power point presentation of session xiii & xiv

8/12/2019 Power Point Presentation of Session XIII & XIV

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Session XIII & XIVREPORTS OF IMPORTANT

COMMITTEES ON CORPORATEGOVERNANCE K.M. BIRLA

COMMITTEE, NARESH CHANDRACOMMITTEE, N.R. NARAYAN

MURTHY COMMITTEE, J.J. IRANICOMMITTEE


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Session Overview: This session will cover the detaileddiscussion on the contents of theabove reports. The instructor isrequested to discuss the gist of thereports and its application incorporate sector for good corporate

governance.The committee reports are attachedas appendices to the STM.


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Session Objective:

At the end of the session, theparticipants will wellconversant with the reports ofthe various committees.


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Kumar Mangalam Birla CommitteeReport

Securities and Exchange Board of India(SEBI) appointed a committee oncorporate governance on May 7, 1999with eighteen members under thechairmanship of Shri Kumar MangalamBirla to promote and raise the standardsof corporate governance. In early 2000,

the SEBI Board accepted and ratified keyrecommendations of this committee andthese were incorporated into Clause 49 ofthe Listing Agreement of the Stock

Exchanges.


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Mand atory recom m endations 1. Applicability : Applicable to all listed companies with

paid up share capital of Rs. 03 Crore and above.

2. Board of Directors : The Board of Directors of acompany must have an optimum combination ofexecutive and non-executive Directors with not lessthan 50 percent of the Board comprising of non-executive Directors. The number of independentDirectors should be at least one third in case thecompany has a non-executive Chairman and at leasthalf of the Board in case the company has anexecutive Chairman.

3. Shri Kumar Mangalam Birla Committee definesindependent directors as directors who apart fromreceiving directors remuneration do not have anymaterial pecuniary relationship or transactions with thecompany, its promoters, its management or its

subsidiaries, which in judgment of the Board mayaffect independence of judgment of the director.


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3. Audit Committee : A qualified and independent Audit Committee should be set up

to enhance the credibility of the financial disclosures and topromote transparency.

The Audit Committee should have minimum 3 members, allbeing non-executive directors, with majority being independent, andat least one Director having Financial and Accounting knowledge.

The Chairman should be an independent Director and must bepresent at the Annual General Meetings to answer shareholders

queries. The Audit Committee to invite such of the executives, as it

considers appropriate (and particularly the head of the financefunction). In addition to head of internal audit, representative of theexternal auditor for the meetings.

Audit Committee to meet at least thrice a year with a gap of notmore than six months, with one meeting necessarily before thefinalisation of annual accounts.

The quorum should be either two members or one third,whichever is higher with minimum of two independent directors.

Audit Committee specifically function as the bridge between

the Board, the Statutory Auditors and the Internal Auditors.Continued


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4. Remuneration Committee of the Board : The Board of Directors to decide the remuneration of non

executive directors. Full disclosure of the Remuneration package of all the

directors covering salary, benefits, bonuses, stock options, pension,fixed component, performance linked incentives along with theperformance criteria, service contracts, notice period, severancefees etc. to be made in the section on corporate governance of theannual report.

5. Board procedures :The Board meetings to be held at least four times a year with amaximum time gap of four months between any two meetings.Minimum information on annual operating plans and CapitalBudgets, Quarterly Results, Minutes of Meetings of AuditCommittee and other Committees, information on recruitment andremuneration of senior officers, significant Labour problems,material default in financial obligations, statutory compliance etc.should be place before the Board. In order to ensure total commitment to the Board Meetings, aDirector should not be a member in more than 10 Committees andact as Chairman of more than 3 Committees across all companiesin which he is a Director.


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5. Managemen t: Management Discussions and Analysis (MDA) report covering industry

structure, opportunities and threats, segmentwise or product wise performance, outlook,risks, internal control system etc. are to formpart of Directors Report or as an addition

thereto. In addition, disclosure must be madeby the Management to the Board relating to allmaterial financial and commercialtransactions, where they have personal

interest that may have a potential conflict withthe interest of the company .

Continued


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6. Shareholders : In case of appointment of a newDirector or re-appointment of existing Director,information containing a brief resume, nature of

expertise in specific functional areas andCompanies in which the person holdsDirectorship/Committee Membership must beprovided.

There is also specific recommendation of sharing ofinformation like quarterly results, presentation madeby the companies to analysts through companys website. In addition, a Board committee under thechairmanship of a non executive director is to beformed to specifically look into the redressing ofshareholder complaints like transfer of shares, non-receipt of accounts, non receipt of declared

dividends etc.


