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![pg. 3
d) Is not a partner or an executive or was not partner or an executive during the
preceding three years,of any of the following:
a. The Statutory audit firm or the internal audit firm that is associated with the
company, and
b. The legal firm(s) and consulting firm(s) that have a material association with
the company.
e) Is not a material supplier, service provider or customer or a lessor or lessee of the
company, whichmay affect independence of the director;
f) Does not a substantial shareholder of the company i.e. own two percent or more of
the block ofvoting rights (shares).
g) Is not less than 21 years of age.
SEPARATION OF ROLE OF CHAIRMAN AND CHIEF EXECUTIVE
In India there is no legal requirement contemplating separation of the role of chairman and
chief executive, however, separation of their roles will be instrumental in determining the
composition of the Board in terms of the Listing Agreement, depending upon executive or
non-executive chairman.
The Listing Agreement provides that a non-executive Chairman may be entitled to maintain
a Chairman'soffice at the company's expense and also allowed reimbursement of expenses
incurred in performance of his duties.
NUMBER OF DIRECTORSHIP
Section 165(I) of the Companies Act, 2013 stipulates that a person cannot hold office at the
same time as aDirector in more than twenty companies.Provided that the
maximumnumber of public companies in which a person can be appointed as a director
shall not exceed ten.
Subject to the provisions of sub-section (1), the members of a company may, by special
resolution, specify any lesser number of companies in which a director of the company may
act as directors.
However, in computing this number of fifteen Directorships, the Directorships of the
following will be omitted:
a) private companies [other than subsidiaries or holding companies of public
company(ies)];
b) unlimited companies;
c) associations, not carrying on business for profit or, which prohibit payment of a
dividend;
d) Alternate directorships, (i.e. he is appointed to act as a Director, only during the
absence orincapacity of some other director).
In terms of the Listing Agreement, a director shall not be a member in more than ten
committees or act asChairman of more than five committees across all companies in which
he is a director.
For the purpose of considering the limit of the committees on which a director can serve,
all public limitedcompanies, whether listed or not, shall be included and all other](https://image.slidesharecdn.com/projectreportcorporategovernance-160415073017/85/Project-report-corporate-governance-4-320.jpg)
![pg. 5
BOARD MEETING
As per Section 173 of the Companies Act, 2013, in every company, a meeting of its Board of
directors shouldbe held at least once in every three months and at least four such meetings
shall be held in every year.Notice of every meeting of the Board of directors of a company
should be given in writing to every director forthe time being in India, and at his usual
address in India to every other director.
The quorum for a meeting of the Board of directors of a company shall be one-third of its
total strength (anyfraction contained in that one-third being rounded off as one), or two
directors, whichever is higher.
Provided that where at any time the number of interested directors exceeds or is equal to
two-thirds of thetotal strength, the number of the remaining directors, that is to say, the
number of the directors who are notinterested [present at the meeting being not less than
two], shall be the quorum during such time.
Clause 49 of the Listing Agreement requires that the Board shall meet at least four times a
year, with amaximum gap of four months between any two meetings. It also specifies the
minimum information which is to be made available to the Board.
POWER OF THE BOARD
In terms section 179 Companies Act, 2013;
(1) ofProvided further that the Board shall not exercise any power or do any act or
thing which is directed or required, whether under this Act or by the memorandum
or articles of the company or otherwise, to be exercised or done by the company in
general meeting.
(2) No regulation made by the company in general meeting shall invalidate any prior act
of the Board which would have been valid if that regulation had not been made.
(3) The Board of Directors of a company shall exercise the following powers on behalfof
the company by means of resolutions passed at meetings of the Board, namely:
a) to make calls on shareholders in respect of money unpaid on their shares;
b) to authorize buy-back of securities under section 68;
c) to issue securities, including debentures, whether in or outside India;
d) to borrow monies;
e) to invest the funds of the company;
f) to grant loans or give guarantee or provide security in respect of loans;
g) to approve financial statement and the Board’s report;
h) to diversify the business of the company;
i) to approve amalgamation, merger or reconstruction;
j) to take over a company or acquire a controlling or substantial stake in
another company;
k) any other matter which may be prescribed:
Provided that the Board may, by a resolution passed at a meeting, delegate to any
committee of directors, the managing director, the manager or any other principal officer of
the company or in the case of a branch office of the company, the principal officer of the
branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify:](https://image.slidesharecdn.com/projectreportcorporategovernance-160415073017/85/Project-report-corporate-governance-6-320.jpg)
![pg. 31
In terms of Section 96, every company including One Person Company shall in each year
hold in addition to any other meetings a generalmeeting as its annual general meeting and
shall specify the meeting as such in the notices calling it; and notmore than fifteen months
shall elapse between the date of one annual general meeting of a company and that of the
next.
Power and duty to acquire shares of shareholders dissenting from scheme or
contract approved by majority;
Where a scheme or contract involving the transfer of shares or its class in a company to
another companyhas, within four months after the making of the offer in that behalf by the
transferee company, been approved by the holders of not less than nine-tenths in value of
the shares whose transfer is involved, the transfereecompany may, at any time within two
months after the expiry of the said four months, give notice to anydissenting shareholder,
that it desires to acquire his shares; and when such a notice is given, the
transfereecompany shall, unless, on an application made by the dissenting shareholder
within one month from the dateon which the notice was given, unless the CLB/Tribunal
thinks fit to order otherwise, be entitled and bound to acquire those shares. "Dissenting
shareholder" includes a shareholder who has not assented to the scheme or contract and
anyshareholder who has failed or refused to transfer his shares to the transferee company
in accordance withthe scheme or contract;
Application to Tribunal* for relief in case of oppression;
Any member of a company who complain that the affairs of the company are being
conducted in a mannerprejudicial to public interest or in a manner oppressive to any
member or members may apply to the Tribunalfor an order.
If the Tribunal is of opinion that the company's affairs are being conducted in a manner
prejudicial to publicinterest or in a manner oppressive to any member or members; and
that to wind up the company wouldunfairly prejudice such member or members but that
otherwise the facts would justify the making of awinding up order on the ground that it
was just and equitable that the company should be wound up; Tribunal may, with a view to
bringing to an end the matters complained of, make such order as it thinks fit.
Application to Tribunal* for relief in cases of mismanagement;
Any members of a company who complain that the affairs of the company are being
conducted in a mannerprejudicial to public interest or to the interests of the company; or
that a material change of the company hastaken place in the management or control of the
company, whether by an alteration in its Board of directorsor manager or in the ownership
of the company's shares, and that by reason of such change, it is likely thatthe affairs of the
company [will be conducted in a manner prejudicial to public interest or] in a
mannerprejudicial to the interests of the company; may apply to the Tribunal for an order.
If Tribunal is of opinion that the affairs of the company are being conducted as aforesaid
the Tribunal may,with a view to bringing to an end or preventing the matters complained
of, make such order as it thinks fit.
The following persons have a right to apply under the above sections:
(i) in the case of a company having a share capital, not less than one hundred members of
the company or not less than one-tenth of the total number of its members, whichever is
less, or anymember or members holding not less than one-tenth of the issued share capital](https://image.slidesharecdn.com/projectreportcorporategovernance-160415073017/85/Project-report-corporate-governance-32-320.jpg)
![pg. 39
of the contract. He has to abstain himself from the discussion on the resolution
[Section300].
Section 299 of the Companies Act, 2013 imposes a specific duty on every director to
disclose his interest tothe full Board.
Since the Board may be a varying body, the section requires a fresh notice of disclosure to
be given at theend of each financial year. By virtue of section 283(1)(i) of the Companies
Act, 2013, if a director acts incontravention of this provision, his office will ipso facto
become vacated. Further, there is also penalty payable. The provisions are founded on the
principle that a director is precluded from dealing on behalf ofthe company as himself and
from entering into engagements in which he has a personal interest conflicting or which
possibly may conflict with the interest of those with whom he is bound by fiduciary duty. A
directoroccupies a fiduciary position in relation to a company and he must act bona fide in
the interest of thecompany. If a director makes a contract with the company and does not
disclose his interest, he will becommitting breach of trust, YashovardhanSaboo v. Groz-
BeckertSaboo Ltd., (1995) 83 Com Cases 371 atp.413 (CLB).
The section is so worded that any conflict of personal interest of the director with his
duties to the companyas its director will have to be disclosed. To emphasize this point, the
relevant sub-section 299 is reproduced below:
“Disclosure of interest by director—(1) Every director of a company who is in any way,
whether directly or indirectly, concerned or interested in a contract or arrangement, or
proposed contract or arrangement, entered into or to be entered into, by or on behalf of the
company, shall disclose the nature of his concern or interest at a meeting of the Board of
directors”Non-compliance with section does not, however, avoid or invalidate the
transaction; but will make it voidable at the option of the company.
Further, Board of Directors are responsible for ensuring that their total shareholding in the
other company with which there is any contract or arrangement does not exceed two
percent of the paid-up capital of the other company. In such a case, i.e., where any of the
directors of the company or two or more of them collectively held not more than two
percent of the paid-up share capital in the other company, the duty of disclosure does not
apply.
Role of independent Auditors
The OECD Guide to fight abusive related party transactions recommends that the external
auditor should beindependent, competent and qualified in order to provide an assurance to
the board and shareholders thatmaterial information concerning related party transactions
is fairly disclosed and alert them to any significant concerns with respect to internal
control. The policy framework should support this role effectively.
The Guide further elaborates that it is in the interests of market operators, regulators,
companies, and auditors themselves that auditors are of a high quality, and that
information on auditor quality is communicated to the market.
A management that knows that it will be questioned and heldresponsible for itsactions, is
always on its feet.
Disinterested shareholders’ approval](https://image.slidesharecdn.com/projectreportcorporategovernance-160415073017/85/Project-report-corporate-governance-40-320.jpg)
![pg. 45
Indian Scenario
Kumar Mangalam Birla Committee on Corporate Governance observed that:
(a) Institutional shareholders have acquired a large stake in equity share capital of listed
companies. In some of the listed companies they are the major shareholders and own
shares largely on behalf ofthe retail shareholders.
(b) They have a special responsibility given the weightage of their votes and have a bigger
role to play in corporate governance as retail investors look upon them for positive use of
their voting rights.
(c) The Institutional shareholders can effectively use their powers to influence the
standard of Corporate Governance.
Expectation of their role and recommendations
The committee therefore recommends that institutional shareholders should reflect the
following characteristics:
— Take active interest in the composition of board of Directors
— Be vigilant
— Maintain regular and systematic contact at senior level for exchange of views on
management, strategy, performance and quality of management
— Ensure that voting intentions are translated into practice
— Evaluate Corporate Governance performance of the company
Given the size of their shareholdings the power of the institutional investors cannot be
doubted. Hirschman, in his seminal work, identified the exercise of institutional power
within an ‘exit and voice’ framework, arguing that ‘dissatisfaction [may be expressed]
directly to management’, the voice option, or by selling theshareholding, the exit option.
The latter choice is not viable for many institutional investors given the size oftheir
holdings or a policy of holding a balanced portfolio.
The Combined Code (2008) had also stated the following principles of good governance for
the InstitutionalShareholders
(a) Dialogue with companies
Institutional shareholders should enter into a dialogue with companies based on the
mutualunderstanding of objectives.
(b) Evaluation of governance disclosures
When evaluating companies’ governance arrangements, particularly those relating to
board structure and composition, institutional Investors should give due weight to all
relevant factors drawn to theirattention.
(c) Shareholder voting
Institutional shareholders have a responsibility to make considered use of their votes.
