPT shall be reported in the Board’s Report along with justification for entering into the same 12/28/2013
  76. 76. Secretarial Audit 12/28/2013
  77. 77. Secretarial Audit – Sec 204 Secretarial Audit Listed Company • • • • & Public Co. having paid-up capital of Rs. 100 Crore or more Audit to be conducted by a Practising Company Secretary Audit of secretarial and related records Secretarial Audit Report to form a part of Board Report BOD to explain in full any qualification or observation or other remarks made in the report Same Powers & Duties as of Statutory Auditor 12/28/2013
  78. 78. Fraud and Penal Provisions 12/28/2013
  79. 79. Fraud – Section 447 (Notified) Fraud Act Omission Concealment of fact Abuse of position With intent to Deceive Gain undue advantage from Injure Interests of Company Shareholders Creditors Whether or not there is Wrongful gain 12/28/2013 Wrongful loss Any other person
  80. 80. Fraud “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled. All offenses covered u/s 447 cognizable and non bailable unless excepted Punishment Min 6 mths Max 10 Yrs 12/28/2013 Min Amt Involved Max 3x Amt Involved
  81. 81. Investigation into the affairs of the Company by SFIO – Section 212 Powers Receipt of Report from Registrar/ Inspector u/s 208 Special Resolution for investigating the affairs of the company Public Interest Request from any department of Central Govt or State Govt  Search and Seizure  Power to Arrest may order Central Govt Serious Fraud Investigation Office may direct SFIO to initiate prosecution against the company & officer Investigation officer will investigate the affairs of the company Investigation Report • SFIO commands authority over other Investigation Agencies of CG/State Govt • SIFO to provide copy of Investigation Report to other agencies who were carrying out investigation 12/28/2013
  82. 82. Acts punishable as Frauds Particulars Section Furnishing any false or incorrect particulars of any information or suppression any material information in relation to incorporation 7(5),(6) Fraudulent conduct of affairs of a charitable company 8(11) Untrue or misleading statement in prospectus 34 (N) Fraudulently inducing persons to invest money 36 (N) Personation for acquisition, etc., of securities 38(1) (N) Issue of duplicate certificate of shares with an intent to defraud 46(5) Transfer of shares by depository or depository participant, with an intention to defraud 56(7) Furnishing False statement, mutilation, destruction of documents statement during inspection, inquiry or investigation 229 Fraudulent application for removal of name 251(1) Fraudulent conduct of business of Company being wound up 339(3) False statement or omission in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of this Act 448 (N) 12/28/2013
  83. 83. Part - D Impact of Change 12/28/2013
  84. 84. Impact of Change Quality of functioning company will increase of the Beginning of new era of Board Governance Enhanced responsibility w.r.t. disclosures and transparency Increase in trust of investors and stakeholders 12/28/2013
  85. 85. What we can do  Saam: Diplomacy of Corporation and Mutual Respect  Daam: Stay on budget  Spasht Kaam: Transparency / Ethics in work, operations and process  Satarkata: Vigilance  Vigyaan: Using the Technology to serve Clients  Paband: Time Commitment These are not the weapons, but the intention of its handler that counts 12/28/2013
  87. 87. Our Technological Move 12/28/2013
  88. 88. Thank You Pavan Kumar Vijay Corporate Professionals Group D-28, South Extension –I, New Delhi-110 049 Ph: +91.11.40622200; Fax: +91.11.40622201; E: 12/28/2013