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7. Manner of implementation : A separatesection on Corporate Governance in the

Annual Reports to be introduced covering briefstatement on Companys philosophy on codeof governance, Board of Director, AuditCommittee, Remuneration Committee,Shareholders Committee, General BodyMeetings, Disclosures etc. Non compliance ofany of the mandatory recommendations withreasons thereof and the extent of adoption onnon-mandatory recommendations highlighted

to enable the Shareholders and securitiesmarket to assess for themselves thestandards of Corporate Governance followedby the company.

Continued


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Non-Mand atory recom m end at ions Chairman of the Board :

The chairmans role should in principle bedifferent from that of the chief executive, thoughthe same executive can perform both the roles.In view of the importance of chairmans role, anon-executive chairman should be entitled to achairmans office at the Companys expenseand also allowed reimbursement of expensesincurred in the performance of his duties, toenable him to discharge his responsibilitieseffectively.

Continued


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2.Remuneration Committee of the Board :The company must have a credible and transparentpolicy in determining and accounting for the

remuneration of the directors. The remunerationpackage should be good enough to attract, retain andmotivate the executive directors of the quality required.The Board of Directors should set up a remunerationcommittee, to determine on their behalf and on behalf of

the shareholders, with agreed terms of reference, theCompanys policy on specific remuneration packagesfor executive directors including pension rights and anycompensation payment. The committee shouldcomprise of at least three directors, all of whom shouldbe non executive directors, the Chairman being anindependent director. All the members must be presentat the meetings for the purpose of quorum as it is notnecessary for the meeting to be held very often. TheChairman should be present at the annual generalmeeting, to answer the shareholders queries.


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3. Shareholders Rights : Half yearly declaration offinancial performance including summary of thesignificant events in the six months, should be sent to

each household of shareholders. 4.Postal Ballot : Currently, although the formality ofholding the general meeting is gone through, in actualpractice only a small fraction of the shareholders of thatcompany do or can really participate therein. This

virtually makes the concept of corporate democracyillusory. It is imperative that this situation which haslasted too long needs an early correction. In thiscontext, for shareholders who are unable to attend themeetings, there should be a requirement, which willenable them to vote by postal ballot on key issues.Some of the critical matters which should be decided bypostal ballot are given below:

Continued


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Matters relating to alteration in the memorandum ofassociation of the company like changes in name,objects, address of registered office etc.

Sale of whole or substantially the whole of theundertaking,

Sale of investments in the companies, where theshareholding or the voting rights of the company

exceeds 25 percent , Making a further issue of shares through

preferential allotment or private placement basis, Corporate re-structuring, Entering a new business area not germane to the

existing business of the company, Variation in rights attached to class of securities,

Matters relating to change in management. Continued


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Shri Naresh Chandra Committee Report A high powered committee was constituted on August21, 2002 by the Ministry of Finance and Company

Affairs to address issues relating to corporateGovernance and to examine the Auditor Companyrelationship and to regulate the role of auditors. Thetrigger was the happenings in the US and certaininstances in India involving auditors. In fact, the

spontaneity with which US responded to the high profilecorporate scams by enacting Sarbanes-Oxley Act in avery short time, to take strong measures to deterrecurrences of such scams, made the Indian regulatorsand authorities to come out with almost similarresponse. It was rightly regarded that the ongoingmeasures, already implemented or underimplementation were far too inadequate to combat thedeep-rooted weaknesses in the system.

Continued


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The terms of reference to the committee were: 1. To examine the issues pertaining to the Auditor company

relationship to ensure the professional nature of relationship,consider rotation of auditors/auditing partners, restriction on nonaudit fee/work, procedures for appointment of auditors anddetermination of audit fee etc.

2. to examine measures to ensure that the managements andauditors actually present the true and fair statement of the affairsof companies, to look into the measures such as personalcertification by directors, random scrutiny of accounts etc.

3. to examine the issues concerning the regulation ofprofessions of Chartered Accountant, Company Secretaries andCost Accountants in the context of serving the concerned share-holders, especially the small investors and examine theadvantage in setting up an independent regulator along the lines

of the regulations contained in Sarbanes-Oxley Act of 2002passed in US. 4. to examine the role of independent directors and how their

independence and effectiveness can be ensured, and5. Any other issues related to or incidental to the above.