FEW EXAMPLES
SATYAM FIASCO
On 16th December, Satyam Computer Services Limited (now Tech Mahindra) announced
its audacious planto acquire controlling interest in Maytas Infrastructure and Maytas
Properties for US$1.6 billion. The familyof RamalingaRaju had a large shareholding in these
two Maytas companies. The deal was cleared bySatyam’s board of directors which had
several reputed independent directors. The move was aimed attransferring over 60 billion](https://image.slidesharecdn.com/projectreportcorporategovernance-160415073017/85/Project-report-corporate-governance-46-320.jpg)
More Related Content
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Project report corporate governance
- 1. Project Report CORPORATE GOVERNANCE SUBMITTEDBY Pankaj Sharma
- 2. pg. 1 CORPORATE GOVERNANCE Introduction CorporateGovernance (CG) The heart of corporate governance is transparency, disclosure, accountability and integrity. Legal andRegulatory framework of corporate governance in India is mainly covered under the SEBI guidelines, ListingAgreement and Companies Act, 2013, however, it is not restricted to only SEBI Guidelines and theCompanies Act, 2013. A gamut of legislations like The Competition Act, the Consumer Protection laws, theLabour laws, the Environment laws, the Anti-Money Laundering Laws, etc. seeks to ensure good governancepractices among the corporates. It is to be borne in mind that mere legislation does not ensure good governance. Good governance flowsfrom ethical business practices even when there is no legislation. Corporate governance is not just a legalconcept but it is a governance concept, it is something which has to come from within. However, one cannothave abstract concepts applicable to corporates at large and there lies the need for a legislative framework. In Indian context, there is no single apex regulatory body which can be said to be the regulator of corporates but there exists a coordination mechanism among various functional regulators. For example, in India, we have different regulators for the following— — Corporates (MCA) — Capital Market and Stock Exchanges (SEBI) — Money Market and Banking (RBI) — Insurance – Life and Non-Life Insurance (IRDA) — Communication (TRAI) — Foreign business (FIPB/SIA) — Imports and Exports (FEMA, DGFT) — Intermediaries, Banking Companies and Insurance business (FIU-India) — Listed companies, Stock brokers (Stock Exchanges) — Professions (Professional Institutes like ICSI, ICAI, ICAI (CMA) etc.) The success of regulation rests on the intention and integrity of the regulator and the regulated. A common law system operates in India. Entities are incorporated as companies in terms of the Companies Act, 2013 and governed by the Companies Act, 2013 (as amended from time to time). The Companies Act is administered by the Ministry of Corporate Affairs.
- 3. pg. 2 The Securitiesand Exchange Board of India (SEBI) is the prime regulatory authority which regulates allaspects of securities market enforces the Securities Contracts (Regulation) Act including the stockexchanges. Companies that are listed on the stock exchanges are required to comply with the ListingAgreement. BOARD STRUCTURE AND SIZE The board structure in India is unitary. Section 149 of the Companies Act, 2013 stipulates that every Public Company shall have minimum threedirectors and in the case of a private company which is a subsidiary of a public companythe minimum number of directors stipulated is 2. Every company shall have a Board of Directors consisting of individuals as directors and shall have a maximum of fifteen directors. Provided further that such class or classes of companies as may be prescribed shall have at least one woman director. In case a companywishes to increase the number of directorship beyond fifteen, it would require the approval of the Shareholders by passing special resolution. The Listing Agreement does not stipulate on the size of the board. COMPOSITION OF BOARD Section 196 of the Companies Act, 2013 stipulates that every public company and a private company, whichis a subsidiary of a public company, must have a Managing Director or a whole-time Director, if the paid upshare capital is Rs.5 crores or more. IN TERMS OF CLAUSE 49 OF THE LISTING AGREEMENT (i) The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executivedirectors. (ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board shouldcomprise of independent directors and in case he is an executive director, at least half of the Boardshould comprise of independent directors."Provided that 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 one-halfof the Board of the company shall consist of independent directors."The expression ‘independent director’ shall mean a non-executive director of the company who: a) Apart from receiving director’s remuneration, does not have any material pecuniary relationships ortransactions with the company, its promoters, its directors, its senior management or its holdingcompany, its subsidiaries and associates which may affect independence of the director; b) Is not related to promoters or persons occupying management positions at the board level or at onelevel below the board; c) Has not been an executive of the company in the immediately preceding three financial years;
- 4. pg. 3 d) Isnot a partner or an executive or was not partner or an executive during the preceding three years,of any of the following: a. The Statutory audit firm or the internal audit firm that is associated with the company, and b. The legal firm(s) and consulting firm(s) that have a material association with the company. e) Is not a material supplier, service provider or customer or a lessor or lessee of the company, whichmay affect independence of the director; f) Does not a substantial shareholder of the company i.e. own two percent or more of the block ofvoting rights (shares). g) Is not less than 21 years of age. SEPARATION OF ROLE OF CHAIRMAN AND CHIEF EXECUTIVE In India there is no legal requirement contemplating separation of the role of chairman and chief executive, however, separation of their roles will be instrumental in determining the composition of the Board in terms of the Listing Agreement, depending upon executive or non-executive chairman. The Listing Agreement provides that a non-executive Chairman may be entitled to maintain a Chairman'soffice at the company's expense and also allowed reimbursement of expenses incurred in performance of his duties. NUMBER OF DIRECTORSHIP Section 165(I) of the Companies Act, 2013 stipulates that a person cannot hold office at the same time as aDirector in more than twenty companies.Provided that the maximumnumber of public companies in which a person can be appointed as a director shall not exceed ten. Subject to the provisions of sub-section (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors. However, in computing this number of fifteen Directorships, the Directorships of the following will be omitted: a) private companies [other than subsidiaries or holding companies of public company(ies)]; b) unlimited companies; c) associations, not carrying on business for profit or, which prohibit payment of a dividend; d) Alternate directorships, (i.e. he is appointed to act as a Director, only during the absence orincapacity of some other director). In terms of the Listing Agreement, a director shall not be a member in more than ten committees or act asChairman of more than five committees across all companies in which he is a director. For the purpose of considering the limit of the committees on which a director can serve, all public limitedcompanies, whether listed or not, shall be included and all other
- 5. pg. 4 companies includingprivate limitedcompanies, foreign companies and companies under Section 25 of the Companies Act shall be excluded. For the purpose of reckoning the limit under this sub-clause, Chairmanship/Membership of the AuditCommittee and the Shareholders Grievance Committee alone shall be considered.
- 6. pg. 5 BOARD MEETING Asper Section 173 of the Companies Act, 2013, in every company, a meeting of its Board of directors shouldbe held at least once in every three months and at least four such meetings shall be held in every year.Notice of every meeting of the Board of directors of a company should be given in writing to every director forthe time being in India, and at his usual address in India to every other director. The quorum for a meeting of the Board of directors of a company shall be one-third of its total strength (anyfraction contained in that one-third being rounded off as one), or two directors, whichever is higher. Provided that where at any time the number of interested directors exceeds or is equal to two-thirds of thetotal strength, the number of the remaining directors, that is to say, the number of the directors who are notinterested [present at the meeting being not less than two], shall be the quorum during such time. Clause 49 of the Listing Agreement requires that the Board shall meet at least four times a year, with amaximum gap of four months between any two meetings. It also specifies the minimum information which is to be made available to the Board. POWER OF THE BOARD In terms section 179 Companies Act, 2013; (1) ofProvided further that the Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. (2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. (3) The Board of Directors of a company shall exercise the following powers on behalfof the company by means of resolutions passed at meetings of the Board, namely: a) to make calls on shareholders in respect of money unpaid on their shares; b) to authorize buy-back of securities under section 68; c) to issue securities, including debentures, whether in or outside India; d) to borrow monies; e) to invest the funds of the company; f) to grant loans or give guarantee or provide security in respect of loans; g) to approve financial statement and the Board’s report; h) to diversify the business of the company; i) to approve amalgamation, merger or reconstruction; j) to take over a company or acquire a controlling or substantial stake in another company; k) any other matter which may be prescribed: Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify:
- 7. pg. 6 Provided furtherthat the acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies or, as the case may be, a makingof loans by a banking company within the meaning of this section. COMMITTEE Audit Committee A key element in the corporate governance process of any organization is its audit committee. Shareholders/Investors Grievance Committee: A board committee under the chairmanship of a non-executive director shall be formed to specifically lookinto the redressed of shareholder and investors complaints like transfer of shares, non-receipt of balancesheet, non-receipt of declared dividends etc. The number of meetings of the Shareholders/Investors Grievance Committee should be in accordance withthe exigencies of business requirements. The Listing Agreement recommends that a company constitute Remuneration/Compensation Committeealthough it is not mandatory. III. DISCLOSURE AND TRANSPARENCY 1. IN TERMS OF COMPANIES ACT, 2013 In terms of Companies Act, 2013 the aspect of disclosure and transparency spans over several sections. With the e-filing of forms with the Registrar of Companies, The Ministry of Corporate Affairs has put in placea mechanism that is imaginative, technologically savvy and stakeholder friendly. Through the application ofInformation Technology to the Government functioning in order to bring about Simple, Moral, Accountable,Responsive and Transparent (SMART) Governance, the MCA aims at moving from paper based to nearlypaperless environment. The filing that a company is required to make under the Companies Act includes: I. Company Registration All the forms required for the purpose of incorporating companies in India. II. Compliance Related Filing All the statutory filing of e-Forms, whether annually or event based is grouped under compliance related filingservices. The filing requirements include the following: (i) Annual returns by companies having share capital; Annual returns by companies not having share capital; (ii) Balance Sheet and Profit & Loss Account; Return of allotment including details of shares issued forconsideration other than cash; Return of buy back of securities, Return of deposits by the company whichhas accepted public deposits during the year; Return of
- 8. pg. 7 appointment ofManaging Director, whole time Director; Notice of appointment of auditor; Statutory report; Cost audit report. III. Change Services Change services cover matters in respect of Indian companies, especially those pertaining to any change inthe capital structure, increase in authorized capital, and increase in the number of members, the change ofsituation of registered office of the company and change of Directors, Manager and Secretary. Foreigncompanies are required to intimate the ROC about the changes in the charter statutes or any instrumentgoverning the company, changes in the registered office, principal place of business or the personsappointed as Director, Secretaries and authorized representatives. IV. Charge management Companies are required to file particulars for registration of charge created or modified and the satisfaction of charge with the concerned ROC. V. Investor Services An e-Form has been prescribed for complaints with respect to each company. The nature of complaint mayrelate to any of the following aspects: o Share/Dividend; o Debenture/Bond; o Fixed Deposits; o Miscellaneous. VI. Provisions Relating to Managerial Personnel This includes applications pertaining to the following: (a) Increase in the number of Directors (b) Appointment or reappointment of Managing Director (MD)/Whole time Director (WTD)/Manager (c) Fixing/increasing the remuneration or waiving off excess/overpayment to the concerned managingauthority (d) Payment of commission to Directors (e) Modification of the terms and conditions for the appointment of Managing Directors, Whole-time Directors and Non Rotational Director (f) Removing disqualification of directors. VII. Approval Services – Head Quarters Approval from MCA (Headquarters) is inter alia required in the following cases: (a) Exemption from attaching annual accounts of subsidiary(s), (b) Exemption or extension time for repayment of deposits, (c) Recognition as a Nidhi company, (d) Appointment of sole selling agent (e) Appointment of sole buying agent (f) Declaration of dividend out of reserves (g) Exemption from providing depreciation (h) Consent for holding office or place of profit (i) Providing loan or guarantee or security in connection with the loan to or by specified category ofpersons (j) Modification of the form and content of Balance Sheet and Profit and Loss Account (k) Appointment of Cost Auditor
- 9. pg. 8 VIII. ApprovalServices – Regional Director The approval of the Regional Director is required in respect of the following matters: (a) Issue of license under Section 25 to an existing company. (b) Issue of license under Section 25 to a new association. (d) Rectification of name of company. (e) Appointment/Removal of auditor. (f) Shifting of registered office of the company from the jurisdiction of one ROC to another within thesame State. (g) Opening of new branches by a Nidhi Company. IX. Approval Services – ROCs ROCs are empowered to accord approval, or to give any direction in relation to the matters pertaining to thechange of name of an existing company and the conversion of a public company into private company. Inaddition, ROC approval is required in following cases: (a) Extension of time period for holding AGM (b) Holding AGM at place other than registered address (c) Declaring of company as defunct (d) Extension of the period of annual accounts (e) Amalgamation of companies (f) Compounding of offences X. Informational Services Informational services cover those forms, which are to be filed with ROC for informational purposes, in compliance with the provisions of the Companies Act. In following cases, forms relating to following informational services are required to be filed: (a) Consent and withdrawal of consent of persons charged as officers in default, (b) Declaration of solvency in case company decides to buy back its shares, (c) Resolutions and agreements, (d) Notice of address of place where books of accounts are kept, (e) Information in relation to transfer of shares by a company to another company, (f) Order received from Court or Company Law Board, The inspection of public document relating to a company is allowed and can be done online from anywhere on payment of the prescribed fee. A copy of balance sheet (including the profit and loss account, the auditor’s report, directors report and everyother document required by law to be annexed or attached, as the case may be, to the balance sheet) which is to be laid before a company in general meeting shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company. After the balance sheet and the profit and loss account have been laid before a company at an annualgeneral meeting as aforesaid, these shall be filed with the Registrar within thirty days from the date on whichthe balance sheet and the profit and loss account were so laid. 2. The listing agreement contemplates the following disclosures: Clause 19 A company is required: — to give prior intimation to the Stock Exchange about the Board Meeting at which proposal forBuyback of Securities, declaration/recommendation of Dividend or Rights or
- 10. pg. 9 issue ofconvertibledebentures or of debentures carrying a right to subscribe to equity shares or the passing over ofdividend is due to be considered at least 2 working days in advance; —to give notice simultaneously to the Stock Exchanges in case the proposal for declaration of bonusis communicated to the Board of Directors of the company as part of the agenda papers. Clause 20 The company will, immediately on the date of the meeting of its Board of Directors held to consider or decide the same, intimate to the Stock Exchange within 15 minutes of the closure of the Board Meetings byphone/fax/e-mail. — all dividends and/or cash bonuses recommended or declared or the decision to pass any dividendor interest payment; — the total turnover, gross profit/loss, provision for depreciation, tax provisions and net profits for theyear (with comparison with the previous year) and the amounts appropriated from reserves, capitalprofits, accumulated profits of past years or other special source to provide wholly or partly for thedividend, even if this calls for qualification that such information is provisional or subject to audit. — the decision on Buyback of Securities. Clause 22 The Company will, immediately on the date of the meeting of its Board of Directors held to consider or decide the same, intimate to the Stock Exchange within 15 minutes of the closure of the Board Meetings byLetter/fax: — short particulars of any increase of capital whether by issue of bonus shares through capitalization,or by way of right shares to be offered to the shareholders or debenture holders, or in any otherway; — short particulars of the reissue of forfeited shares or securities, or the issue of shares or securitiesheld in reserve for future issue or the creation in any form or manner of new shares or securities orany other rights, privileges or benefits to subscribe to; — short particulars of any other alterations of capital, including calls; — any other information necessary to enable the holders of the listed securities of the Company toappraise its position and to avoid the establishment of a false market in such listed securities. Clause 29 The Company will promptly notify the Stock Exchange of any proposed change in the general character ornature of its business. Clause 30 The Company will promptly notify the Stock Exchange: (a) of any change in the Company’s directorate by death, resignation, removal or otherwise; (b) of any change of Managing Director, Managing Agents or Secretaries and Treasures; (c) of any change of Auditors appointed to audit the books and accounts of the Company.
