Corporate governance and the role of professionals under the Companies Act, 2013- Dr S. Chandrasekaran - Article published in Business Advisor, dated July 25, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVI Part 2 July 25, 2016 7 Business Advisor
Corporate governance and the role of
professionals under the Companies Act,
2013
Dr S. Chandrasekaran
The term “Corporate Governance” (CG) has not been
defined but given different meaning by different
persons. CG is the system of rules, practices and
processes by which a company is controlled and
directed. It has to take into consideration the interest of
all stakeholders including shareholders, customers,
employees, regulators and above all the environment. It
started to gain momentum in early 2002 through the
Sarbanes Oxley Act of US. It was necessitated after the
accounting frauds in Enron and WorldCom.
Cadbury Report of the UK further highlighted that it is important not only to
earn profits in a company but also to reform the corporate sector through
environmental awareness and ethical behaviour.
The basic need for good CG is adequate disclosure in a transparent manner
of all transactions, taking responsibility for each and every action initiated,
and overall accountability. Corporate is nothing but run by individual mind
sets and unless the individuals who are at the helm of the affairs of the
management behave with utmost ethics and fairness in their approach and
decisions, the interest of all stakeholders would be in shambles.
Vital role of professionals in the management
The concept of control of the management by promoters and their friends
and relatives is slowly fading away with the involvement of professionals at
various levels to achieve better results with fairness in dealings and
Corporate governance is the system of rules, practices and
processes by which a company is controlled and directed.

2. Volume XVI Part 2 July 25, 2016 8 Business Advisor
behaviour. The association of independent directors in the Board room by
compulsion is also gaining momentum except in some of the Government-
controlled companies. The newly introduced provision in the Companies
Act, 2013 (the Act) of the duties of directors is an added feather to CG. The
Act, besides mandating independent directors with rich experience and
expertise in different fields in all listed companies and in certain class of
companies, also in one way or the other involves the association of
professionals such as chartered accountants, company secretaries and cost
accountants in corporate entities. All professionals are expected to play a
vital role is discharging their respective duties in the overall interest of all
stakeholders.
The Act has considered and introduced the following team of professionals
in different ways to strengthen CG:
a) Independent directors: The Securities and Exchange Board of India
(SEBI) introduced the concept of CG in listed companies with the
appointment of independent directors. The Board of listed companies with
executive chairman has to have at least one-third of the total strength of
Board members as independent directors, and listed companies with non-
executive chairman have to have at least half of the members of the Board
as independent directors. The Act extended the concept of appointment of
independent directors of public companies to have at least two directors
as independent directors as follows --
 Public companies having paid up share capital of ten crore rupees or
more; or
 Public companies having a turnover of one hundred crore rupees or more;
or
 Public companies which have, in aggregate, outstanding loans,
borrowings, debentures and deposits, exceeding fifty crore rupees.
b) Audit committee: The Act in line with the SEBI directives made it
compulsory to have independent directors in audit committee. The audit
committee shall consist of a minimum of three directors with independent
directors forming majority. To emphasise the involvement of
professionals, it is the requirement that the majority of audit committee
including the chairperson shall be persons with ability to read and
understand the financial statement.
There are changes in the preparation of financial statements, and
companies are to be ready to compile the financial statements as per the

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Companies (Indian Accounting Standards) Rules, 2015. Moreover,
companies having global investors are required to prepare the financials in
accordance with GAAP; GAAP guidelines require businesses to prepare
financial statements according to the matching principle using the accrual
basis of accounting and full disclosure requirements. This means financial
statements must include every piece of information an investor or lender
needs to evaluate the current financial condition of the business.
c) Establishment of vigil mechanism: Another important introduction in
the Act to protect the employees who are one of the main stakeholders for
every company is the establishment of a vigil mechanism. Companies
which accept deposits from the public and which have borrowed money
from banks and public financial institution in excess of fifty crores are
required to establish a vigil mechanism which would be overseen by the
audit committee; and in companies which are not required to appoint
independent directors, the Board of directors shall nominate a director to
play the role of audit committee for this purpose. The objective behind
such a move is to safeguard the interest of public money from any fraud
or otherwise within the organisation.
Audit mechanism: The Act in order to strengthen the CG with more
disclosure, transparency, responsibility and accountability, provides for
different types of audit from professionals. The different types of audit are --
a) Statutory audit: The corporate financial results have to be true and fair
in all respects. It is not only to safeguard the investment of the
shareholders in the capital formation of the company but also to ensure
the proper deposit of all taxes with appropriate authorities on time. It is,
therefore, necessary that the statutory auditors have to be independent;
and, with the introduction of rotation of auditors, and restricting auditors
from rendering other non-audit assignments, the role of statutory
auditors is well recognised and this would pave way for good governance
in companies. Additionally, the introduction of a separate provision on
frauds and expecting auditors to report on any fraud on the company or
by the company are in the right direction to strengthen CG.
b) Internal audit: Another audit is on the functioning and activities of a
company. It has to be carried out by professionals, either a chartered
accountant or cost accountant or such other professional as may be
decided by the Board. The following class of companies shall be required
to appoint an internal auditor or a firm of internal auditors, namely:
 Every listed company;