Continued


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The committees recommendations are quite comprehensive. The committee hasrecognized the independence of audit as one of the key factors of governanceand has recommended suitable measures which are briefly stated below:

1. Prohibition of direct financial interest in the audit client by the audit firms,its partners or members of the engagement team as well as their directrelatives.

2. Prohibition of receiving any loan and/or guarantees from or on behalf ofthe audit client by the audit firm, its partners or any member of the engagementteam and their direct relatives.

3. Prohibition of business relationship with the audit client by the audit firmand other associated persons as mentioned above.

4. Prohibition of audit partners and other associated persons from joining anaudit client or any key personnel of the audit client wanting to join the auditfirm, for a period of two years from the time they were involved in thepreparation of accounts and audit of the client.

5. Prohibition of undue dependence on audit client by ensuring that feereceived by a firm from any one client and its subsidiaries and affiliates shouldnot exceed 25 percent of the total revenue of the audit firm, providing certainexceptions in case of new or small audit firms.

6. Prohibition, restraining audit firms from performing certain non auditservices, as per the list specified for this purpose, in line with similar provisionscontained in the Sarbanes-Oxley Act of the US.

7. Rotation of the audit partners and at least 50 percent of the engagement team,responsible for the audit every five years, falling short of the provisions

contained in the Companies Bill 1997, suggesting rotation of statutory auditors.


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The committee further recommended that the Audit Committeeshould approve the terms of appointment of auditors.

Disclosures : With regard to disclosure requirements, thecommittee recommended that the auditors should discloseimplications of contingent liabilities, so that the investors andshareholders have a clear picture of a companys contingentliabilities. The management on its part should provide a cleardescription of each material liability and its risks and theauditors should give their comments on managements views, in clear terms.

Qualifications in audit report : In addition to the existingprovisions in the Companies Act, regarding qualifications inaudit reports, the committee has made furtherrecommendations to the effect that the auditor should readout the qualifications with explanations, to the shareholdersat the companys annu7al general meeting and the audit firmis mandated to send separately a copy of the qualified reportto the Registrar of Companies, SEBI and the Principal StockExchange, with a copy of the letter to the management of the

company. Continued


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Replacement of auditors: In the event of an auditor beingappointed in the place of the retiring auditor, the committee hasrecommended that section 225 of the Companies Act be amendedto require a special resolution for the purpose and that the

explanatory statement to give reasons for such replacement. Theoutgoing auditor to have the right to comment and the AuditCommittee to rectify whether the explanatory statement is true andfair.

Certification of Accounts: Avery significant recommendation ofthe committee is to require a company to furnish a certificate by theCEO and CFO stating that the signing officers have reviewed andthat the statements do not contain any materially untrue ormisleading statement, not omitted any material fact and thestatements present a true and fair picture of thefinancial/operational state of the company, the signing officers areresponsible for establishing and maintaining internal controls. Thecommittee has recommended that in the event of any materiallysignificant mis-statement or omissions, the signing officers willreturn to the company that part of any bonus or incentive or equitybased compensation which was inflated on account of such error,as decided by the audit committee.

Continued


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Minimum number of Directors : The committeerecommended that the minimum number of directors forthe categories of companies referred to above shall be

seven of which at least four shall be independentdirectors.

Board proceedings : The committee recommended thatproceedings of the Board reflected in minutes should

clearly disclose, apart from the members who are inattendance, the duration of each meeting and thedetails of the proceedings thereof. The committee hasalso recommended for holding the board meetingthrough tele/video conferencing.

Exemption from criminal and civil liabilities : Therecommendations include that non-executive/independent directors be exempted in thedefinition of chapter of various enactments from criminaland civil liabilities


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Training for independent directors: It has beenrecommended that the independent directors shouldcompulsorily undergo at least one training course before

assuming responsibilities or within a year from the dateof becoming an independent director. Directors failing toundergo such training would be disqualified undersection 274 (1)(g) of the Companies Act after giving

reasonable notice. Remuneration of non-executive directors : Thecommittee, in view of the enhanced responsibilities ofnon-executive/independent directors, recommendedreviewing the statutory limit on the sitting fees and itshould be resolved between the management andshareholders.