- 11. pg. 10 Clause 31 TheCompany will forward to the Stock Exchange promptly and without application: — six copies of the Statutory and Directors Annual Reports, Balance Sheets and Profit and Loss Accounts and of all periodical and special reports as soon as they are issued and one copy each toall the recognized stock exchanges in India; — six copies of all notices, resolutions and circulars relating to new issue of capital prior to theirdispatch to the shareholders; — three copies of all the notices, call letters or any other circulars including notices of meetingsconvened u/s 391 or section 394 read with section 391 of the Companies Act, 2013 together with Annexures thereto, at the same time as they are sent to the shareholders, debenture holders orcreditors or any class of them or advertised in the Press. — copy of the proceedings at all Annual and Extraordinary General Meetings of the Company; — three copies of all notices, circulars, etc., issued or advertised in the press either by the company, orby any company which it proposes to absorb or with which the Company proposes to merge oramalgamate, or under orders of the court or any other statutory authority in connection with anymerger, amalgamation, re-construction, reduction of capital, scheme or arrangement, includingnotices, circulars, etc. issued or advertised in the press in regard to meetings of shareholders ordebenture holders or creditors or any class of them and copies of the proceedings at all suchmeetings. Clause 32 The Company shall supply: (i) Soft copies of full annual reports containing its Balance Sheet, Profit & Loss account and DirectorsReport to all those shareholder(s) who have registered their email address(es) for the purpose; (ii) Hard copy of statement containing the salient features of all the documents, as prescribed in sub-clause (iv) of clause (b) of proviso to section 219 of the Companies Act, 2013 to those shareholder(s) who have not so registered; (iii) Hard copies of full annual reports to those shareholders, who request for the same.The Company will also give a Cash Flow Statement along with Balance Sheet and Profit and Loss Account. The Cash Flow Statement will be prepared in accordance with the Accounting Standard on Cash FlowStatement (AS-3) issued by the Institute of Chartered Accountants of India, and the Cash Flow Statementshall be presented only under the Indirect Method as given in AS- 3.The company will mandatorily publish Consolidated Financial Statements in its Annual Report in addition tothe individual financial statements. The company will have to get its Consolidated Financial Statementsaudited by the statutory auditors of the company and file the same with the Stock Exchange. Companiesshall be required to make disclosures in compliance with the Accounting Standard or “Related PartyDisclosures” in the Annual Report.
- 12. pg. 11 Clause 35 Thecompany will file the Shareholding Pattern including of promoters group with the exchange, separately for each class of equity shares/security in the specified formats, in compliance with the following timelines:- (a) One day prior to listing of its securities on the stock exchanges. (b) On a quarterly basis, within 21 days from the end of each quarter. (c) Within 10 days of any capital restructuring of the company resulting in a change exceeding + -2% ofthe total paid-up share capital. Clause 35A The company will submit to the stock exchange, within 48 hours of conclusion of its General Meeting, details regarding the voting results in the prescribed format. Clause 35B The company will provide e-voting facility to its shareholders, in respect of those businesses, which aretransacted through postal ballot. The Company shall utilize the service of any one of the agencies providing e-voting platform, which is in compliance with conditions specified by the Ministry of Corporate Affairs,Government of India, from time to time. The company shall mention the Internet link of such e-voting platform in the notice to their shareholders. The company shall continue to enable those shareholders, who do not have access to e- voting facility, tosend their assent or dissent in writing on a postal ballot pursuant to the provisions of the Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 or amendments made thereto. Clause 36 The Company will keep the Exchange informed of events such as strikes, lock-outs, closure on account of power cuts, etc. and all events which will have a bearing on the performance / operations of the company as well as price sensitive information both at the time of occurrence of the event and subsequently after thecessation of the event in order to enable the shareholders and the public to appraise the position of thecompany and to avoid the establishment of a false market in its securities. Clause 41 The company has an option either to submit audited or unaudited quarterly and year to date financial results to the stock exchange within forty-five days of end of each quarter (other than the last quarter). If the company decided to submit the unaudited quarterly results then it shall be subjected to limited review by the statutory auditors of the company (or in case of public sector undertakings, by any practicing CharteredAccountant) and such limited reviewed results (financial results accompanied by the limited review report)shall be submitted to the exchange within forty-five days from the end of the quarter. In respect of the last quarter, the company shall submit audited financial results for the entire financial yearwithin sixty days of the end of the financial year. The quarterly financial results shall be approved by the Board of Directors of the company or by a committee thereof, other than the audit committee. The committee shall consist of not less than one third of the directorsand shall include the managing director and at least
- 13. pg. 12 one independentdirector. When the financial results areapproved by the Committee, they shall be placed before the Board at its next meeting. The financial results shall be submitted to the stock exchange within fifteen minutes of conclusion of themeeting of the Board or Committee in which results were approved, through such mode as may be specified by the stock exchange. The financial results submitted to the stock exchange shall be signed by the Chairman or Managing Director,or a Whole Time Director. In the absence of all of them, it shall be signed by any other director of thecompany who is duly authorized by the Board to sign the financial results. The company shall give prior intimation of the date and purpose of meetings of the Board or Committee in which the financial results will be considered at least seven clear calendar days prior to the meeting (excluding the date of the intimation and date of the meeting) to the stock exchange. The company shall also simultaneously issue a public notice in at least in one English daily newspapercirculating in the whole or substantially the whole of India and in one daily newspaper published in thelanguage of the region, where the registered office of the company is situated. The company shall, within 48 hours of conclusion of the Board or Committee meeting at which the financialresults were approved, publish a copy of the financial results which were submitted to the stock exchange in atleast in one English daily newspaper circulating in the whole or substantially the whole of India and in one dailynewspaper published in the language of the region, where the registered office of the company is situated. ‘quarter’ means the period of three months commencing on the first day of April, July, October or January of a financial year. Clause 49 – Corporate Governance SEBI requires the Listed companies to include a separate report on Corporate Governance in their Annual Report by including Clause 49 in the Listing Agreement (Text of Clause 49 is placed as Annexure). Thedisclosures about Corporate Governance to be made in the Annual Report are as under: (1) Disclosures on mandatory requirements (2) Disclosure on non-mandatory requirements Disclosures about Mandatory Requirements Disclosure on Remuneration of Directors As per Clause 49-I(B), all fees, compensation, if any, paid to non-executive directors includingindependent directors shall be fixed by the Board of Directors and shall require previous approval of shareholders in thegeneral meeting. The shareholders’ resolution shall specify the limits for the maximum number of stockoptions that can be granted to non-executive directors including independent directors in any financial yearand in aggregate. However, the requirement of obtaining prior approval of shareholders in general meeting shall not apply topayment of sitting fees to non-executive directors, if made within the
- 14. pg. 13 limits prescribedunder the CompaniesAct, 2013 for payment of sitting fees without approval of the Central Government. As per Clause 49-IV(E), all pecuniary relationships or transactions of non-executive directors vis-a-vis thecompany should be disclosed in the Annual Report. “Pecuniary relationship or transaction” refers to any relationship or transaction of a director with the company which gets him any monetary benefit, reward, remuneration including remuneration for directorship in whatever form (e.g. salary, fees, commission, sittingfee, charges for professional services irrespective of whether or not these are exempt under the CompaniesAct for the purpose of computation of managerial remuneration). Further the following disclosures on the remuneration of directors shall be made in the section on thecorporate governance of the Annual Report: (i) All elements of remuneration package of individual directors summarized under major groups, suchas salary, benefits, bonuses, stock options, pension etc. (ii) Details of fixed component and performance linked incentives, along with the performance criteria. (iii) Service contracts, notice period, severance fees. (iv) Stock option details, if any – and whether issued at a discount as well as the period over whichaccrued and over which exercisable. (v) The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report. (vi) The company shall disclose the number of shares and convertible instruments held by nonexecutive directors in the annual report. (vii) Non-executive directors shall be required to disclose their shareholding (both own or held by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director Disclosure of Basis of related party transactions Clause 49-IV(A) states that a statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. Further details of materialindividual transactions with related parties which are not in the normal course of business shall be placedbefore the audit committee. Details of material individual transactions with related parties or others, whichare not on an arm’s length basis, should be placed before the audit committee, together with Management’sjustification for the same. As the sub-clause does not specify frequency of placing the transactions before the Audit Committee, itwould be sufficient compliance if transactions are placed at periodic intervals decided by the Committee. TheCommittee would thus be free to decide the periodicity. It is however inferred from sub-clause IID(4) that theCommittee would review the transactions annually while submitting annual financial statements for approvalof the Board.
