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Manvinder Singh Partner
manvinder@jsalaw.com | +91 99586 91440
J. Sagar Associates advocates & solicitors
Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad | Chennai
Introduction of New Concepts in
Corporate Governance
Agenda
2
Section I:
Introduction
Section II New Concepts in Corporate
Governance and Consequent
Challenges
Section III Implications on Directors
Section I
Introduction
3
• Companies Act 2013 (“CA 2013”) enacted, new concepts introduced.
• Consequent amendment to Clause 49 of the Listing Agreement (“LA”) in line with CA
2013.
• Enhanced responsibilities of the Board and Independent Directors
• More involvement of Independent Directors (“IDs”) in the functioning and management
of companies. Companies seek to benefit from their experience, skills, knowledge and
expertise.
• In light of additional roles and responsibilities of IDs, Company implementing a program
to familiarize the IDs with the Company, their roles, rights, responsibilities in the
Company, nature of the industry and the business model of the Company.
• As a beginning to the familiarization process, this presentation gives an overview of the
new concepts introduced under CA 2013 and LA in corporate governance and the impact
on the Directors.
4
SECTION II
NEW CONCEPTS IN CORPORATE GOVERNANCE
AND
CONSEQUENT CHALLENGES
Section II
Key Highlights
5
CA 2013 enhances self regulation, encourages corporate democracy and reduces the number of approvals required from government
Increased disclosure requirements, greater operational transparency. Adopts internationally accepted practices
Several aspects of CA 2013 (340 out of 490 sections) are governed by the rules drafted by the MCA
Stringent provisions for violations, enhanced penalties
Practical issues are emerging in implementation
6
Section II
4. Related Party Transactions Policy
• Enhanced scope of RPTs; includes, inter alia,
sale/purchase of goods; selling/disposing/buying
property; leasing immovable property; availing &
rendering services, by company itself or through agents
and appointment of related party to office of profit.
• Approval process requires determination of three
factors: (a) whether transaction is in ordinary course of
business; (b) whether it is on arm’s length and (c)
whether it is a material RPT.
Section II
Related Party Transactions
Issues/Concerns
• Inconsistency between LA and CA 2013: CA 2013
requires only related party with reference to RPT
under consideration to abstain from voting on the
resolution. However, LA requires all related parties
to abstain from voting at resolutions for approving
proposed RPTs.
• Companies are required to formulate a RPT Policy;
follow prescribed approval process and comply with
documentation requirements.
Approval Requirements for RPTs
Non - Material
RPTs, which are in
ordinary course of
business and on
arm's length
Audit Committee
approval only
Non - Material
RPTs, which are
Not in ordinary
course of business
or Not arm's length
or both
Audit Committee
and Board approval
For Material RPTs;
OR
RPTs which are Not
in ordinary course
of business, or Not
on arm's length or
both And above the
prescribed
thresholds
Audit Committee,
Board and
Shareholder's
approval by special
resolution, where
related parties shall
not vote.
7
Section II
Deposits
Concept of Deemed Deposits
• All deposits accepted prior to commencement of CA 2013 to be repaid within 365 days from
commencement of CA 2013. Exemption available for deposits accepted or invited under Companies
Act, 1956 if company is regular in repaying deposits and interest thereon.
• Issues / concerns:
If goods cannot be manufactured or services cannot be rendered within 365 days?
Operational difficulties in identifying deposits as regulations may apply.
Advances from resident non-corporate entities in ordinary course
of business
Not appropriated against goods/services within 365 days from date of receipt
of advance
Tantamount to Deposits
Share application money/advance towards allotment of securities
Securities not allotted within 60 days and such money is not refunded
within 15 days of completion of 60 days
Tantamount to Deposits
Amounts raised through debentures, other than bonds/debentures
secured by first charge on assets of equivalent market value or bonds/
debentures compulsorily convertible into shares within 5 years
Tantamount to Deposits
8
Section II
Loans to Directors and Secretarial Audit
Loans to Directors
• Absolute restrictions on advancing of loan or giving of guarantee by a company to directors including
any partner, relative, firm or private company of director.