Continued


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Audit committees : As per the report, the auditcommittee should consist of only independent directors.However, this is not to be mandatory for unlisted

companies having 50 percent or less shareholders,companies not having debts from institutions and banks,and unlisted subsidiaries of listed companies. The chairman of the Audit committee must annuallycertify whether and to what extent each of the functions

listed in audit committees charter was discharged in thecourse of the year. This will serve as the committees action taken report to the shareholders. It should alsogive a specific report on adequacy of internal controlsystem, perceptions of risks and in the event of anyqualifications, why the audit committee accepted andrecommended the financial statement withqualifications.

Continued


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Accountability and deterrents: The committee has recommendedthat consolidated financial statements should be made mandatoryfor companies having subsidiaries . It further recommended thatgreater accountability should be provided for, with respect totransfer of money by way of inter-corporate deposits or advances ofany kind from listed companies to any other company.Managers/promoters to be held personally liable, when found guiltyof offences. Other measures suggested to improve governanceinclude prevention of stripping of assets, random scrutiny of

accounts and propagation of an internal code of ethics forcompanies.

Setting up of a Corporate Serious Frauds Office : The committeesuggested setting up of a corporate serious frauds office withouttaking away the powers of investigation and prosecution from

existing agencies for detecting the frauds committed by companies. The Department of Company Affairs has accepted most of the

suggestions and many of the recommendations have been includedin the Companies (Amendment) Bill 2004.

Continued

e ng up o ua y ev ew oar


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e ng up o ua y ev ew oar(QRB):

The Committee on Corporate Governanceheaded by former cabinet secretary NareshChandra has recommended setting up ofindependent QRBs, one each for Institute ofChartered Accountants for India (ICAI),Institute of Company Secretaries of India(ICSI) and Institute of Cost and Works

Accountants of India (ICWAI). Mr Chandra said these QRBs would consist

of persons of eminence, apart from councilnominees.

It shall periodically examine and review thequality of audit, secretarial and costaccounting firms and comment on the qualityand sufficiency of systems.

The QRB has since been set up by thecentral Government vide notification No.G.S.R. 490 (E) dated 13.07.2007.


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Shri Narayana Murthy Committees report The SEBI, while analysing the financial statements of

companies and the reports on corporate governance,observed that their quality was not uniform. It thereforefelt a need to review the existing code on corporategovernance as to the adequacy of the present practicesand to improve such practices. The committee on

corporate governance was, thus, set up by SEBI underthe chairmanship of Shri N.R. Narayana Murthy.

The terms of reference were: 1. to review the performance of corporate

governance and2. to determine the role of companies in responding to

rumour and other price sensitive information circulatingin the market, in order to enhance the transparency and

integrity of the market.


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The important mandatory and non-mandatoryrecommendations of the committee are discussedbelow:

Mandatory recommendations Audit committee: The committee recommended that the

audit committee of public listed companies would berequired to review the following information mandatory:

Financial statements and draft audit reports,including quarterly/half yearly information.

Management discussion and analysis of financialcondition and the results of operations.

Report relating to compliance with laws and risk

management. Management letter/s of internal control

weaknesses issued by statutory/internal auditors andRecords of related party transactions.

Continued


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Related party transactions: A statement of all transactionswith related parties including their bases should be placedbefore the audit committee for formal approval/ratification

and that if any transaction is not on an arms length basis,management should provide explanation to the auditcommittee justifying the same.

Proceeds from initial public offerings : The companiesraising money through initial public offering, should discloseto the audit committee the uses/application of funds undermajor heads on a quarterly basis. Each year the companyshall prepare a statement of funds utilised for the purposesother than those stated in offer document/prospectus. Thisstatement shall be certified by the independent auditors ofthe company. The audit committee should make appropriaterecommendations to the Board to take steps in the matter.The suggestion enlarges the existing requirement in thisregard and is a response to manipulations perpetrated by

some corporate in this area. Continued


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Risk Management : The committee has deemedit necessary for the boards of the companies tobe fully aware of the risks involved in thebusiness and that it is also important for theshareholders to know about the process bywhich companies manage their business risks.The mandatory recommendations in this regard

are:procedures should be in place to inform board

members about the risk assessment andminimization procedures. These procedures

should be periodically reviewed to ensure thatexecutive management controls risks throughmeans of a properly defined frame work

Continued


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Management should place a report before the entire boardof directors, every quarter, documenting the businessrisks faced by the company, measures to address and

minimise such risks, and any limitations to the risktaking capacity of the Corporation. This documentshould be formally approved; by the board.