- 15. pg. 14 Disclosure ofAccounting Treatment As per clause 49-IV(B), where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the managements explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report. Under section 211(3B) of the Act, Companies are required to disclose in their profit and loss account andbalance sheet if any deviation from accounting standards have been made along with reasons for such deviation and the financial effect, if any, arising due to such deviation. Board Disclosures - Risk Management Clause 49-IV(C) provides that the company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. Under aforesaid sub-clause, every company must have a system to inform the Board about the riskassessment and minimization procedures. Such a system should be periodically reviewed to ensure that the management has been taking measures to control and minimize the risks. Risk management involves handling appropriately risks that are likely to harm an organization. The various types of risk associated with conducting business among others may be credit risks, market risks, operational risks, etc. If risk is one that can be described sufficiently accurately for a calculation to be made of the probability of its happening, on the basis of past records, it can be insured. Fire, theft, accidents etc.are all insurable risks. Some of the advantages of implementing risk management policies are effective strategic planning; better cost control; enhancing shareholders value by minimizing losses and maximizing opportunities; increased knowledge and understanding of exposure to risk; a systematic, well-informed and thorough method of decision making; increased preparedness for outside review; minimized disruptions; better utilization of resources; strengthening culture for continued improvement; creating best practices and quality organization. Proceeds from public issues, rights issues, preferential issues, etc. As per clause 49-IV(D), when money is raised through an issue (public issues, rights issues, preferential issues etc.) it shall disclose to the Audit Committee the uses/application of funds by major category (capital expenditure, sales and marketing, working capital etc.) on a quarterly basis as a part of their quarterly declaration of financial results. Further on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and place it before theaudit committee. Such disclosure shall be made only till such time that the full money raised through theissue has been fully spent. This statement shall be certified by the statutory auditors of the company. Furthermore, where the company has appointed a monitoring agency to monitor the utilization of proceeds ofa public or rights issue, it should place before the Audit Committee
- 16. pg. 15 the monitoringreport of such agency,upon receipt, without any delay. The Audit Committee shall make appropriate recommendations to the Boardto take up steps in this matter. As per section 292A, the Audit Committee recommendations on any matterrelating to financial management shall be binding upon the Board. As per Clause 43, every listed Company shall furnish to the stock exchanges on a quarterly basis, astatement indicating the variations between projected utilization of funds and/ or projected profitabilitystatement made by it in its prospectus or letter of offer or object/s stated in the explanatory statement to the notice for the general meeting for considering preferential issue of securities and the actual utilization of funds and/ or actual profitability. Management As part of the directors report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position: 1. Industry structure and developments. 2. Opportunities and Threats. 3. Segment–wise or product-wise performance. 4. Outlook 5. Risks and concerns. 6. Internal control systems and their adequacy. 7. Discussion on financial performance with respect to operational performance. 8. Material developments in Human Resources / Industrial Relations front, including number of people employed. Senior management shall make disclosures to the board relating to all material financial and commercialtransactions, where they have personal interest, that may have a potential conflict with the interest of thecompany at large (for e.g. dealing in company shares, commercial dealings with bodies, which haveshareholding of management and their relatives etc.) Explanation: the term “senior management” shall mean personnel of the company who are members of itscore management team excluding the Board of Directors. This would also include all members of management one level below the executive directors including all functional heads. Disclosure to Shareholders As per Clause 49-IV(G)(i), the following information relating to appointment of a new director or reappointment of a director must be provided to the shareholders: (a) A brief resume of the director; (b) Nature of his expertise in specific functional areas; (c) Names of companies in which the person also holds directorship and the membership of Committees of the Board; and (d) Shareholding of non-executive directors. The aforesaid information should be disclosed in the form of an explanatory statement annexed to the Notice of the general meeting (Companies Act, 2013) at which
- 17. pg. 16 theappointment orreappointment is proposed. The information should be disclosed even where the explanatorystatement is not required to be annexed to the notice such as in case of reappointment of a director retiringby rotation at the AGM pursuant to section 196 of the Companies Act, 2013. The company should disclose in its Annual Report details of officer or committee or the Registrar and ShareTransfer Agents to whom request can be made for transfer of shares. Disclosure of Relationships between Directors As per Clause 49-IV(G)(ia), disclosure of relationships between directors inter-se shall be made in the Annual Report, notice of appointment of a director, prospectus and letter of offer for issuances and any related filings made to the stock exchanges where the company is listed. Disclosure of certain Information on Website As per Clause 49-IV(G)(ii), the company should place the following information on its website : (a) Quarterly results. (b) Presentation made by the company to analysts. Alternatively, the details shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own website. As per Clause 54 of the listing agreement the company shall maintain a functional website containingbasic information about the company e.g. details of its business, financial information, shareholding pattern,compliance with corporate governance, contact information of the designated officials of the company who are responsible for assisting and handling investor grievances, details of agreements entered into with the media companies and/or their associates, etc. The company also ensures that the contents of the said website are updated at any given point of time. Report on Corporate Governance Clause 49-VI provides that there shall be a separate section on Corporate Governance in the AnnualReports 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 should be specifically highlighted. The companies shall submit a quarterly compliance report in prescribed format to the stock exchanges within15 days from the close of quarter. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company. Non-Mandatory Requirements These requirements may be implemented at 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 shall be made in the section on corporate governance of the Annual Report.
- 18. pg. 17 Disclosures relatingto Non-Mandatory Requirements 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.Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years,on the Board of a company. The company may ensure that the person who is being appointed asan independent director has the requisite qualifications and experience which would be of use to thecompany and which, in the opinion of the company, would enable him to contribute effectively to thecompany in his capacity as an independent director." 2. 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. 3. 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. Companies generally post their half-yearly and quarterly results on their websites and advertisethrough newspapers. Some companies send half-yearly results to each household of shareholders. In practice, it may not be feasible for companies to send quarterly results because of administrative,financial and other constraints, but companies should send the half-yearly report to each household of the shareholders for following reasons: (i) Many shareholders may not have access to the website of the company, or may not be computer savvy; (ii) All shareholders may not be subscribing to the particular newspaper in which half- yearly results are published. (iii) The company should disclose in the Report on Corporate Governance whether it has sent to each household of shareholders half-yearly report on financial performance including summary of the significant events which occurred in the last six months. (iv) Company may move towards a regime of unqualified financial statements. (v) 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. (vii) Mechanism for evaluating non-executive Board Members (vii) Whistle Blower Policy Clause 52 Corporate Filing and Dissemination System (CFDS), viz., www.corpfiling.co.in to file on the CDFS, such information, statements and reports as may be specified by the Participating Stock Exchanges in this regard within the time limit specified in the respective clause of the listing agreement. Clause 55 Securities Exchange Board of India (SEBI) videcircular CIR/CFD/DIL/8/2012 dated August 13, 2012 inserted a new Clause 55 in the listing agreement by mandating inclusion of Business Responsibility (BR)Reports as part of the Annual Reports for listed entities. As per the circular the requirement to include BR Reports as part of the Annual Reports
- 19. pg. 18 shall bemandatory for top 100 listed entities based on marketcapitalization at BSE and NSE as on March 31, 2012. Other listed entities may voluntarily disclose BR Reports as part of their Annual Reports. The Clause 55 prescribed that listed entities shall submit, as part of their Annual Reports, Business Responsibility Reports, describing the initiatives taken by them from an environmental, social and governance perspective, in the prescribed format. C. Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992Disclosure of interest or holding by directors and officers and substantial shareholders in listedcompanies - Initial Disclosure. (Regulation 13) (1) Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company in the prescribed form, the number of shares or voting rights held by such person, on becoming such holder, within 4 working days of:— (a) the receipt of intimation of allotment of shares; or (b) the acquisition of shares or voting rights, as the case may be. (2) Any person who is a director or officer of a listed company shall disclose to the company in the prescribed form, the number of shares or voting rights held and positions taken in derivatives by such person and hisdependents, within 2 working days of becoming a director or officer of the company. Continual disclosure Any person who holds more than 5% shares for voting rights in any listed company shall disclose to the company in the prescribed form the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5%, if there has been change in such holdings from the last disclosure made and such change exceeds 2% of total shareholding or voting rights in the company. Any person who is a director or officer of a listed company, shall disclose to the company and the stock exchange where the securities of the company are listed, in the prescribed form, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings of such person and his dependents from the last disclosure made and the change exceeds Rs. 5 lakh invalue or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower. These disclosures shall be made within 2 working days of: (a) the receipts of intimation of allotment of shares, or (b) the acquisition or sale of shares or voting rights, as the case may be. Disclosure by company to stock exchanges Every listed Company shall disclose to all stock exchanges on which the company is listed, the information received under these regulation, within 2 working days of receipt. Code of internal procedures and conduct for listed companies and other entities. (Regulation 12) All listed companies and organizations associated with securities markets including: — the intermediaries as mentioned in Section 12 of the SEBI Act, asset management company andtrustees of mutual funds; — the self-regulatory organizations recognized or authorized by the Board;
- 20. pg. 19 — therecognized stock exchanges and clearing house or corporations; — the public financial institutions as defined in Section 4A of the Companies Act, 2013; and — the professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies, shall frame a code of internal procedures and conduct as near thereto the Model Code specifiedunder these regulation without diluting it in any manner and ensure compliance of the same. The aforesaid entities shall abide by the code of Corporate Disclosure Practices as specified under these regulations and are required to adopt appropriate mechanisms and procedures to enforce the codes specified. ANNEXURE LISTING AGREEMENT CORPORATE GOVERNANCE Applicability of Clause 49: (i) Entities seeking listing for the first time, at the time of seeking in-principle approval for listing. (ii) Existing listed entities having a paid-up share capital of Rs. 3 croreand above or networth of Rs. 25 crore or more at any time in the history of the company. The company agrees to comply with the following provisions: I. BOARD OF DIRECTORS (A) Composition of Board (i) The Board of directors of the company shall have an optimum combination of executive and nonexecutive directors with not less than fifty percent of the board of directors comprising of nonexecutivedirectors. (ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. Provided that 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 one-half of the Board of the company shall consist of independent directors. Explanation-For the purpose of the expression “related to any promoter” referred to in sub- clause (ii): a. If the promoter is a listed entity, its directors other than the independent directors, its employees orits nominees shall be deemed to be related to it; b. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.” (i) For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executivedirector of the company who: (a) apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;
- 21. pg. 20 (b) isnot related to promoters or persons occupying management positions at the board level or at one level below the board; (c) has not been an executive of the company in the immediately preceding three financial years; (d) is not a partner or an executive or was not partner or an executive during the preceding three years,of any of the following: (i) the statutory audit firm or the internal audit firm that is associated with the company, and (ii) the legal firm(s) and consulting firm(s) that have a material association with the company. (a) is not a material supplier, service provider or customer or a lessor or lessee of thecompany, which may affect independence of the director; (b) is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares. (c) is not less than 21 years of age (B) Non executive directors’ compensation and disclosures All fees/compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. Theshareholders’ resolution shall specify the limits for the maximum number of stock options that can be grantedto non-executive directors, including independent directors, in any financial year and in aggregate. Provided that the requirement of obtaining prior approval of shareholders in general meeting shall not applyto payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government. (C) Other provisions as to Board and Committees (i) The board shall 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 inAnnexure – IA. (ii) A director shall not be a member in more than 10 committees or act as Chairman of more than fivecommittees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. (D) Code of Conduct (i) The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company. (ii) All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.
- 22. pg. 21 II. AuditCommittee (A) Qualified and Independent Audit Committee A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following: (i) The audit committee shall have minimum three directors as members. Two-thirds of the members of audit committee shall be independent directors. (ii) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. (iii) The Chairman of the Audit Committee shall be an independent director; (iv) The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries; (v) 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. The finance director, headof internal audit and a representative of the statutory auditor may be present as invitees for themeetings of the audit committee; (vi) The Company Secretary shall act as the secretary to the committee. (B) Meeting of Audit Committee The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present. (C) Powers of Audit Committee The audit committee shall have powers, which should include the following: 1. To investigate any activity within its terms of reference. 2. To seek information from any employee. 3. To obtain outside legal or other professional advice. 4. To secure attendance of outsiders with relevant expertise, if it considers necessary. (D) Role of Audit Committee The role of the audit committee shall 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 orremoval 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 to: (a) Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 173 of the Companies Act, 2013.