• No exemption prescribed for private companies.
• No provision for Central Government approval.
• Exemption is available in case of loan advanced and guarantee given by a holding company to its
WOS/Subsidiaries only if loan is used by WOS/Subsidiary for its principal business activities.
• Penalty - Punishable with imprisonment of up to 6 months or fine or both.
Secretarial Audit
• Mandatory for listed companies and report is to be annexed to the Board’s report.
• Company secretary to audit compliance with laws applicable to company including
2013 Act, foreign exchange laws, SEBI guidelines and regulations.
• Secretarial audit report to comment on whether systems and processes in a
company for monitoring and ensuring compliance with applicable
laws/rules/regulations/guidelines commensurate with the company’s size and
operations.
Section II
Auditors and Accountability
CA 2013 has introduced detailed provisions about appointment of statutory auditors, their responsibility
and liability
Appointment
and Rotation
• No listed company can appoint:
individual auditor for more than 1 term of five years;
audit firm for more than 2 consecutive terms of five years each.
• Eligible for reappointment only after 5 years of cooling off period.
• No audit firm:
having a partner common with the retiring firm, or
being in the “same network” as the outgoing firm can be appointed. Same
network includes firms under same brand name, network or trademark.
• Companies get 3 years to comply with this provision .
Restrictions on
non-audit work
• Auditors not to provide, directly or indirectly, any specified non-audit services.
• Comply within one year of commencement of CA 2013.
Reporting of
frauds
• If auditor has reason to believe that an offence involving fraud has been committed
by officers/ employees of the company against the company - duty to report to the
Central Government.
• If auditor does not act in good faith in reporting fraud then he is punishable with
imprisonment for up to 1 year and fine. Auditor to also refund remuneration and
pay damages in such cases.
9
Section II
Corporate Social Responsibility
• Provisions applicable to every company
having minimum: (i) net worth of INR 500
crore; or (ii) turnover of INR 1000 crore; or
(iii) net profit of INR 5 crore, in any 3
preceding FYs.
• Mandatory constitution of CSR Committee to
formulate policy and recommend expenditure.
• Spend min. 2% of the average net profits of
the co. during the 3 preceding FYs. Mention
reasons for failure to spend in Board’s report.
Activities in India will be included as CSR.
• CSR projects and programs to be carried out
itself or along with its associate companies.
Mere donations not sufficient. If carried out
through qualified Trust or Society, then
exercise control and monitor of utilization of
funds.
• CSR activities to be carried on in program/project
mode and not as one-off activity.
• CSR projects that only benefit employees or their
families are not eligible CSR expenditures.
• Activities which are identified as CSR -
eradicating poverty; promoting education, gender
equality, empowering women; reducing child
mortality; combating fatal diseases; ensuring
environmental sustainability, etc. List of activities
to be interpreted liberally, intention to cover wide
range of activities.
• Contribution to political parties, expenditure
incurred on fulfilment of any statute/regulation not
considered CSR expenditure.
10
Section II
Class Action Suits
Class Action Suit
Who can file? Members: 100 or more members or specified
% of members or members holding specified
% of capital, whichever is lower
Depositors: 100 or more depositors or
specified % of depositors, whichever is lower,
or depositors to whom company owes
specified % of total deposits
Against
Whom?
Company, its directors, auditors or any
experts, advisors and consultants for wrongful
acts
Why file? That the management and conduct of the company are being conducted in a manner prejudicial to the
interests of the company, its members or depositors
Implications? • Restrain company from acting ultra vires, declaring a resolution passed by suppressing material facts
as void or doing an act which is against their interest
• Grant damages or compensation from the company, its directors, auditors including audit firm, expert
or advisor or consultant.
11
12
Section II
Policies of the Board
Risk Management Policy Board Diversity Policy Policy on Material Subsidiaries
Relevant
Provision
• Board to formulate risk
management policy and
specify steps towards
implementation of the
said policy in the Board
report.