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 Every unlisted public company having a paid up share capital of fifty
crore rupees or more; or turnover of two hundred crore rupees or more; or
outstanding borrowings of one hundred crore rupees or more at any point
of time during the financial year; or outstanding deposits of twenty five
crore rupees or more at any point of time during the financial year;
 Private companies with the above criteria other than paid up share
capital and deposits.
c) Secretarial audit: This is the extension of making compulsory what were
hitherto conducted by several Nifty, Government, public and private
companies and MNCs on a voluntary basis. The Act has made this
compulsory for all listed companies and public companies having either
paid up share capital of fifty crore rupees or more or having a turnover of
two hundred fifty crore rupees or more.
The main objective of secretarial audit is to ensure proper compliance
management not only with regard to the Act, SEBI provisions, and
Secretarial Standards, but also to extend compliance with various other
applicable laws to the company. Secretarial audit is to be conducted by a
practising company secretary and such an audit would ensure overall
compliance level which in other words would be good governance in the
company for the interest of all stakeholders. Unfortunately, such an audit is
not extended to private company with the same threshold. The shareholders
may not be many but stakeholders include the employees, customers,
regulators and environment and, therefore, extension of secretarial audit to
private companies with the same threshold would further improve
governance in those private companies. Moreover, when internal audit is
made applicable for private companies, it is further more important to have
compliance with all applicable laws in private companies.
Role of professional directors: As discussed above, the association of
professional directors in one way or the other is necessary in every
company. The Act has included the following for the directors to address to
the stakeholders, as an extended arm of CG --
a) Directors’ responsibility statement (DRS): The DRS in the earlier
Companies Act, 1956 has been further extended with two additions in the
new Act.
i) The directors, in the case of a listed company, had laid down internal
financial controls to be followed by the company and that such internal
financial controls are adequate and were operating effectively;

5. Volume XVI Part 2 July 25, 2016 11 Business Advisor
ii) The directors had devised proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate
and operating effectively.
b) Duties of directors: The Act also included a separate section, “duties of
directors”. Majority of the directors in the listed companies and above-
discussed class of companies are professionals and one of the duties in
line with CG is that “a director shall act in good faith in order to promote
the objects of the company for the benefit of its members as a whole, and
in the best interest of the company, its employees, the shareholders, the
community and for the protection of environment.”
c) Business responsibility report: The Act has not introduced the
requirement of business responsibility report to be prepared annually.
But SEBI has introduced and now modified that the top 500 listed
companies will now be required to prepare annual business responsibility
reports, covering their activities related to environment, stakeholders
relationships, governance and other areas. This is in order to improve CG
norms and to take care of socially responsible activities.
Conclusion
The Act has taken several measures to have good CG. The directors‟ role in
audit committee, different types of audit and, of course, DRS and duties of
directors all are to strengthen CG. But it is the mind set of all such
professionals who are involved in the different roles to extend their support
with professional ethics and standards. The professionals are to concentrate
not only on the maximisation of wealth to the shareholders but also take
care of all other stakeholders. The Act is just two years old from its
introduction and it is, therefore, important that to achieve the goals of good
governance, all professionals have to collectively play their vital role.
Some of the Chambers of Commerce, and the Institute of Company
Secretaries of India introduced corporate governance awards; yet, it will take
quite a long time to excel in that direction. It is also important that various
Acts, Rules, Regulations etc., have to be synchronised so that corporate is
not burdened with compliance with different procedures for different Acts.
The recent introduction of IRDA’s new guidelines on CG requiring
company secretary to be appointed as compliance officer on the same
lines of listing obligations and disclosure requirements is a welcome
move in this direction.
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi.)