- 23. pg. 22 (b) Changes,if any, in accounting policies and practices and reasons for the same (c) Major accounting entries involving estimates based on the exercise of judgment by management (d) Significant adjustments made in the financial statements arising out of audit findings (e) Compliance with listing and other legal requirements relating to financial statements (f) Disclosure of any related party transactions (e) Qualifications in the draft audit report. 5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval 5A. Reviewing, with the management, the statement of uses/application of funds raised through anissue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purpose other than those stated in the offer document/prospectus/notice and the report submitted by themonitoring agency monitoring the utilization of proceeds of a public or rights issue, and makingappropriate recommendations to the Board to take up steps in this matter. 6. Reviewing, with the management, performance of statutory and internal auditors, and adequacy of the internal control systems. 7. 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 8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters wherethere is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 10. Discussion with statutory auditors before the audit commences, about the nature and scope of auditas well as post-audit discussion to ascertain any area of concern. 11. 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. 12. To review the functioning of the Whistle Blower mechanism, in case the same is existing. 12A. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person headingthe finance function or discharging that function) after assessing the qualifications, experience &background, etc. of the candidate. 13. Carrying out any other function as mentioned in the terms of reference of the Audit Committee. (E) Review of information by Audit Committee The Audit Committee shall 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
- 24. pg. 23 5. Theappointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee. III. Subsidiary Companies (i) At least one independent director on the Board of Directors of the holding company shall be adirector on the Board of Directors of a material non listed Indian subsidiary company. (ii) The Audit Committee of the listed holding company shall also review the financial statements, inparticular, the investments made by the unlisted subsidiary company. (iii) The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions andarrangements entered into by the unlisted subsidiary company. IV. DISCLOSURES (A) Basis of related party transactions (i) A statement in summary form of transactions with related parties in the ordinary course of businessshall be placed periodically before the audit committee. (ii) Details of material individual transactions with related parties which are not in the normal course ofbusiness shall be placed before the audit committee. (iii) Details of material individual transactions with related parties or others, which are not on an arm’slength basis should be placed before the audit committee, together with Management’s justificationfor the same. (B) Disclosure of Accounting Treatment Where in the preparation of financial statements, a treatment different from that prescribed in an AccountingStandard has been followed, the fact shall be disclosed in the financial statements, together with theManagement’s explanation as to why it believes such alternative treatment is more representative of the trueand fair view of the underlying business transaction in the Corporate Governance Report. (C) Board Disclosures – Risk management The company shall lay down procedures to inform Board members about the risk assessment andminimization procedures. These procedures shall be periodically reviewed to ensure that executivemanagement controls risk through means of a properly defined framework. (D) Proceeds from public issues, rights issues, preferential issues etc. When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall discloseto the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales andmarketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financialresults. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposesother than those stated in the offer document/prospectus/notice and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fullyspent. This statement shall be certified by the statutory auditors of the company. Furthermore, where thecompany has appointed a monitoring agency to monitor the utilization of proceeds of a public or rights issue,it shall place before the Audit
- 25. pg. 24 Committee themonitoring report of such agency, upon receipt, without anydelay. The audit committee shall make appropriate recommendations to the Board to take up steps in thismatter. (E) Remuneration of Directors (i) All pecuniary relationship or transactions of the non-executive directors vis-à-vis the company shallbe disclosed in the Annual Report. (ii) Further the following disclosures on the remuneration of directors shall be made in the section onthe corporate governance of the Annual Report: a. All elements of remuneration package of individual directors summarized under major groups,such as salary, benefits, bonuses, stock options, pension etc. b. Details of fixed component and performance linked incentives, along with the performancecriteria. c. Service contracts, notice period, severance fees. d. Stock option details, if any – and whether issued at a discount as well as the period over whichaccrued and over which exercisable. (iii) The company shall publish its criteria of making payments to non-executive directors in its annualreport. Alternatively, this may be put up on the company’s website and reference drawn thereto inthe Annual Report. (iv) The company shall disclose the number of shares and convertible instruments held by nonexecutivedirectors in the Annual Report. (v) Non-executive directors shall be required to disclose their shareholding (both own or held by / forother persons on a beneficial basis) in the listed company in which they are proposed to beappointed as directors, prior to their appointment. These details should be disclosed in the notice tothe general meeting called for appointment of such director. (F) Management (i) As part of the director’s report or as an addition thereto, a Management Discussion and Analysisreport should form part of the Annual Report to the shareholders. This Management Discussion &Analysis should include discussion on the following matters within the limits set by the company’scompetitive position: 1. Industry structure and developments. 2. Opportunities and Threats. 3. Segment–wise or product-wise performance. 4. Outlook 5. Risks and concerns. 6. Internal control systems and their adequacy. 7. Discussion on financial performance with respect to operational performance. 8. Material developments in Human Resources / Industrial Relations front, including number ofpeople employed. (ii) Senior management shall make disclosures to the board relating to all material financial andcommercial transactions, where they have personal interest, that may have a potential conflict withthe interest of the company at large (for e.g. dealing in company shares, commercial dealings withbodies, which have shareholding of management and their relatives etc.).
- 26. pg. 25 (G) Shareholders (i)In case of the appointment of a new director or re-appointment of a director the shareholders mustbe provided with the following information: a. A brief resume of the director; b. Nature of his expertise in specific functional areas; c. Names of companies in which the person also holds the directorship and the membership ofCommittees of the Board; and d. Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above. (ia) Disclosure of relationships between directors inter-se shall be made in the Annual Report, noticeof appointment of a director, prospectus and letter of offer for issuances and any related filingsmade to the stock exchanges where the company is listed. (ii) Quarterly results and presentations made by the company to analysts shall be put on company’sweb-site, or shall be sent in such a form so as to enable the stock exchange on which the companyis listed to put it on its own web-site. (iii) A board committee under the chairmanship of a non-executive director shall be formed tospecifically look into the redressal of shareholder and investors complaints like transfer of shares,non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall bedesignated as ‘Shareholders/Investors Grievance Committee’. (iv) To expedite the process of share transfers, the Board of the company shall delegate the power ofshare transfer to an officer or a committee or to the registrar and share transfer agents. Thedelegated authority shall 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, 2013 and theCFO i.e. the whole-time Finance Director or any other person heading the finance function discharging thatfunction shall certify to the Board that: (a) They have reviewed financial statements and the cash flow statement for the year and that to thebest of their knowledge and belief: i. these statements do not contain any materially untrue statement or omit any material fact orcontain statements that might be misleading; ii. These statements together present a true and fair view of the company’s affairs and are incompliance with existing accounting standards, applicable laws and regulations. (b) There are, to the best of their knowledge and belief, no transactions entered into by the companyduring the year which are fraudulent, illegal or violative of the company’s code of conduct. (c) They accept responsibility for establishing and maintaining internal controls for financial reportingand that they have evaluated the effectiveness of internal control systems of the companypertaining to financial reporting and they have disclosed to the auditors and the Audit Committee,deficiencies in the design or operation of such internal controls, if any, of which they are aware andthe steps they have taken or propose to take to rectify these deficiencies. (d) They have indicated to the auditors and the Audit committee i. significant changes in internal control over financial reporting during the year; ii. Significant changes in accounting policies during the year and that the same have beendisclosed in the notes to the financial statements; and
- 27. pg. 26 iii. Instancesof significant fraud of which they have become aware and the involvement therein, ifany, of the management or an employee having a significant role in the company’s internalcontrol system over financial reporting. VI. Report on Corporate Governance (i) There shall be a separate section on Corporate Governance in the Annual Reports of company,with a detailed compliance report on Corporate Governance. Non-compliance of any mandatoryrequirement of this clause with reasons thereof and the extent to which the non-mandatoryrequirements have been adopted should be specifically highlighted. The suggested list of items tobe included in this report is given in Annexure- IC and list of non- mandatory requirements is givenin Annexure – ID. (ii) The companies shall submit a quarterly compliance report to the stock exchanges within 15 daysfrom the close of quarter as per the format given in Annexure IB. The report shall be signed eitherby the Compliance Officer or the Chief Executive Officer of the company, VII. Compliance 1. The company shall obtain a certificate from either the auditors or practicing company secretariesregarding compliance of conditions of corporate governance as stipulated in this clause and annexthe certificate with the director’s report, which is sent annually to all the shareholders of thecompany. The same certificate shall also be sent to the Stock Exchanges along with the annualreport filed by the company. 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 mandatoryrequirements and adoption (and compliance) / non-adoption of the non- mandatory requirementsshall be made in the section on corporate governance of the Annual Report.
- 28. pg. 27 CORPORATE GOVERNANCEANDSHAREHOLDER RIGHTS Protection of shareholder rights is sacrosanct for good corporate governance. It is one of the pillars ofcorporate governance. For the efficient functioning of the capital market, the fundamental requirement is thatthe investor rights are well protected. The Preamble to Securities and Exchange Board of India Act, 1992reads as under: “An Act to provide for the establishment of a Board to protect the interests of investors in securities and topromote the development of, and to regulate the securities market and for matters connected there with orincidental thereto.” The central element in corporate governance is the challenges arising out of separation of ownership andcontrol. The shareholders are the true owners of a corporate and the governance function controls theoperations of the corporate. There is a strong likelihood that there is a mismatch between the expectations ofthe shareholders and the actions of the management. Therefore there is a need to lay down clearly the rightsof the shareholders and that of the management. In the Indian context, the SEBI Act, 1992, the various SEBI Regulations and Guidelines and the CompaniesAct, 2013 enables the empowerment of shareholder rights. In the international context, the OECD Principles on Corporate Governance which serves as an internationalbenchmark for policy makers, investors, corporations and other stakeholders worldwide also has madeextensive recommendations as to the shareholder rights. RIGHTS OF SHAREHOLDERS: Shareholders generally enjoy the following types of rights: Voting rights on issues that affect the corporation as a whole Rights related to the assets of the corporation Rights related to the transfer of stock Rights to receive dividends as declared by the board of directors of the corporation Right to receive financial statements Rights to inspect the records and books of the corporation Rights to bring suit against the corporation for wrongful acts by the directors and officers of thecorporation Rights to share in the proceeds recovered when the corporation liquidates its assetsThe OECD Principles on Corporate Governance, which broadly recommends six principles. Recommendsthe following two principles with regard to shareholders: The corporate governance framework should protect and facilitate the exercise of shareholders’rights. (Principle II). The corporate governance framework should ensure the equitable treatment of all shareholders,including minority and foreign shareholders. All shareholders should have the opportunity to obtaineffective redress for violation of their rights (Principle III). The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. (Principle II)
- 29. pg. 28 These Principlespropound basic shareholder rights should include the right to: (i) Secure methods of ownership registration: that is mechanism whereby the names of the shareholders and their shareholdings are properly registered. Section 150 of the Companies Act, 2013 which requires companies to maintain a Register of members ensures this right. (ii) Convey or transfer shares: similarly the laws should be in place for free transferability of shares.Section 108 of the Companies Act, 2013 with regard to transfer of shares ensures this right. (iii) Shareholders should obtain relevant and material information on the corporation on a timely and regular basis. This right is enabled under the companies Act as well as the Listing Agreement, in case of listed companies. (iv) Shareholders should be empowered to participate and vote in general shareholder meetings. (iv)Shareholders should be empowered to elect and remove members of the board; and (v) Shareholders will have a right to a share in the profits of the corporation. It further provides that shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as: (1) Amendments to the statutes, or articles of incorporation or similar governing documents of the company; (2) The authorization of additional shares; and (3) Extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company. The Companies Act, 2013 requires that such businesses be approved by shareholders by special resolution. Further, Section 192A of the Companies Act, 2013 requires a listed public company that resolutions relatingto certain businesses should be got passed only by postal ballot. This is to allow all the shareholders to havetheir say on important matters. The postal Ballot Rules list out the businesses which may be passed bypostal ballot. The principles also recommend that shareholders should have the opportunity to participate effectively andvote in general shareholder meetings and be furnished with sufficient and timely information concerning thedate, location and agenda of general meetings, as well as full and timely information regarding the issues tobe decided at the meeting. Shareholders should have the opportunity to ask questions to the board. Effectiveshareholder participation in key corporate governance decisions, such as the nomination and election ofboard members, should be facilitated. Shareholders should be able to make their views known on theremuneration policy for board members and key executives. Shareholders should be able to vote in personor in absentia, and equal effect should be given to votes whether cast in person or in absentia. Other Recommendations Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed. Markets for corporate control should be allowed to function in an efficient and transparentmanner.