• Listed companies to
constitute risk
management committee
comprising majority of
Board members and
senior executives
Nomination and Remuneration Committee to
formulate policy on Board diversity.
LA requires listed company to formulate
policy for determining ‘material subsidiaries’.
Policy to be disclosed on company’s web site.
Main
Purpose
Identifying and assessing
risks; formulating plan to
mitigate risks
• Candidates to be selected having due regard
to benefits of diversity of the Board.
• Selection of candidates to be considered
across number of aspects: gender, age,
cultural and educational background,
professional experience etc.
Identify material subsidiaries:
• for appointment of ID of holding company
on board of material subsidiary;
• Special resolution required for: disposal of
shares of material subsidiary reducing stake
of holding company to less than 50% or
resulting in holding company ceasing to
have control; selling, disposing, leasing
assets of material subsidiary amounting to
more than 20% of assets of material
subsidiary;
• minutes of all significant transactions of
material subsidiary to be placed at Board
meeting
12
Section II
Whistle Blow Mechanism
13
• Director or employees of the company having genuine
concerns or grievances, such as actual or suspected
fraud, unethical behavior or violation of company’s
ethics policy, can report concerns.
• Every listed company to establish vigil mechanism.
• Code of conduct of IDs to ascertain that company has adequate and functional vigil
mechanism. Vigil mechanism to support Board’s functions of laying internal controls to
prevent and detect frauds.
• Audit Committee or person nominated by the Board shall oversee the vigil mechanism.
• Vigil policy to provide adequate safeguards against victimization of employees and direct
access to overseer of vigil mechanism. Policy should ensure that whistle blower has
complete anonymity.
• Protection built for companies – company may take appropriate action if repeated frivolous
complaints.
• Issues/Concerns: What action is to be taken? If director/employee not satisfied with the
action that has been taken, can he appeal to any higher authority?
SECTION III
IMPLICATIONS ON DIRECTORS
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Section III
Qualifications for Directors
Not have been convicted of offence in
relation to RPTs under section 188 of CA
2013 during 5 years, immediately
preceding his appointment and in case
convicted, such order must not be in
effect
Must not be a director (including
alternate director) in more than 20
companies or in more 10 public
companies
Not be an undischarged insolvent nor
preferred an application for being
adjudicated as insolvent, which application
is pending
Paid calls on shares held by him in
the company and in case not paid, 6
months shall not have lapsed from the
date such payment is due
No order disqualifying him from being
appointed as a director of any company
should have been passed by a court or
tribunal or if passed, such order shall not
be in force
Must be of a sound mind
In the immediately preceding 5 years, must not
have been a director of a company which has:
(i) not filed financial statements or annual
returns for continuous period of 3 FYs, or
(ii) failed to repay deposits or interest thereon
or to redeem debentures on the due date
and such failure to pay or redeem
continues for 1 year or more
Must not have been convicted of any
offence making him incapable of being
appointed as a director under CA 2013
Qualifications
for a Director
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Section III
Role of Nomination and Remuneration Committee
Board to constitute a Nomination and Remuneration Committee (“NRC”) comprising of 3 or more non-executive
directors, with at least ½ IDs and the chairman being an ID.
Role of
NRC
To identify and recommend to the Board
persons qualified to become directors and
hold in senior management position;
Formulating criteria for evaluation of IDs
and the Board;
Formulating criteria for determining
qualifications, positive attributes and
independence of directors;
Formulating policy on remuneration for the
directors, KMPs and other employees based
on principles such as (i) need to attract,
retain and motivate talent in running the
company, and (ii) relationship between
remuneration and performance.
Devising policy on Board diversity.
Appointment of IDs
• Explanatory statement for appointment of ID to specify that
in the opinion of the Board the ID fulfils the prescribed
conditions.
• Company to issue formal letters of appointment to IDs.
