A note on corporate governance


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A note on corporate governance

  1. 1. A NOTE ON CORPORATE GOVERNANCE Corporate Governance can be considered as the system by which companies are directed and controlled. It is a set of standards which aims to improve the company’s image, efficiency, effectiveness and social responsibility. The concept of corporate governance primarily hinges on complete transparency, integrity and accountability of the management with an increasingly greater focus on INVESTOR PROTECTION AND PUBLIC INTEREST. The basic objective of Corporate Governance are enhancement of the long term shareholder value while at the same time protecting the interests of the OTHER STAKE HOLDERS. From the Company’s perspective, the emerging consensus is that the purpose of high standards of governance is to increase the firm’s value, subject to meeting the corporations’ financial and other legal or contractual obligations. This harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders’ wealth whilst not in any way being detrimental to the interest of other stakeholders in the company, viz., suppliers, customers, creditors, bankers, employees of the company, the Government and the society at large. Corporate Governance measures can be adopted by a company purely voluntarily. It has to be compulsorily adopted, if it is provided as a mandatory measure by the Companies Act, 1956, Sebi guidelines etc., A few of the steps prescribed/recommended for Corporate Governance under the Companies Act, 1956, Sebi guidelines are as follows:1) S.58AA of the provides for certain special provisions for Small depositors. A ‘small depositor’ means a depositor who has deposited in a financial year, a sum not exceeding twenty thousand rupees in a company and includes his successors, nominees and legal representatives. 2) S.252 provides for a small shareholders’ right to have a director elected from among themselves. It provides that a Public Company having a) paid up capital of Rs. Five Crores or more and b) 1000 or more small share holders MAY have a director elected by such small shareholders in the manner as may be prescribed. A ‘small shareholder’ means a shareholder holding shares of nominal value of Rs. 20,000/- or less in a public company to which this section applies. You may observe from the above that it is not mandatory for a company to make provision for the appointment by its small shareholders of their own representatives elected as a director. It is only an ENABLING provision which enables a company to make such a provision, if it feels so voluntarily. 3) Listing Agreement:- Clause 49 of the listing agreement with the stock exchanges provides for corporate Governance compliances for listed companies like, Board Of Directors:- In case of non executive chairman, atleast one third of the Board should comprise of independent directors and in case of an executive chairman, atleast half of Board should comprise of independent directors. Even if the non-executive chairman is, in any way, connected or related to the promoters of the company or the top management or to the management one level below the top management, then the Board of directors of that company, even though it has a non-
  2. 2. executive director, should have at least half of its directors who are independent directors. According to an amendment to clause 49 of the listing agreement notified by SEBI on 08/04/2008, if the non-executive chairman is a promoter or is related to promoters or persons occupying management positions at the Board level or at one level below the Board, AT LEAST ONEHALF OF THE BOARD of the Company should consist of independent directors. The time gap between two board meetings is reduced to 3 months from earlier 4 months. There is no time gap between two board meetings under the existing provisions of the companies Act,1956. Definition of Independent Directors:- An Independent Director means a director, who, apart from receiving directors’ remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries. 4) Audit Committee under Section 292 A of the Companies Act, 1956. S.292A of the Companies Act, 1956 provides that every public company, having a Paid up capital of not less than five crores of rupees shall constitute a committee of the Board known a “Audit Committee” which shall consist of not less than three directors and such number of directors as the Board may determine of which two thirds of the total number of members shall be directors, other than Managing or Whole time directors. 5) Report on Corporate Governance:- The Company agrees that there shall be a separate section on Corporate Governance in the Annual Report of the company with a detailed compliance report on Corporate Governance. 6) The Company shall obtain certificate from the auditors of the Company or the Company Secretary regarding the compliance of conditions of Corporate Governance as stipulated in clause 49 of the listing agreement. 7) Establishment of Investor Education and Protection Fund by the Central Government under S.205C of the Companies Act, 1956 is a part of the Corporate Governance measure. 8) Under Section 274(g) of the Companies Act, 1956, it is provided that a person shall not be a director of any other PUBLIC COMPANY for a period of five years, if there is a failure on the part of the Company in which he is at present a director in filing the Annual Accounts and Annual reports for three continuous financial years or there is a failure for one year or more to repay the deposits or interest thereon on due date or failure to redeem debentures on due dates, pay dividend etc. 9) The provision in the Companies Act, 1956 that a person who is indebted to a company for more than Rs.1000/- or who is holding share of the company carrying voting rights cannot become the Auditor of the company is also a step towards proper Corporate Governance. Xxxxxxx@xxxxxxX