Corporate Governance in India - techshristi.com April... · Government of India has constituted...

Corporate Governance in India

1998

1999

2000

2000 2002

2003

CII Kumar Mangalam Birla

Com.

Claus 49

DCA -Task Force on

Corporate Excellence

Naresh Chandra Com.

Narayan Murthy Com.

DCA Report

2004-05

Amended Clause 49

– J.J. Irani Com.

2003

To strengthen the Corporate Governance norms, Government of India has constituted various expert committees from time to time. Various recommendations of such Committees are as follows:-

Naresh Chandra Committee –

1) Compulsory Audit Partner Rotation

2) Auditors’ disclosure of contingent liabilities

3) Management’s certification in the event of auditor’s replacement

4) Auditors annual certification of independence

5) CEO & CFO certification of annual audited accounts

6) Setting up of Independent Quality Review Board

Path for CG ……

7. Proposed disciplinary mechanism for auditors

8. Percentage of Independent Directors

9. Minimum Board size of Listed Companies

10. Disclosure on duration of Board Meetings/Committee Meetings

11. Tele-Conferencing & Video Conferencing

12. Audit Committee Charter

13. Remuneration of Non-Executive Directors

14. Training of Independent Directors

15. Establishment of Corporate Serious Fraud Office

Path for CG ……

Narayan Murthy Committee –

1) Disclosure of Contingent liabilities

2) Certification by CEO & CFO

3) Independence of Audit Committee

4) Disclosure to Audit Committee of Source and Application of funds raised by IPO

5) Risk Assessment and Management

6) Code of Conduct for Senior Management & Board Members

Path for CG ……

Dr. J.J. Irani Committee –

1) Independent Directors in Listed Companies

2) Pyramidal Structure

3) Power to Shareholder

4) Single Person Company

5) Self Regulation

6) Stringent penalties

Path for CG ……

Clause 49 – Corporate Governance

I. Board of Directors

(A) Composition of Board

Board of Directors should comprise of not less than 50% Non-Executive Directors.

In case of Non-Executive Chairman –

One-Third of the Board should comprise of Independent Directors.

In case of Executive Chairman –

One-Half of the Board should comprise of Independent Directors.

Listing Agreement – Clause 49

Board of Directors

Board Structure, MIS & Composition

Responsibilities of the Board

Evaluation of Board performance

Questions for practicing qualitative

governance by independent directors


Board Structure, Composition & BIS

Size of the Board

Non-Executive: Executive Ratio

Non-executive independent directors

Task of Board of Directors

Role of Chairman

Board Information Systems


Senior Mgt. Performance

Succession Planning

Strategic Planning

Risk Management

Disclosure &Transparency

Legal & Compliance

Corporate Oversight

Environment Ethics

Represent Core Belief

&Values

Stakeholder Accountability

Corporate Social

Responsibility

MIS & Business Audit

Systems


Responsibilities of Board of Directors

But If Non-Executive Chairman is a promoter / is related to any promoter or person occupying the management position at the Board Level or one level below the Board, One-Half of the Board should comprise of Independent Directors.

As per Clause 49, “Independent Director” means a Non-Executive Director 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;


b. is not 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.

e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director.

f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.

g. 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. However, no such approval is required for payment of sitting fees within the limits specified by the Companies Act.


(C) Other provisions as to Board and Committees

Board Meeting

– At least 4 times a year

– Maximum time gap between two meetings 4

months

Committee

– Membership in not more than 10 committee

– Chairmanship in not more than 5 committee

Replacement of an Independent Director

- within 180 days from the date of resignation.



(D) Code of Conduct

Board should lay down the code of conduct for all Board members and senior management of the company.

Should also be posted on the web site of the company.

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 off by the CEO and COO.

II. Audit Committee

(A) Qualified and Independent Audit Committee

—Minimum three directors as members

—Two-Third of the members shall be independent Director

—All members shall be financially literate and at least one member shall have accounting/financial management expertise

—Chairman shall be independent director

—Chairman shall remain present at AGM to answer the queries of Shareholders


(B) Meeting of Audit Committee

– At least 4 times a year

– Maximum time gap between two meetings 4 months

– quorum should be One-Third or Two members, but there

should be at least two independent directors present

(C) Powers of Audit Committee

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

There are various functions required to be carried out by the Audit Committee.

(E) Review of information by Audit Committee

Audit Committee has to review management discussion analysis, statement of related party transactions, internal audit reports, etc.


III. Subsidiary Companies

- At least one independent director of Holding Company shall be a director of a material non-listed subsidiary Company

- Audit Committee of Holding Company shall review financial statements of such subsidiary Company

- Minutes of Board meetings of such subsidiary Company shall be place at the Board meeting of the holding Company


IV. Disclosures

Following disclosure are required to be made under Clause 49 :-

(A) Basis of related party transactions

(B) Disclosure of Accounting Treatment

(C) Board Disclosures – Risk management

Risk Management includes…….

- Understanding of Corporate / Business objectives

- Identification of various Risks

- Assess and Plan Controls


- Mitigate the Risks

- Improve, Review and Learn

(D) Proceeds from public issues, rights issues, preferential issues etc.

(E) Remuneration of Directors

(F) Management

(G) Shareholders


V. CEO/CFO certification

The CEO, i.e. the Managing Director and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify the financial statement.

CEO/CFO Certification on…….