• Every ID is required to give a declaration that he meets the
criteria for independence, at (i) the first meeting of the Board
that he attends; (ii) first meeting of the Board in every FY;
and (iii) whenever there is any change in the circumstances
which may affect his independence.
Remuneration to directors
• To be determined based on the policy framed by NRC.
• Total managerial remuneration payable to all directors (and
manager, if any) for a FY not to exceed 11% of the net profits
of the company, except with the consent of the Central
Government.
• Non-Executive directors may be paid (i) sitting fee, (ii)
reimbursement of expenses for participation in Board
meetings; and (iii) profit related commission as approved by
the shareholders, subject to the maximum thresholds
prescribed.
• No stock options to ID. 16
Section III
Tenure, Evaluation and Vacation of Office
Tenure of an ID
• Maximum tenure: 2 consecutive terms of 5 years
each.
• Re-appointment for second term requires special
resolution of the shareholders.
• After completion of the 2 consecutive terms, the
individual shall be eligible for appointment, only
after a cooling off period of 3 years, provided he
has not been associated with the company in any
other capacity, either directly or indirectly during
the said period of 3 years.
Vacation of office of director
• The office of a director stands vacated if the director
inter alia:
absents himself from all the meetings of the Board
held during 12 months with or without seeking
leave of absence;
fails to disclose his interest in a contract or
arrangement in which he is interested in
contravention of section 184 of CA 2013; or
is convicted by a court of any offence and
sentenced to imprisonment for six months or more,
irrespective of whether the order is under appeal.
• Person who knows that his office as director has
become vacant on account of above disqualifications,
and continues to function as a director, may be
punished with imprisonment for up to 1 year or with
fine between INR 1 lakh to INR 5 lakh or with both.
Performance Evaluation
• NRC to formulate criteria and evaluate
performance of directors.
• Performance evaluation of IDs to be done by the
entire Board, except the director being evaluated.
• Based on the performance evaluation report, to
determine whether the ID will continue to hold
office or his tenure be extended.
Resignation
Director to forward a copy of the resignation along with
detailed reasons to the Registrar of Companies within 30
days of resignation.
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Section III
General Duties of Directors
• Unlike Companies Act, 1956, duties of directors codified in CA 2013 to include the following:
• Additionally, Clause 49 of LA also specifies certain key functions to be undertaken by the Board such as
monitoring effectiveness of company’s governance practices; ensuring transparent board nomination
process and ensuring appropriateness of systems for risk management, financial and operational control,
and compliance with the law and relevant standards.
• Directors’ responsibility statement to inter alia include a statement that the directors “devised proper
systems to ensure compliance with provisions of applicable laws and such systems were adequate and
operating effectively”.
• Enhanced penalties for defaults by directors - for example, imprisonment prescribed for failure to
disclose interest, non-compliance with provisions regarding RPTs, availing loan from the company in
contravention with section 185 of CA 2013 and engaging in insider trading.
Do’s Don'ts
Act in good faith in order to promote objects of
the Company for benefit of members, employees,
shareholders, community and environment.
Perform duties with due care, skill and diligence
and exercise independent judgment.
Not act in a manner so as to achieve or attempt to
achieve any undue gain/advantage, either for
himself or for his relatives, partners, or associates.
Not be involved in situations where he may have
a direct or indirect interest that conflicts or may
conflict, with the interest of the company.
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Section III
Duties of Directors: Disclosure of Interest
• Explanatory statement for a shareholders meeting: Additional disclosures in the explanatory statement
annexed to a notice of a general meeting
Where the agenda for a meeting includes any special business, extent of shareholding interest of every
(i) promoter, (ii) director, (iii) manager and (iv) every KMP of the company, in the counter party shall
be disclosed, if the interest is 2% or more in the paid up capital of such counterparty.
If due to insufficient disclosure any benefit accrues to a promoter, director or KMP, such person shall
hold the benefit in trust for the company and be liable to compensate the company for the benefit.