At present, in clause-49 of the Listing Agreement, there isa stipulation that the management discussion and

analysis report forming part of the boards annual reportshould include discussion on risks and concerns . Thesuggestion contained in the Narayana MurthyCommittees report is more elaborate and this wouldencourage a meaningful discussion at the board levelperiodically and the company will have the benefit ofadvice from board members who are not in day-to-daymanagement.

Continued


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Code of conduct : The committee has recommendedmaking it obligatory for the board of a company to laydown a code of conduct for all board members andd

senior management of the company and that this codeshould be posted on the companys website and allboard members and senior management personnelshall afirm compliance with the code on an annualbasis. The annual report of the company shall contain a

declaration to this effect, signed off by the CEO. Thissuggestion is in line with the best practices adopted bycorporate in developed countries.

Nominee directors: The committee recommended doingaway with nominee directors. If an institution wishes toappoint a director on the board, such appointmentshould be made by the shareholders. Nominee of theGovernment on public sector companies shall besimilarly elected and shall be subject to the sameresponsibilities and liabilities as other directors.

Continued


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Other mandatory recommendations : Compensation to non executive directors tobe approved by the shareholders in general meeting;restrictions placed on grant of stock option,requirement of proper disclosures of details ofcompensation.

Whistle blower policy to be in place in acompany (freedom to companys personnel toapproach the audit committee without necessarilyinforming the superiors if they observe anunethical or improper practice, protection for the

complainant from retaliation etc. The directors of the holding company are to be in

the picture; audit committee of the holdingcompany to review financial statements of

subsidiaries etc. Continued


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Non-mandatory recommendations The non-mandatory recommendations pertain to moving to a

regime providing for unqualified corporate financial

statements, training of board members and evaluation ofnon-executive directors performance by a peer groupcomprising the entire board of directors, excluding thedirector being evaluated.

The SEBI has approved modifications in clause-49 of Listing

Agreement to give effect to the recommendations of ShriN.R. Narayana Murthy Committees report on corporategovernance. SEBI issued a circular dated August 26,2003 to all the stock exchanges in this regard. Therevised clause-49 contains the sub-clause as per the

existing clause-49m as well as new sub-clauses. All listedentities having a paid up capital of Rs. 3 Crore and aboveor net worth of Rs. 25 crore or more at any time in thehistory of the entity, are required to comply with theprovisions of revised clause-49, effective from April 1,2004.

Continued


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Shri J.J. Irani Committees report The committee consisting of 13 members and 6 specialinvitees drawn from various disciplines and fields wasconstituted on 2 nd December 2004 under thechairmanship of Dr. J.J. Irani, Director, Tata Sons withthe task of advising the Government on the proposedrevisions to the Companies Act 1956. The objective of

this exercise was to have a simplified compact law thatwill be able to address the changes taking place in thenational and international scenario, enable adoption ofinternationally accepted best practices as well asproviding adequate flexibility for timely evolution of newarrangements in response to the requirements of ever-changing business models. The Committee presentedits report to Government in May 2005.

Continued


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A summary of recommendations made by thecommittee are as under :

1. Background

1.1 Legal framework for corporate entities isessential to enable sustainable economic reform. Suchframework has to be in tune with emerging economicscenario, encourage good corporate governance and enableprotection of the interests of the stakeholders, includinginvestors.

It is appropriate that comprehensive reviews of the CompaniesAct 1956 has been taken up through a consultative processinitiated by Ministry of Company Affairs by exposing aConcept Paper on Company Law through electronic media.Such broad based consultation would enable working out anappropriate legislative proposal to meet the requirements ofIndias growing economy and should form an integral part ofthe law making exercise.

Continued


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2. Approach towards new Company Law2.1 Company Law should comprise of the basic principles guiding the

operation and governance of different kinds of corporate entities inIndia and be available in a single, comprehensive, centrally

administered framework. Such legal framework should provide asmooth and seamless transition from one form of business entity toanother and be amenable to adaptation to new business models asthey emerge.

2.2 Company law should be compact. While essential principles shouldbe retained in the substantive Law, procedural and quantitative

aspects should be addressed in the Rules.2.3 Law should enable self-regulation but impose greater accountabilitythrough disclosures and speedy administration of reasonable legalsanctions.

2.4 The new Company Law should enable harmonious operation of allGovernment and regulatory agencies and dovetailing of variousgovernance codes and standards complementary with the principleslaid down in the law.

2.5 The law should enable development of institutional structures toaddress new requirements dictated by changes in the economicenvironment.