- Compliance with existing accounting standards,

applicable laws and regulations

- Transactions complying with the Company’s Code of

Conduct

- Establishment and maintenance of internal controls


- Evaluation of the effectiveness of the internal control

systems

- Steps taken or to be taken to rectify the deficiencies


To

The Board of Directors

XYZ Limited

(a)We have reviewed financial statements and the cash flow statement for the year ended on 31st March, 2010 and that to the best of our knowledge and belief:

(i) these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

(ii) these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

Listing Agreement – Clause 49 – CEO/CFO Certification

(b)There are, to the best of our knowledge and belief, no transactions entered into by the Company during the year ended on 31st March, 2009, which are fraudulent, illegal or violate of the Company’s Code of Conduct.

(c)We accept responsibility for establishing and maintaining internal controls for financial reporting and that we have evaluated the effectiveness of the internal control systems of the company pertaining to the financial reporting and 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 and the steps they have taken or propose to take to rectify these deficiencies.


(d)We 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 been disclosed in the notes to the financial statements; and

(iii) instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the Company’s internal control system over financial reporting.

For XYZ Limited

Chairman & Managing Director Chief Finance Officer


VI. Report on Corporate Governance

There shall be a separate section on Corporate Governance in the Annual Report of company, with a detailed compliance report on Corporate Governance.


Corporate Governance Report INTRODUCTION

A. MANDATORY REQUIREMENTS (I) Company's Philosophy on the code of Governance

(II) Board of Directors

(III) Audit Committee

(IV) Shareholders'/ lnvestors' Grievance Committee

(V) Remuneration Committee

(VI) Remuneration of Directors

(VII) Committee of Directors


Corporate Governance Report

(VIII) Details of General Meetings

(IX)Disclosures on Materially significant related party transactions

(X)Details of Non-compliance by the Company and penalties, strictures imposed on the Company by the Stock Exchange, SEBI or any Statutory Authorities on any matter related to capital market during the last three years

(XI) Code of Conduct

(XII) CEO / CFO Certificate

(XIII) Disclosures on Whistle Blower Policy

(XIV) General Shareholders Information


CEO/CFO Certificate

To

The Members

XYZ Ltd.

I, _____________________, Chairman and Managing Director and

Chief Executive Officer of the Company, do hereby declare that the

Directors and Senior Officers of the Company have exercised their

authorities and powers and discharged their duties and functions in

accordance with the requirement of the Code of Conduct as

prescribed by the Company and have adhered to the provisions of the

same.

For Elecon Engineering Company Ltd.

_______________________

Place : Chairman & Managing Director Date :

Corporate Governance Report

B. NON-MANDATORY REQUIREMENTS

A) CHAIRMAN OF THE BOARD

B) REMUNERATION COMMITTEE

C) SHAREHOLDER RIGHTS TO RECEIVE FINANCIAL RESULTS

D) POSTAL BALLOT

E) AUDIT QUALIFICATIONS

F) TRAINING OF BOARD MEMBERS

G) OFFICE SPACE FOR NON EXECUTIVE CHAIRMAN


VII. Compliance

The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of Corporate Governance and such certificate shall be annexed to the Directors’ Report in the Annual Report.


Auditors’ Certificate on CG

Auditors' Certificate on compliance with mandatory

requirements of Corporate Governance to the members of

Elecon Engineering Company Limited

To

The Members

XYZ Limited

We have examined the compliance of the conditions of

Corporate Governance by XYZ Limited for the year ended on

31st March, 2010 as stipulated in Clause 49 of the Listing

Agreement of the Company with the Stock Exchanges in India.

The compliance of the conditions of Corporate Governance is

the responsibility of the management. Our examination was

limited to the procedures and implementation thereof, adopted

by the company for ensuring the compliance of the conditions

of the Corporate Governance. It is neither an audit nor an

expression of an opinion on the financial statements of the

Company.

In our opinion and to the best of our information and according

to the explanation given to us, the Company has complied with

the conditions of the Corporate Governance as stipulated in

the above Listing Agreement.


We state that in respect of investor grievance received during the

year ended on 31st March, 2010, no investor grievances are

pending against the Company as per records maintained by the

Company and presented to the Investors’/Shareholders’

Grievance Committee of the Company.

We further state that such compliance is neither an assurance as

to the future viability of the Company nor the efficiency or the

effectiveness with which the management has conducted the

affairs of the Company.

For and on behalf of

_________________________________________

Place: Chartered Accountants

Date : M. No. : _____

Firm Regn. No. _____


Information to be placed before Board of Directors (Mandatory) :-

1. Annual operating plans and budgets and any updates.

2. Capital budgets and any updates.

3. Quarterly results for the company and its operating divisions or business segments.

4. Minutes of meetings of audit committee and other committees of the board.

5. The information on recruitment and remuneration of senior officers just below the board level, including appointment or removal of Chief Financial Officer and the Company Secretary.


6. Show cause, demand, prosecution notices and penalty notices, which are materially important

7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.

8. Any material default in financial obligations to and by the company, or substantial nonpayment for goods sold by the company.

9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company.


10. Details of any joint venture or collaboration agreement.

11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.

12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc.

13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business.


14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material.

15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc.

Clause 49 also provides for a suggestive list of items to be included in the Report of Corporate Governance in the Annual Reports of Companies.


Non-Mandatory Requirements :-

There are certain other requirements, which may be complied by a Company without any obligation. Such items include maintaining of Chairman’s office by Non-Executive Chairman, Setting up of a Remuneration Committee, Training of Board Members, Mechanism for evaluating Non-Executive Members, Whistle Blower Policy, etc.


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