Companies Act 2013:Keeping pace withBoard Governance Evolution

2 | Companies Act

Adapting to the new landscape

The Companies Act, 2013 clearly indicates focus of regulators toward enhancing the responsibility and accountability of boards. The Act outlines various requirements for Governance, disclosures and enhanced roles, responsibilities and liabilities of the board, its committees and independent directors.

Section 166 of the Act, outlines the “Duties of Directors” as under:

“A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.”

This leaves no doubt in terms of the all-encompassing ambit of oversight mandated and hence, requires a concerted effort toward implementation of a mechanism to ensure that the responsibilities entrusted are discharged effectively.

Board Talk – Emerging Concerns

What exposure do I have as an independent director on the board? What can I be held accountable for?

Can I be insured for my exposure? What are the options available?

Do I understand the business dynamics and underlying financial flows really well?

In the absence of any private sessions with external and internal auditors as well as any other consultants, am I just relying on management’s perspective?

Are the agenda, charter and the focus of the board and its committee’s aligned with what leading boards do? How can I access that?

What should I have in my contract to protect my interest and exposure?

Do I have adequate time on hand to do justice to all the responsibilities entrusted to me?

Do I get the right information, at the right time to get in to sufficient level of detail?

Where do I draw a line between management’s responsibility and that of a board or any of board’s committees?

Am I adequately prepared to discharge the responsibilities entrusted upon me?

Board Governance - Key Requirements

ApplicabilityKey Requirements Relevant Section

Public Private Listed

Board Of Directors

ü ü üConstitute the Board of Directors 149 (1)

Atleast 1/3rd of the Directors in the Board to be ü1 ü- 149(4)

Independent Directors

Minimum one director who stayed in India for ü ü ü 149(3)

more than 182 days in the previous calendar year

One Director may be appointed by the small ü- - 151

shareholders2

Atleast one Director to be a Woman Director

Committees to be Constituted by the Board

Board of Directors to constitute an Audit Committee (consisting of minimum three directors with majority being independent directors)

Terms of reference for the Audit Committee to be specified by Board in writing

Majority members of Audit Committee (including the Chairperson) to be able to read and understand financial statements

Vigil mechanism to be established and to be operated by the Audit Committee, where Audit Committee exists

Board of Directors to constitute a Nomination and Remuneration Committee (NRC) consisting of minimum three non-executive Directors of which more than 50% should be Independent Directors

Board of Directors to constitute a Stakeholders Relationship Committee consisting of a non-executive Director as a Chairperson and other members as the Board may decide

ü ü ü 149(1) Rule 11.1

ü1 ü- 177(1) Rule 12.4

ü3 ü- 177(4)

ü3 ü- 177(2)

ü3 ü ü 177(10) Rule 12.5

ü1 ü- 178(1) Rule 12.4

ü4 ü ü 178(5)

1 Paid up share capital > INR 100 crores or outstanding loans or borrowings or debentures or deposits > INR 200 crores

2 Small shareholder = shareholder holding shares of nominal value of not more than INR 20,000

3If accepting deposits from Public or have borrowed from banks and public financial institutions in excess of INR 50 crores

4more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year

Key Requirements Applicability

Public Private

Requirements for Independent Directors

Roles, responsibilities and duties

Selection of Independent Directors

Qualification of Independent Directors

Enhancing Board Effectiveness

Performance evaluation of the Board

Performance evaluation of Board members – Section 178 and Schedule IV üevaluation of non-independent and Independent ü

Directors

Guidelines on remuneration of board members ü ü ü Section 178 and Section 197

Disclosures by the Board

Disclosures to be made as part of Board Report (Extract of annual return, policy on appointment and remuneration of Directors, comments on ü üqualifications, contracts with related parties, Schedule V Part II Section IV formal evaluation of Board performance, etc.)

Relevant Section

Listed

ü4 - ü Schedule IV

ü4 - ü Section 150

ü4 - ü Rules under Chapter XI

ü4 - ü Schedule IV

ü

Training of Independent Directors ü4 - ü Schedule IV

134(3)

ü

Note: The above list if prepared for a quick and easy understanding of the requirements. Please go through the relevant section and the corresponding rules for a detailed understanding of the requirements.

4more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year

| Companies Act 4

Questions to be considered Well

prepared Requires

consideration Are we aligned as per the requirements and is the composition effective?

► Is the composition and size of the Board and its committees aligned to the requirements under the Companies Act 2013?

► Do we have the right mix of skills, knowledge and familiarity with the company that is required for effective functioning of the Board?

Do we have complete understanding of our roles, responsibilities and powers and the associated risk/exposure we are accepting?