Body corporate in which
the director (along with
other directors), holds more
than 2% shareholding;
Body corporate in which
the director is a Promoter,
Manager or CEO
Firm in which the
director is a partner,
owner or member
Disclosure by Interested Director
• Directors to disclose their concern/interest in the
following persons; and
• Not participate in meetings where transactions with
such persons are discussed
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Section III
Additional Duties of Independent Directors
Duties of IDs
Not disclose confidential
information of the company
Undertake induction, refresh skills,
knowledge and familiarity with
company
Be well informed about company and external
environment relating to operations of company
Report concerns about unethical behaviour,
actual/suspected fraud and ensure existence adequate functional
vigil mechanism
Notify concerns about running of the company to
the Board; ensure unresolved concerns are
recorded in minutes
Attend meetings; seek
clarifications/information / professional
advice where necessary
In addition to the above, IDs are required to
comply with the Code for Independent
Directors (Schedule IV of CA 2013) which
lays down the duties, role and functions for
IDs.
20
Section III
Additional Duties of Independent Directors
Separate meetings
• IDs required to convene at least 1 meeting in a year, without the
presence of the non-independent directors and members of the
management.
• Such meeting of IDs shall:
review performance of non-independent directors and the
Board as a whole;
review performance of chairperson of the company and
take into account views of executive directors and non-
executive directors;
asses quality, quantity and timelines of flow of information
between management and the Board required by the board
of directors to perform its functions.
21
Section III
Officer in Default
Wide definition for “Officer in
Default” introduced to include the
following:
Officer in Default
Whole-time director
KMP
Director - as specified by Board in this
regard and who has consented to it or all directors,
if no director specified
Person - under immediate
authority of Board or KMP, who is charged with any responsibility and who fails to take steps to prevent
default
Person - in accordance with whose advice/ directions the
Board is accustomed to
act
Every director who is aware of contravention*
• Limitation on liability of non-
executive directors: Despite the wide
definition, IDs and non executive
directors (not being promoter or
KMP) only liable for acts which
occurred with their knowledge,
attributable through Board processes
and with his consent or connivance or
where he did not act diligently.
• The broader definition of officer in
default and the enhanced penalty
provisions are a double edged sword -
on one hand these warrant active
participation of the non-executive
directors in the Board proceedings
leading to better management, while
on the other hand, may lead to an over
cautious approach, thereby delaying
the decision making process.
* A director may be considered to be aware of a contravention by virtue of receipt by
him of any proceedings of the Board or participation in such proceedings without
objecting to the same, or where such contravention had taken place with his consent
or connivance. 22
• Prohibition on Insider Trading - No person shall deal in securities while having access to any non-public price sensitive
information.
• Price sensitive information means any information which relates directly or indirectly to the company and which if
published is likely to materially affect the price of securities of a company; includes major expansion plans or new
projects; amalgamation, mergers, take overs; disposal of whole or substantial part of undertaking; significant changes in
policies, plans, operations of company.
• Disclosures by directors and officers of listed companies:
• Directors and officers to deal in securities of company only during valid ‘trading windows’ specified by the company.
23
Section III
Insider Trading
One time disclosure Continual Disclosure
To the company To the company and stock exchange
Within 2 working days of appointment as director
or officer of the company
Within 2 working days of receiving intimation of allotment of
shares or acquisition or sale of shares or voting rights
Shareholding or voting rights held in the company
and positions taken in derivatives by him and his
dependents
Total shareholding/ voting rights held and changes thereto
(including holdings of dependents) since last disclosure; change
exceeding INR 5 lakh in value or 25,000 shares or 1% of total
shareholding or voting rights, whichever is lower
• All proposed transactions in securities of company to be undertaken by directors and
officers require pre-clearance by the company as per its pre-clearance procedure.
• All transactions in company’s securities to be completed within 1 week from receipt of
pre-clearance by company; fresh pre-clearance required if order for securities not
executed within 1 week.
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Thank you
manvinder@jsalaw.com
+91 99586 91440
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