- 30. pg. 29 i. Therules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporateassets, should be clearly articulated and disclosed so that investors understand their rights andrecourse. Transactions should occur at transparent prices and under fair conditions that protectthe rights of all shareholders according to their class. ii. Anti-take-over devices should not be used to shield management and the board from accountability. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 cover these aspects. The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated. i. Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures thatthey have in place for deciding on the use of their voting rights. ii. Institutional investors acting in a fiduciary capacity should disclose how they manage materialconflicts of interest that may affect the exercise of key ownership rights regarding theirinvestments. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse. Shareholder rights enshrined in the Companies Act, 2013 These rights can be categorized as under: (1) Right to receive copies of the following documents from the company: (i) Abridged balance-sheet and profit and loss account in the case of a listed company and balance-sheet and profit and loss account otherwise. (ii) Report of the Cost Auditor, if so directed by the Government. (iii) Contract for the appointment of the managing director/manager. (iv) Notice of the general meetings of the company. (2) Right to inspect statutory registers/returns and get copies thereof on payment of prescribed fee. The members have been given right to inspect the following registers etc.: (i) Debenture trust deed; (ii) Register of Charges; (iii) Register of Members, and Debenture holders and Index Registers, Annual Returns; (iv) Minutes Book of General Meetings; (v) Register of Contracts; (vi) Register of Directors’; (vii) Register of Directors’ Shareholdings; and (viii) Copy of agreement of appointment of the managing director/manager. The members can also get the copies of the aforesaid registers/returns on payment of prescribedfee except those of Register of Directors and Register of Directors’
- 31. pg. 30 Shareholdings. Memberscan also get copies of memorandum and articles of association on payment of a fee of Re. One. (3) Right to attend meetings of the shareholders and exercise voting rights at these meetings eitherpersonally or through proxy. (4) Other rights. Over and above the rights enumerated at Item Nos. 1 to 3 above, the members have the following rights: (i) To receive share certificates as title of their holdings. (ii) To transfer shares. (iii) To resist and safeguard against increase in his liability without his written consent. (iv) To receive dividend when declared. (v) To have rights shares. (vi) To appoint directors. (vii) To share the surplus assets on winding up. (viii) Right of dissentient shareholders to apply to court. (ix) Right to be exercised collectively in respect of making application to the Central Government forinvestigation of the affairs of the company, and for appointment of Government directors. (x) Right to make application collectively to the Company Law Board/Tribunal for oppression andmismanagement. (xi) Right of Nomination. (xii) Act provides that every member of a public company limited by shares, holding equity shares, shall have votes in proportion to his share of the paid-up equity sharecapital of the company. (xiii) Preference shareholders ordinarily vote only on matters directly relating to rights attached topreference share capital. A resolution for winding up of the company or for the reduction of the share capital, will be deemed to affect directly the rights attached to preference share and sothey can vote on such resolutions. (xiv) Section 106 of the Companies Act, 2013 lays down that the rights attached to the shares of any class can be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separatemeeting of the holders of the issued shares of the class. Further, the variation of rights ofshareholders can be effected only: (i) if provision with respect to such variation is contained in the Memorandum or Articles ofassociation of the company; or (ii) in the absence of any such provision in a Memorandum or Articles of association of thecompany, if such a variation is not prohibited by the terms of issue of the shares of thatclass. According to this section, where the rights of any class of shares are varied, the holders of notless than ten per cent of the shares of that class, being persons who did not consent to or votein favor of the resolution for the variation, can apply to the Court/ Tribunal to have the variationcancelled. Where any such application is made to the Court/Tribunal, the variation will not beeffective unless and until it is confirmed by the Court. Annual General Meeting (AGM)
- 32. pg. 31 In termsof Section 96, every company including One Person Company shall in each year hold in addition to any other meetings a generalmeeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and notmore than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next. Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority; Where a scheme or contract involving the transfer of shares or its class in a company to another companyhas, within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, the transfereecompany may, at any time within two months after the expiry of the said four months, give notice to anydissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transfereecompany shall, unless, on an application made by the dissenting shareholder within one month from the dateon which the notice was given, unless the CLB/Tribunal thinks fit to order otherwise, be entitled and bound to acquire those shares. "Dissenting shareholder" includes a shareholder who has not assented to the scheme or contract and anyshareholder who has failed or refused to transfer his shares to the transferee company in accordance withthe scheme or contract; Application to Tribunal* for relief in case of oppression; Any member of a company who complain that the affairs of the company are being conducted in a mannerprejudicial to public interest or in a manner oppressive to any member or members may apply to the Tribunalfor an order. If the Tribunal is of opinion that the company's affairs are being conducted in a manner prejudicial to publicinterest or in a manner oppressive to any member or members; and that to wind up the company wouldunfairly prejudice such member or members but that otherwise the facts would justify the making of awinding up order on the ground that it was just and equitable that the company should be wound up; Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. Application to Tribunal* for relief in cases of mismanagement; Any members of a company who complain that the affairs of the company are being conducted in a mannerprejudicial to public interest or to the interests of the company; or that a material change of the company hastaken place in the management or control of the company, whether by an alteration in its Board of directorsor manager or in the ownership of the company's shares, and that by reason of such change, it is likely thatthe affairs of the company [will be conducted in a manner prejudicial to public interest or] in a mannerprejudicial to the interests of the company; may apply to the Tribunal for an order. If Tribunal is of opinion that the affairs of the company are being conducted as aforesaid the Tribunal may,with a view to bringing to an end or preventing the matters complained of, make such order as it thinks fit. The following persons have a right to apply under the above sections: (i) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or anymember or members holding not less than one-tenth of the issued share capital
- 33. pg. 32 of thecompany,provided that the applicant or applicants have paid all calls and other sums due on their shares; (ii) in the case of a company not having a share capital, not less than one-fifth of the total number of itsmembers. The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorize any member or members of the company to apply to the Tribunal under section 397 or 398, notwithstanding the requirements of such number of members are not fulfilled. Pending the making by it of a final order the Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company's affairs; upon such terms and conditions as appear to it to be just and equitable. Investor Protection in India Securities and Exchange Board of India (SEBI) is the capital market regulator and nodal agency in India who regulates the security market. One of the objectives of the SEBI is to provide a degree of protection to the investors and to safeguard their rights, steady flow of savings into market and to promote the development of and regulate the securities market. Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices. Such practices may include: o Deliberate misstatement in offer statements to investors o Price manipulations o Insider trading. SEBI has issued many guidelines and regulations to regulate the capital market and to protect the investors. Some of the guidelines are SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009; SEBI (Ombudsman) Regulation 2003 – designed to redress the investor’s grievance against listed companies or intermediaries or both for amicable settlement; SEBI (Prohibition of fraudulent and unfair Trade Practices relating to securities market) Regulations 2003 – to prohibit any fraudulent and unfair Trade Practices relating to securities market;SEBI (Prohibition of Insider Trading) Regulations 1992 and amended in 2002. The basic objective is to prohibit persons who have more access to company’s information which can be used to benefit the individual or group of individual or agency. In addition to the above, SEBI has set up a separate cell to address the grievances of investors – SEBI Complaints RedressalSytem (SCORES). Insider Trading Insider Trading, in general parlance, means dealing in the securities of a company based on certain information which is not publicly disclosed (the recipient has access to such information due to his proximity to the source) and such information is likely to have an influence on the price of the securities. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, say, "Insider" is any person, who is or was connected with the company, and who is reasonably expected to haveaccess to unpublished price-sensitive
- 34. pg. 33 information aboutthe stock of that particular company, or who hasaccess to such unpublished price sensitive information. Information that could be price sensitive includes; o Periodical financial results of a company, o Intended declaration of dividend, o Issue or buyback of securities, o any major expansion plans or execution of new projects, amalgamation, merger, takeovers,disposal of the whole or substantial part of the undertaking and any other significant changes inpolicies, plans or operations of the company. Modus Operandi Insider buys the stock (he might also already own it). He then releases price-sensitive information to a smallgroup of people close to him, who buy the stock based on it, and spread the information further. This results in an increase in volumes and prices of the stock. The inside information has now become known to a largergroup of people which further pushes up volumes and prices of the stock. After a certain price has been reached, which the insider knows about, he exits, as do the ones close to him,and the stock's price falls. Those who had inside information are safe while the ordinary retail investor isstuck holding a white elephant as, in many cases, the 'tip' reaches him only when the stock is already on aboil. The regular investor gets on the bandwagon rather late in the day as he is away from the buzz with no directconnection to the 'real' source. He buys the overvalued stock due to imbalance in the information flow. However, insider trading isn't always illegal. Trading by a company insider in its shares is not violation per seand is legal. What is illegal is the trading by an insider on the basis of unpublished price-sensitive information. Insider trading violations may also include 'tipping' such information and the person using it. Rules against insider trading on material non-public information exist in most jurisdictions around the world, though the details and the efforts to enforce them vary considerably. The United States is generally viewedas having the strictest laws against illegal insider trading, and makes the most serious efforts to enforcethem. CASE STUDY A recent case in the United States of America serves as a good case study on Insider Trading Rajratnam and Rajat Gupta CaseRajaratnamwas the Sri-Lankan manager of the hedge fund Galleon Group, which managed $6.5 billion at its height.Rajat Gupta is a former director at Goldman Sachs and head of McKinsey consulting. He also served onthe board of Procter & Gamble.Warren Buffet is the CEO of Berkshire Hathaway, an investment company. Facts and Claims Facts On September 23, 2008, Warren Buffet agreed to pay $5 billion for preferred shares of Goldman Sachs.This information was not announced until 6 p.m., after the NYSE closed on that day. Before the announcement, Raj Rajaratnam bought 175,000 shares of Goldman Sachs.
- 35. pg. 34 The nextday, by which time the infusion was public knowledge, Rajaratnam sold his shares, for a profitof $900,000. In the same period of time financial stocks as a whole fell. Claims Rajat Gupta had called Rajaratnam immediately after the board meeting at which Warren Buffet’s infusion had been announced, and told him of the money Goldman expected to receive. This information was material to the price of Goldman stock, thus inciting Rajaratnam to make the trade, something he would otherwise not have done. Conviction Rajaratnam was sentenced to 11 years in prison and fined a criminal and civil penalty of over $150 million combined. Rajat Gupta was convicted on insider trading charges stemming from the Raj Rajaratnam/GalleonGroup insider trading cases on four criminal felony counts of conspiracy and securities fraud. He wassentenced to two years in prison, an additional year on supervised release and ordered to pay $5 millionin fines Indian Scenario Tata Finance Limited SEBI has passed an order dated January 11, 2008 in the matter of M/s. Tata Finance Limited (TFL)restraining Mr. D.S. Pendse, Mrs. AnuradhaPendse, Dr. Anjali Beke and M/s. Nalini Properties Pvt. Ltd. from accessing the securities market and prohibiting them from buying, selling or otherwise dealing or associating with the securities market in any manner whatsoever, for a period of five years. Upon receiving a complaint from TFL, a copy of which was also received from Joint Parliamentary Committee, SEBI initiated an investigation inter alia into the alleged insider trading by Mr. Pendse and hisrelatives/associates/friends. It was alleged that Mrs. AnuradhaPendse, Dr. Anjali Beke and Nalini Properties (P) Ltd. had sold shares of TFL on 28th March 2001 on the basis of a unpublished price sensitive information relating to the financial position of TFL which was not in public domain. The unpublished price sensitive information was alleged tohave been provided to them by Mr. DilipPendse who at the relevant point of time, was the ManagingDirector of TFL. The price sensitive information was pertaining to the loss of Rs.79.37 crores suffered byNishkalp Investment and Trading Co Ltd, a wholly owned subsidiary of TFL. This information was madepublic only on 30th April 2001. Mr. DilipPendse, besides being MD of TFL was also the Director of Nishkapat the relevant time. It is alleged that Mr. Pendse was aware of the poor financial position of TFL on accountof the losses incurred by Nishkap before the information was made public on 30.04.2001. Accordingly, hisassociates/ relatives sold 2,90,000 shares of TFL during March 2001, before the information became public. 40,000 shares of TFL were sold by Mrs. AnuradhaPendse and Nalini Properties, Dr. Anjali Beke a close friend and associate of Mr. Pendse for several years, also sold 2,30,000 shares in the name of AnjudiProperties & Investment Pvt. Ltd., a company associated/ connected with Mr. Pendse and controlled by Dr. Anjali Beke and her husband Dr. Beke. It was alleged that on account of the sale, unjust profit accrued to the entities.