Continued


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3. Classification and Registration of Companies3.1 The law should take into account the requirements of different

kinds of companies prescribing the essential requirements of theircorporate governance structure.

3.2 Small and Private Companies should be provided greater flexibilityand freedom of operation while enabling compliance at low cost. Tounleash the entrepreneurial talent of the people in the informationand technology driven environment, law should recognize OnePerson Company (OPC). Such companies should be provided witha simpler legal regime through exemptions.

3.3 Government Companies should be treated at par with othercompanies and be subject to a similar compliance standards.

3.4 There may not be any restriction to a company having any numberof subsidiaries or to such subsidiaries having further subsidiaries.However, the Act should provide for a more elaborate regime of

corporate governance along with disclosures that reveal the nature ofthe transaction truthfully. Transactions between holding andsubsidiary companies may be treated as related party transactionsand consolidation of financial statements should be mandatory forsuch companies

Continued


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3.5 Special dispensations for Producer Companies and PublicFinancial Institutions (PFIs) need not be provided through theCompanies Act. If need be a separate legislation may beconsidered for such entities.

3.6 Law should recognize that joint ventures enable access to capital,technology and markets and should provide legal recognition to joint ventures ensuring that such arrangements do not become awindow for circumventing the essential provisions of the Law.

3.7 The e-Governance Project (MCA-21) taken up by the Governmentpromises significant efficiency and gains to companies incompliance processes. All registration process and statutory filingsshould be made compatible to the electronic medium. Such filingsshould be kept secure and should be identifiable through digitalsignatures.

3.8 Process of registration should be speedy, optimally priced and

compatible with e-Governance initiatives. Companies should berequired to make necessary declarations and disclosures aboutpromoters and directors at the time of incorporation. Stringentconsequences should follow if incorporation is done under false ormisleading information.

Continued


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3.9 Strong action should be taken under law against companies thatvanished with the investors funds. Preventive action in respect ofsuch vanishing companies should begin with registration itself andshould be sustained through a regime that requires regular and

mandatory filing of statutory documents. This should be followed upwith clearly provided legal process for tracking and causingdisgorgement of ill-gotten gains. Corporate veil should be lifted toenable access to the individuals responsible.

3.10 Regular filing should be made easy efficient and cost effective.Non-filing of documents or incorrect disclosures should be dealtwith seriously. Delays in filing should be penalized through non-discretionary late fee relatable to the period of default. Thereshould be a system of random scrutiny of filings of corporate to becarried out by the registration authorities.

3.11 Limited liability partnerships should be facilitated through aseparate enactment. Companies Act need not prescribe limitationson the number of members of other kinds of organisations.

3.12 Law should require transparency in functioning of charitable andlicensed companies.

Continued


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3.13 Procedures applicable for statutorycompliance should be made simpler anddeclaration based. The requirement of obtainingthe certificate of Commencement of Business tobe dispensed with. The procedure for a companyseeking exit from the Companies Act should be

made equitable and fair to the stakeholdersenabling easy exit to companies that cease totransact business. The procedure for shifting ofregistered office from one State to another State

should also be made simpler, faster and easier.Continued


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4. Management and Board Governance4.1 Law should provide an appropriate framework of governance that

should be complied with by all companies without sacrificing thebasic requirement of exercise of discretion and business judgmentin the interests of company and its stakeholders.

4.2 There should be an obligation on the part of a company tomaintain a Board of Directors as per the provisions of the Law andto disclose particulars of the directors through statutory filings ofinformation.

4.3 Law should provide for only the minimum number of directorsnecessary for various classes of companies. There need not be anylimit to maximum number of directors. Government should notintervene in the process of appointment and removal of directors innon-Government companies. No age limit for directors need bespecified in the Act other than procedures for appointments to befollowed by prescribed companies for appointment of directors abovea particular age.

Continued

4 4 Every company to have at least one director resident in India


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4.4 Every company to have at least one director resident in India.Requirement of obtaining approval of Central Govt underCompanies Act for appointment of non-resident managerialpersons should be done away with. Duty to inform the Registrar ofparticulars regarding appointment/resignation/death etc. of directorsshould be that of the company.

4.5 Presence of independent director on the boards of companieshaving significant public interest would improve corporategovernance. Law should recognize the principle of independentdirectors and spell out their attributes, role, qualifications, liabilityand manner of appointment along with the criteria of independence.However, prescription of the number and proportion of suchdirectors in the Board may vary depending on size and type ofcompany and may be prescribed through Rules.