► Are we aware of the individual responsibilities and powers entrusted under the Act, including the consequences and exposure (personal and company) in case of non-compliance?

► Are we confident that we have a comprehensive understanding of the financial statements and have drawn the right conclusions? Have we considered all the information provided adequately?

► Are we asking all the right questions and happy with the responses we are getting? ► Is there a process for orienting the Board and Committee members on their

responsibilities? ► Do we have a complete understanding of the Business and its functioning? ► What can I do to better understand the internal control environment and any potential

red flags with respect to potential frauds? ► Do we as a Board consult with the relevant experts to understand the issues and get an

independent perspective?

Have we managed our risk/exposure through a structured mechanism/framework? ► Are we sure that disclosures made by us in Directors Report are complete, accurate and

relevant? How do we ensure management is reporting all the relevant aspects to be considered for the disclosures?

► Do we have an adequate framework enabling us to sign off on critical aspects of internal financial controls, fraud reporting, risk management, compliance, etc.?

► How do we demonstrate compliance to qualitative criteria specified in the Companies Act 2013 (especially related to qualifications, skills of Directors and Independent Directors)?

► Have we mandated and institutionalized frameworks required under the Act (Vigil Mechanism, Risk management, Compliance, etc.), along with detailed policies, procedures and responsibilities for administering the same?

Measure our effectiveness/performance? How do we ensure continuous improvement? ► Do we have a framework for evaluating performance of key managerial personnel

(KMP)? Is there a process of identifying successors for KMPs? ► How do we measure if we are discharging all the responsibilities effectively? Do we

have a framework for continuous improvement? Are we aligned with the leading Boards globally?

► Is the remuneration of Board members aligned to their individual performance, overall Board performance and the organizations’ performance?

6 | Companies Act

How Can EY Help You Meet the Board Governance Challenges

Suggested Action Assistance from EY Do I need support?

Understand the changes and ensure

alignment with the requirements

Ensure clarity and uniform

understanding of individual roles, responsibilities

and powers

1. Board Navigation sessions

Navigate through the requirements: Board Orientation sessions Opportunity for Board Members and Independent Directors to have focussed sessions to gain understanding of the requirements under the provisions of the Companies Act 2013 and resultant potential implications

Assess readiness and prepare implementation roadmap: Blueprint for Board Compliance Assess the current state as compared to the requirements under the Companies Act 2013 and define an implementation roadmap for aligning with the requirements (along with timeline and responsibilities)

2. Directors toolkit

Define a standard toolkit: Directors Induction toolkit

Standard induction toolkit for new directors, including key aspects related to the following: ► Understanding of the relevant Industry/Business and its associated challenges ► Independent Director and Companies Act (Definition, responsibilities, etc.) ► Alignment of statutory roles and responsibilities with the individual contract and the

Company/company-defined charters ► Individual risk exposures in the event of potential non-compliances ► Oversight role (Compliance, risk management, Internal Financial Controls, Related

Party, Corporate Social Responsibility, etc.) ► Essential tools (Guidance on disclosures, Letter of appointment, etc.) Define training framework: Process of conducting periodic/need based orientation sessions on key aspects stated above

3. Board Handbook

Create a Board reference manual, including the following: Board Handbook

► Board Governance manual: Including Charters, contract templates and procedural aspects based on requirements of the Companies Act 2013 including detailed

Define relevant procedures regarding appointment and selection of Directors, Independent Directors procedures and and other committee members framework to ► Reporting Protocols:

ensure sustenance and adherence ► Information to be reported

► Manner and timing of reporting

► Management responsibility for reporting

► Templates for reporting

► Capturing actions and monitoring them

► Disclosure framework: Framework to capture the relevant aspects along with the appropriate checks and balances to ensure completeness, accuracy, relevance, etc. of the disclosures being made

How Can EY Help You Meet the Board Governance Challenges

Suggested Action Assistance from EY Do I need support?

Create a framework for

evaluation

4. Board Evaluation toolkit

Create Board Evaluation Toolkit: Board Evaluation Framework ► Institute a mechanism (self, survey, interview, etc.) for performance evaluation and

capturing the relevant action/decisions

► Define and formalize metrics for evaluation of the Board, Audit Committee, as well as individual Board members

Develop Board succession and reward management framework: ► Develop succession planning mechanism for managing director, executive directors, CEO

and other key managerial personnel

► Develop reward mechanisms for the Board members

Define framework to remain effective and align with the leading practices

5. Board Effectiveness Programme

Institutionalize improvement program: Board effectiveness program

► Benchmark maturity level compared to leading practices and implement measures for enhancing effectiveness of the Board performance

► Benchmark with global governance frameworks and adopt measures to enhance level of Governance

Notes

8 | Companies Act

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