- 36. pg. 35 Investor Education&Protection Fund (IEPF) Investor Education and Protection Fund (IEPF) has been established under Section 125 of the Companies Act, 2013. Investor Education and Protection Fund (awareness and protection of investors) Rules, 2001 stipulate the activities related to investors’ education, awareness and protection for which the financialsanction can be provided under IEPF. An initiative of Ministry pursues following activities as stipulated under Rules o Investor Education programme through Media o Organizing Seminars and Symposia o Proposals for registration of Voluntary Associations or Institution or other organizations engaged inInvestor Education and Protection activities, o Proposals for projects for Investors’ Education and Protection including research activities and proposals for financing such projects o Coordinating with institutions engaged in Investor Education, awareness and protection activities. The Securities and Exchange Board of India (SEBI) also notified SEBI (Investor Protection and Education Fund) Regulations, 2009 according to which SEBI will establish an Investor Protection and Education Fund which will be used inter-alia, for “aiding investors’ associations recognized by the Board to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed” – clause 5 (2) (d) of the Regulations. This amendment is a path-breaking one and is believed to set shareholder activism inIndia. Through this an attempt is being made to provide incentive to class action litigations. Though a regime has started yet much is needed to make such litigations successful in India. PROTECTION OF RIGHTS OF MINORITY SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Accounting Standard 18 defines Related Party and Related Party Transactions as under: 10.1 Related party - parties are considered to be related if at any time during the reporting period one partyhas the ability to control the other party or exercise significant influence over the other party in makingfinancial and/or operating decisions. 10.2 Related party transaction - a transfer of resources or obligations between related parties, regardless ofwhether or not a price is charged. Related Party Transaction is a critical issue in any organization. They are not necessarily wrong; in fact transactions with related parties happen across all jurisdictions and in the normal course of business. However, because of their delicate nature and the risk of abuse or fraud, they must be carefully scrutinized and fully disclosed. The Asian Corporate Governance Association’s white paper on Corporate Governance in India alludes thataccording to domestic Indian fund managers, typical transactions that listed companies engage in include: o Spinning off valuable assets from listed companies to unlisted private entities for the benefit of promoters.
- 37. pg. 36 o Spinningoff investments in group companies to a holding company, valuing the investments at a large discount to fair value, then buying back the shares of the holding company from the market. o Shifting new business to unlisted private entities and letting an affiliated listed company pay for branding and distribution costs. It is very apparent that these types of transactions are detrimental to the interests of the minority shareholders. Therefore related party transactions need to be monitored properly to prevent abuse. Role of Audit Committee The audit committee has an important role in monitoring related party transactions. In most jurisdictions the first level monitoring of the related party transactions is done by the audit committee. As per Clause 49 of the Listing Agreement, the term "related party transactions" shall have the samemeaning as contained in the Accounting Standard 18, issued by The Institute of Chartered Accountants of India. Clause 49(II)(D) of Listing Agreement requires Audit Committee to review, with the management, the annualfinancial statements before submission to the board for approval, with particular reference to Disclosure of any related party transactions. Sub-Clause IIE of Clause 49 of Listing Agreement requires Audit Committee to mandatorily review the information related to Statement of significant related party transactions (as defined by the audit committee), submitted by management. Sub-Clause IV of Clause 49 of Listing Agreement requires the following disclosures about the basis of related party transactions: (i) A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. (ii) Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee. (iii) Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the audit committee, together with Management’s justification for the same. Related party transactions are many times made through complex transactions between the company and itsmanagers, directors, subsidiaries, and major shareholders; it is hard for outsiders to discover questionable orfraudulent transactions, if any. Therefore it becomes imperative for the Internal Control Processes within thecompany to be robust enough to identify the related party transactions, determine whether they are at arm’slength and that these are not used as a means of manipulation. The audit committee can ensure that adequate checks and balances are placed to ensure that minimumconflict of interest situation arises. Some of the basic measures that can be adopted is to have clear and well laid down policies with regard to purchases, engagement of vendors, appointments at key levels, openbidding for material contracts and a well- functioning whistle-blower mechanism. Role of Internal Auditors The internal auditors have a key role to play in actually ensuring that the systems of checks and balances are functioning effectively. The internal auditor should directly report to the
- 38. pg. 37 audit committee.An issue of debate with regard to the internal auditor is whether the internal audit function should be assigned to an external audit firm or can be carried out within the company. In India, Clause 49 requires that the audit committee review, with management, the performance of internal auditors, as well as the adequacy of the internal audit function, if any, including the structure of the internal audit department, reporting structure coverage and the frequency of internal audit. The audit committeeshould also review the internal audit reports relating to internal control weaknesses and discuss significantfindings with the internal auditors. Currently, the appointment, removal and terms of remuneration of the chiefinternal auditor should also be reviewed by the audit committee. Due Diligence Process While, the internal audit process is likely to reveal the occurrence of questionable transactions after theyhave occurred, a system of due diligence will help curbing abusive related party transactions from occurring. Audit committee should seek a due diligence report with regard to all proposed material transactions which should highlight potential conflict of interest. In this regard companies should have well-articulated policiesspecifying that transactions beyond certain threshold limits and transactions of certain nature would require apre-clearance from the audit committee. Role of Independent Directors The independent directors have a pivotal role to play in monitoring related party transactions. This is one ofthe key recommendations of the OECD Guide to Fighting Abusive Related Party TransactionsRecommendation 5 states as under: Independent directors should play a central role in monitoring related party transactions, such as designing board approval procedures, conducting investigations and having the possibility for obtaining advice from independent experts. Their role should be supported by the policy framework. Independent directors play a crucial role in monitoring abusive related party transactions. While all directorsare required to discharge fiduciary duties to all shareholders, inviting directors with a conflict of interest indiscussions on related party transactions may be counter-productive. Independent judgment is critical tomonitoring related party transactions and to ensure that agreed transactions are in the interests of thecompany and all shareholders. Although the OECD Guide has recommended the threshold approach todisclosure and approval at the shareholder level, it suggests that all related party transactions require boardoversight (with interested parties abstaining from both discussions or voting on the transaction). The OECD Guide on Fighting abusive related party transactions recommends that only non- conflicted directors discuss and decide on a related party transaction, and this could be included in the company’s policy about a board approval procedure. A number of jurisdictions currently enforce similar requirements including India which requires as part of the company’s Listing Agreement that the audit committee approve all related party transactions and that the firm disclose “materially significant” related party transactions toshareholders. Moreover, the Guide recommends that, where transactions require shareholder approval,independent directors may wish to:
- 39. pg. 38 o retainan independent expert to offer professional advice to independent directors on the fairness ofthe transaction; and o make a recommendation to shareholders. Whistle-blower mechanism The OECD Guide describes that an effective ‘whistle blower’ mechanism may be established by management as an internal control mechanism, assessed by internal auditors. Such mechanisms are in many cases under the remit of the audit committee, and the internal auditor might assess the robustness of such mechanisms. In particular, internal auditors might consider whether employees are able to anonymously relate concerns over transactions. In some cases whistle-blower mechanisms and procedures are in place, but fall down on fundamental flaws; they may request the whistle-blowers to identifythemselves, for example, or may route the whistle-blower hotline direct to the CEO and/or Chairman (who may be the counter-party of concern). Many effective mechanisms make use of external bodies, ensuringanonymity and allowing for an uninhibited disclosure. Regulators and legislators may seek to providestatutory protection for whistle blowers, protecting these parties from court action where a report was madein good faith. In India, Clause 49 of the Listing Agreement prescribes as a non-mandatory requirement that companies may establish a mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanismcould also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Onceestablished, the existence of the mechanism may be appropriately communicated within the organization. The audit committee is tasked to review the functioning of the Whistle Blower mechanism, in case the sameis existing. Further it suggests that in the Corporate Governance Report, the company disclose the whistleBlower policy and affirmation that no personnel has been denied access to the audit committee. Disclosure The OECD Guide provides that the legal and regulatory framework for “related party transactions” should provide appropriate and effective threshold-based tiers, referring to materiality for disclosure and shareholders’ approval and/or board approval of related party transactions according to the risk of potential abuse. It should also take into account regulatory efficiency, weighing the potential cost and benefits. The Board is duty bound to have control over Related Party and Related Party Transactions. It is the responsibility of the Board to ensure that such transactions are just, fair and total in the interests of the company. In terms of the Companies Act, 2013 every director of a company must disclose the nature of his concern or interest in any transaction of the company at a meeting of the Board of Directors. In the case of a publicly owned company a directed interested or concerned in any contract or arrangement entered into or to beentered in to by the company is also prohibited from voting on the resolution brought up at the Board meeting for the approval
- 40. pg. 39 of thecontract. He has to abstain himself from the discussion on the resolution [Section300]. Section 299 of the Companies Act, 2013 imposes a specific duty on every director to disclose his interest tothe full Board. Since the Board may be a varying body, the section requires a fresh notice of disclosure to be given at theend of each financial year. By virtue of section 283(1)(i) of the Companies Act, 2013, if a director acts incontravention of this provision, his office will ipso facto become vacated. Further, there is also penalty payable. The provisions are founded on the principle that a director is precluded from dealing on behalf ofthe company as himself and from entering into engagements in which he has a personal interest conflicting or which possibly may conflict with the interest of those with whom he is bound by fiduciary duty. A directoroccupies a fiduciary position in relation to a company and he must act bona fide in the interest of thecompany. If a director makes a contract with the company and does not disclose his interest, he will becommitting breach of trust, YashovardhanSaboo v. Groz- BeckertSaboo Ltd., (1995) 83 Com Cases 371 atp.413 (CLB). The section is so worded that any conflict of personal interest of the director with his duties to the companyas its director will have to be disclosed. To emphasize this point, the relevant sub-section 299 is reproduced below: “Disclosure of interest by director—(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors”Non-compliance with section does not, however, avoid or invalidate the transaction; but will make it voidable at the option of the company. Further, Board of Directors are responsible for ensuring that their total shareholding in the other company with which there is any contract or arrangement does not exceed two percent of the paid-up capital of the other company. In such a case, i.e., where any of the directors of the company or two or more of them collectively held not more than two percent of the paid-up share capital in the other company, the duty of disclosure does not apply. Role of independent Auditors The OECD Guide to fight abusive related party transactions recommends that the external auditor should beindependent, competent and qualified in order to provide an assurance to the board and shareholders thatmaterial information concerning related party transactions is fairly disclosed and alert them to any significant concerns with respect to internal control. The policy framework should support this role effectively. The Guide further elaborates that it is in the interests of market operators, regulators, companies, and auditors themselves that auditors are of a high quality, and that information on auditor quality is communicated to the market. A management that knows that it will be questioned and heldresponsible for itsactions, is always on its feet. Disinterested shareholders’ approval
- 41. pg. 40 The OECDGuide recommends - Where reliance is placed on shareholders’ approval, a voting system should be established with a majority of disinterested shareholders for the approval of related party transactions at Shareholders Meetings. This concern is not presently addressed in the Indian context but is prevalent in many jurisdictions is the voting by only disinterested shareholders.