4.6. Decision on remuneration of directors should not be based on aGovernment approval based system but should be left to the

company. However, this should be transparent, based on principlesthat ensure fairness, reasonableness and accountability and should beproperly disclosed. No limits need be prescribed. In case ofinadequacy of profits also the company to be allowed to payremuneration recommended by remuneration committee (whereverapplicable) and with the approval of shareholders.

Continued


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4.7 Certain committees to be constituted with participation ofindependent directors should be mandated for certain categories ofcompanies where the requirement of independent directors ismandated. In other cases constitution of such committees should

be at the option of the company. Law should specify the mannerand composition of various committees of the Board like (i) AuditCommittee (ii) Stake- holders Relationship Committee and (iii)Remuneration Committee along with obligation on the part of thecompany to consult them in certain matters.

4.8 Certain basic duties of directors should be specified in the Act inan inclusive manner.

4.9 The conditions for disqualification of directors should also beprescribed in the Act. Directors should be required to disclose to theBoard their previous disqualification, if any. Failure to attend boardmeetings for a continuous period of one year to be made a ground forvacation of office regardless of whether or not leave of absence wasgranted to such director. Specific provisions to be made in the Law toregulate the process of resignation by a director.

Continued


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4.10 Board meetings to be held every three months with aminimum of four meetings to be held in a year. The gapbetween two meetings not to exceed four months.Meetings by electronic means to be allowed. In the caseof companies where Independent Directors are prescribed,notice period of 7 days has been recommended for BoardMeetings with provisions for holding emergency meetingsat a shorter notice. Consent of shareholders by way ofspecial resolution should be mandatory for certainimportant matters.

4.11 Use of postal ballot during meetings of members should beallowed to be more widely used by companies. Law shouldprovide for voting through electronic mode. AGMs may beheld at a place other than place of registered office (in India),provided at least 10% members in number reside at suchplace. Small Companies to be given an option to dispensewith holding of AGM. Demand for poll to be limited withdue regard for minority interests.

Continued


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4.12 Managing Director (MD)/Whole Time Directors(WTD)/ Executive Director (ED) should be in the whole-time employment of only one company at a time.Provisions relating to options for appointment ofdirectors though proportionate representation to becontinued. Limit of paid up capital under existing section269 for mandatory appointment of MD/WTD to beenhanced to Rs. 10 crore.

4.13 Every company should be required to appoint, aChief Executive Officer, Chief Finance Office andCompany Secretary as its Key Managerial Personnelwhose appointment and removal shall be by the Board ofDirectors. Special exemptions may be provided for small

companies, who may obtain such services, as may berequired from qualified professionals in practice.

Continued


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5 Related Party Transactions5.1 Law should impose a duty on every director to disclose

to the company the contracts in which he has any interest

or concern. Transactions in which directors are interestedshould take place subject to approval of Board of directorsand beyond a limit subject to approval of shareholders.Details of transactions of company with its holding,subsidiary and associate companies to be placed

periodically before the Board through the AuditCommittee, if any and those not in the ordinary course ornot on an arms length basis to be placed along withmanagement justification thereof. Loans to directors andthe facility of holding of office or place of profit by

relative of a director should be regulated throughshareholders approval. There need not be anyrequirement of Government approvals for suchtransactions.

Continued


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6. Minority Interests6.1 Minority and Minority Interest should be defined in the

substantive Law. Law must balance the need for effective decisionmaking on corporate matters through consensus without permittingpersons in control to stifle action for redressal arising out of theirown wrong doing.

6.2 Law should prescribe a regime in which minority rights are fairlyprotected without enabling any interest group to obstruct corporateprocesses. There should be recognition of principle of valuation ofshares through an independent valuer whenever company causesan exercise of merger/ restructuring etc.

6.3 The procedure for enabling/giving an effective hearing in companymeetings to minority shareholders should be prescribed. In order toobject a scheme of amalgamation by investors, a limit should bedetermined either according to minimum number of members oraccording to minimum percentage of shareholding.

6.4 Law should recognize Class suits and Derivative Actions .Continued


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7. Investor Education and Protection7.1 Investors should be enabled to exercise their choice in an

informed manner while making investment decisions.However, interests of small investors and depositorsshould be specifically safeguarded.

7.2 A separate enactment for investor protection is notrequired. Corporate processes should recognize theinvestors as a stakeholder. There is a need to bring about

coordination in the role and actions of various regulatoryagencies on the matter relating to protection of interests ofsmall investors.