- 42. pg. 41 Role ofInstitutional Investors In conclusion what can be said is that the fight against abusive related party transaction is as much a governance issue as it is a gearing up the internal control processes within an organization. Company’s sustainability hinges on the effective processes that the company adopts to curb abusive related party transactions. In addition to the regulators, independent directors, the internal auditors and the statutory auditors, the minority shareholders, institutional investors have a significant role to play in this regard. Institutional investors should exercise their voting rights with due care and question the company on related party transactions which may be in conflict with the interests of the company. Similarly the minority shareholders should exercise their voting rights judiciously and be vigilant. They should respond to resolutions sought to be passed by postal ballot and request companies to facilitate e-voting at general meetings. SHAREHOLDER ACTIVISM Shareholder activism refers to the active involvement of stockholders in their organization. Active participation in company meetings is a healthy practice. Theycan resolve issues laid down in the annual and other general meetings and canraise concerns over financial matters or even social causes such as protection ofthe environment. Shareholder activists include public pension funds, mutual funds, unions, religious institutions, universities, foundations, environmental activists andhuman rights groups. A share in a company is not only a share in profits but also a share in ownership. Shareholders must realize that their active participation in the company’s operations ensures better management, less frauds and better governance. The corporate crisis that looms today - shareholder activism - is with differentactors but the same stories. In the 90’s it was hostile takeovers. Today it ishostile hedge funds frustrated with performance and employing new strategiesto improve overall returns. Ironically, shorter term investors that once “voted with their feet” are now taking the long road of shareholder activism. History of Shareholder Activism Shareholder activism can be traced back 80 years when Henry Ford chose to cancel a special dividend and instead spend the money on advancing social objectives. The court ultimately sided with dissented shareholders, reinstated the dividend, sparking a new paradigm in shareholder activism. Shareholders can ensure that thecompany followsgood corporate governance practices and implements beneficial policies. In the late 1980’s, shareholder activism took a more aggressive turn with corporate raiders like Paul Getty. Shareholders took on management, The New Crisis: Shareholder Activism Ashton Partners engaging in hostile takeovers and leveraged-buyouts to gain control of undervalued and underperforming companies. In the 1990’s shareholder activism found mainstream pension fund managers like CalPERS pushing for the repeal of staggered boards and poison pills. These players used a form of
- 43. pg. 42 “quiet” activism– favoring abstentions and withholding votes for important proxy issues – as a way to influence management and Board decisions. The purpose of shareholder activism is to Provide an overview of shareholder activist, and how it may influence a company’s behavior, Identify what options are available for shareholders wishing to pursue an activist agenda, and Consider the legal framework in which UK public companies must operate when faced with shareholder activism. Shareholder activism can be exercised through proxy battles, publicity campaigns, shareholder resolutions, litigation and negotiations with management. For example, o Shareholder activism played a major role in eradicating apartheid in South Africa through divestment. o Shareholders have also influenced the phasing out of polystyrene products at McDonalds. o More recently, shareholders were able to bring public pressure and media attention on HomeDepot to stop the use of wood from environmentally sensitive areas. The shareholder activism means Establishing dialogue with the management on issues that concern Influencing the corporate culture. Using the corporate democracy provided by law. Increasing general awareness on social and human rights issues concerning the organization. Internet and mass media are effective tools in building up pressure on the management. Shareholder activism often highlights differences in strategy or poor communication. In numerous activistsituations companies believing they’ve told one story, and the investment community hearing another, or nothing at all. Inconsistency in messaging and lack of information breed investor discontent, and ultimately shareholder activism. If ignored long enough, the situation comes to a breaking point where activist investorschoose a drastic approach. INVESTORS FORCE ETHICAL ISSUES ON TESCO’s AGENDAAGM 29 June 2007- TESCO Tesco a UK based Supermarket Chain Company faced an unprecedented revolt over the meager wages itpays workers in the developing world to supply its supermarkets with everything from cheap clothing to fruit. Shareholders at the company's annual meeting in London also voiced their anger at a controversial pay scheme for chief executive Sir Terry Leahy, which could see him pocket over £11 million if Tesco's expansion into the US market succeeded. More than one-in-six shareholders failed to back Sir Terry's new pay scheme, while almost 20% of shareholders refused to reject a resolution calling for Tesco to pay workers in the developing world a "living wage". The latter resolution was tabled by Ben Birnberg, a retired solicitor. It was the first time an independent shareholder had got a motion onto the table at a Tesco AGM, and it was an important piece of shareholder activism. The board of Tesco called on shareholders to reject it saying that the company was already taking steps to ensure its suppliers treat workers properly, but Mr.Birnberg told the meeting that "the irony of the board
- 44. pg. 43 recommending thatshareholders vote againstour resolution to increase the meager pay of its outsourced workers while at the same time provocativelyrecommending that shareholders vote for incentive plans which will augment the already absurdly generous remuneration packages for its top executives may be lost on the board but it is certainly not lost on thisshareholder or more to the point on the public at large". "There is nothing that lowers a company more in the estimation of right thinking people generally than a public display of executive greed in an affluent world going hand in hand with a public display of corporate miserliness and indifference towards those at the bottom in an impoverished world who contribute so munificently to our corporate wealth," he further said. He received support for his resolution from the Joseph Rowntree Trust, with just under a million shares, while the CIS, which had £25bn under management and is a significant shareholder in Tesco, was among thosewho abstained on the vote. South African fruit picker who attended the meeting said "Our children still go hungry ... we don't want to begand borrow to stay alive. We are asking Tesco to give us what we deserve. We just want to live a life ofdignity." The meeting, which ran for more than three hours, was also addressed by a Bangladeshi textile worker whotold the company that workers there are not being paid "a living wage". In the end, 8.75% of shareholders refused to back the company's remuneration policy while 17.71% refusedto back Sir Terry's special US bonus. Investor Relations (IR) Investor Relations (IR) is a strategic management responsibility that integrates finance, communication, marketing and securities lawcompliance to enable the most effective two- way communication between a company, the financial community, and other constituencies,which ultimately contributes to a company's securities achieving fairvaluation. Typically, investor relations are a department or person reporting to theChief Financial Officer. In some companies, investor relations aremanaged by the public relations or corporate communications departments, and can also be referred to as "financial public relations" or "financial communications". Many larger publicly-traded companies now have dedicated IR officers (IROs), who oversee most aspects of shareholder meetings, press conferences, private meetings with investors, (known as "one-on-one" briefings), investor relations sections of company websites, and company annual reports. The investor relations function also often includes the transmission of information relating to intangible values such as the company's policy on corporate governance or corporate social responsibility. Recently, the field has trended toward an increasingly popular movement for "interactive data", and the management of company filings through streaming-data solutions such as XBRL or other forms of electronic disclosurehas becomeprevalent topics of discussion amongst leading IROs worldwide. Investor Relations describes the department of a company devoted to handling inquiries from shareholders and investors, as well as others whomight be interested in acompany's stock or financial stability. The investor relations function must be aware of current and upcoming issues that an organization or issuermay face, particularly those that relate to fiduciary duty and organizational impact. In particular, it must beable to assess the various patterns of stock-
- 45. pg. 44 trading thata public company may experience, often as theresult of a public disclosure (or any research reports issued by financial analysts). The investor relationsdepartment must also work closely with the Company Secretary on legal and regulatory matters that affectshareholders. IRO's have access to the Chief Executive Officer (CEO) and Chairman or President of the corporation. Thismeans that being able to understand and communicate the company's financial strategy, they are also ableto communicate the broader strategic direction of the corporation and ensure that the image of thecorporation is maintained in a cohesive fashion. Due to the potential impact of legal liability claims awarded by courts, and the consequential impact on thecompany's share price, IR often has a role in crisis management of, for example, corporate downsizing,changes in management or internal structure, product liability issues and industrial disasters. The most highly-regarded professional member organization for Investor Relations in the United States is theNational Investor Relations Institute, or NIRI. In the United Kingdom, the recognized industry body is TheInvestor Relations Society, while in Canada, the professional association is called the Canadian Investor Relations Institute, or CIRI. Australia's professional organization is known as the Australian InvestorRelations Association (AIRA). ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNANCE Institutional investors are organizations which pool large sums of money and invest those sums incompanies. Their role in the economy is to act as highly specialized investors on behalf of others. In India,there are broadly the following types of institutional investors: o Development oriented financial institutions such as IFCI, IDBI and state financial corporations o Insurance Companies- LIC, GIC and other subsidiaries o Banks o All mutual funds and including UTI o Pension Funds For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreadsrisk, so if one company fails, it will be only a small part of the whole fund's investment. Most of the reports on corporate governance have emphasized the role which the institutional investors playin corporate governance. The Cadbury Committee (1992) states: “Because of their collective stake we look to the institutions in particular, with the backing of theInstitutional Share Holder’s Committee to use their influence as owners to ensure that companies inwhich they have invested comply with the code”A similar view was expressed in Greenbury Report (1995) as one of the main action point is: “the investor institution should use their power and influence to ensure that the implementation of thebest practices set out in the code”Similarly Hampel Report (1998) stated that:“it is clear that a discussion of the role of shareholders in corporate governance will mainly concernthe institution”.
- 46. pg. 45 Indian Scenario KumarMangalam Birla Committee on Corporate Governance observed that: (a) Institutional shareholders have acquired a large stake in equity share capital of listed companies. In some of the listed companies they are the major shareholders and own shares largely on behalf ofthe retail shareholders. (b) They have a special responsibility given the weightage of their votes and have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting rights. (c) The Institutional shareholders can effectively use their powers to influence the standard of Corporate Governance. Expectation of their role and recommendations The committee therefore recommends that institutional shareholders should reflect the following characteristics: — Take active interest in the composition of board of Directors — Be vigilant — Maintain regular and systematic contact at senior level for exchange of views on management, strategy, performance and quality of management — Ensure that voting intentions are translated into practice — Evaluate Corporate Governance performance of the company Given the size of their shareholdings the power of the institutional investors cannot be doubted. Hirschman, in his seminal work, identified the exercise of institutional power within an ‘exit and voice’ framework, arguing that ‘dissatisfaction [may be expressed] directly to management’, the voice option, or by selling theshareholding, the exit option. The latter choice is not viable for many institutional investors given the size oftheir holdings or a policy of holding a balanced portfolio. The Combined Code (2008) had also stated the following principles of good governance for the InstitutionalShareholders (a) Dialogue with companies Institutional shareholders should enter into a dialogue with companies based on the mutualunderstanding of objectives. (b) Evaluation of governance disclosures When evaluating companies’ governance arrangements, particularly those relating to board structure and composition, institutional Investors should give due weight to all relevant factors drawn to theirattention. (c) Shareholder voting Institutional shareholders have a responsibility to make considered use of their votes. FEW EXAMPLES SATYAM FIASCO On 16th December, Satyam Computer Services Limited (now Tech Mahindra) announced its audacious planto acquire controlling interest in Maytas Infrastructure and Maytas Properties for US$1.6 billion. The familyof RamalingaRaju had a large shareholding in these two Maytas companies. The deal was cleared bySatyam’s board of directors which had several reputed independent directors. The move was aimed attransferring over 60 billion
- 47. pg. 46 of cashfrom Satyam’s shareholders to the Raju family which defacto controlledSatyam (with only 8% shareholding) and Maytas companies (with a substantial shareholding). This outraged the mutual funds and institutional investors in India, who threatened legal action. The dealwas announced by Satyam after the Indian markets had closed on December 16, 2008, but Satyam’s ADRcrashed over 50% when it opened for trading in the US. In view of the outrage, the deal was cancelled nextday. The share price still crashed 30% and continued to fall even after the deal was cancelled. This forcedthe Chairman of the company to confess the fraud on January 7, 2009. He admitted in a letter to the stockexchanges and SEBI, that he had falsified the books of Satyam. He and his brother and the MD and the CFOof Satyam resigned. SHAREHOLDERS vs. MARKS & SPENCER Shareholders in UK high-street name Marks & Spencer had been calling for the company to split the role ofchairman and chief executive since Sir Stuart Rose assumed both roles in March 2008. In the AGM 2009held 40% of shareholders backed a special motion put forward by the Local Authority Pension FundForum (LAPFF) calling for the retailer to appoint a new chairman to replace Sir Stuart Rose by July 2010, ayear earlier than planned. The motion required 75% backing to be passed which it failed to attain. The LAPFF was protesting about Sir Stuart's joint role as chief executive and chairman In November 2009 however, their calls were answered when Marc Bolland was appointed as chief executive.Bolland kicked off his tenure with a Golden Hello of £15m.