7.3 Monitoring the end use of funds collected from publicshould be the responsibility of the shareholders of the

company. There should be transparency through disclosuresof financial operations of the company. The insurance optionshould be explored for deposits with the companies. Creditrating need not be mandated except for companies seekingdeposits.

Continued..


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7.4 There is a need to enable exit options by investors in areasonable and equitable environment. No provision ofcompensation except in cases of fraud. Law should enableill-gotten gains acquired through cheating of investors tobe accessed and disgorged.

7.5 An effective investors grievance redressal mechanism byway of recourse to consumer courts and capital marketsombudsman should be provided for safeguarding interestsof investors.

7.6 Rights of investors in respect of unclaimed dividends etc.to be recognized even after 7 years period. IEPF should notbe based solely on expropriated unclaimed returns butshould be in the form of a corpus in which funds may beparked to be managed and utilize for investors education.Contributions to IEPF not to be deposited in Consolidatedfund but directly to IEPF, to be managed by anAdministrator. Schemes initiated by Central Governmentunder IEPF should be made more comprehensive.

Continued


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8. Access to Capital8.1 There is a need for flexibility to manage capital

dynamically and to enable reallocation of capital

between businesses.8.2 The basic framework for governance issues relating tomaintenance and management of capital, the rightsflowing from ownerships of such capital and regulationof various stakeholders in a corporate entity with regard

to capital should be addressed in the Companies Act.8.3 Simultaneous to the harmonious regulatory approach

providing for space to each regulator to operate effectivelyin their domain, provisions in the Companies Act allowingmultiple jurisdiction may be done away with. There ishowever, need for different regulatory agencies to interactwith each other more comprehensively in operationalmatters.

Continued


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8.4 Timeframes prescribed for processes of issue of capital berationalized to be at par with international practices.Processes should be made time bound with the introductionof concept of Deemed Approval. Corporate issuers of capitalshould also be allowed to use electronic media forcommunication of information in the process of issue ofcapital.

8.5 Concept of Shelf Prospectus may be extended to otherclass(es) of companies who access capital market more

frequently as Well Known Seasoned Issuers (WKSI), in amanner to be prescribed by the capital market regulator. Inreckoning numbers of persons to whom offer is made, theoffers made to Qualified Institutional Buyers (QIBs) should beexcluded.

8.6 Enabling provisions for Tracking Stock and Treasury Stockscould be made in the new Law. Actual introduction of thesestocks should however be preceded by certain preparatoryactions to be taken. Targeted Buyback need not be introducedat this stage.

Continued


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8.7 Companies should be permitted to issueperpetual/longer duration preference shares.Regulatory framework for payment of dividend to

preference shares, particularly when they arecumulative should be reviewed.8.8 Institutional mechanism such as Courts/NCLT should

decide on issues relating to capital reduction in a time

bound manner with due safeguards for interests ofcreditors.8.9 The regime of acceptance and invitation of Public

Deposits should be made stricter.

8.10. Registration of charges to be enabled by thelender if the borrower does not register the chargewithin a fixed time.

Continued


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8.11 Non-cash consideration for allotment of shares should be valuedthrough independent valuers. Provisions relating to inter-corporateloans and investments should be strengthened to ensure that thereis no mis-use of these provisions for price rigging or by diversion offunds. Penalties to be increased in case of non-compliance.Detailed disclosures to be given, in case of loan transactions, in theannual reports of the lending company about the end use of loansand advances by recipient.

8.12 In case of unlisted public companies, preferential allotment

should be made on the basis of valuation by an independent valuer.8.13 Penalties for fraudulently inducing any person to invest money

should be made more stringent8.14 Law may allow, subject to adequate disclosures and fulfillment of

conditions, to retain subscription received in Public Offer,notwithstanding non receipt of amount of minimum subscription.

8.15 Nidhi Companies to be regulated by RBI. The norms relating tolimits of DRR in case of NBFCs should be prescribed by RBI.

Continued

d d


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9. Accounts and Audit9.1 Accounting Standards should be notified under the Companies

Act early.9.2 Consolidation of financial statements should be made mandatory.

Requirement of attaching financial statements of subsidiarycompany(ies) with the holding company to be done away with.

9.3 Format of financial statements should be prescribed in the Act/Rules. Cash Flow Statement to be made part of mandatoryfinancial statements. Financial year should be aligned to uniformly

end on 31st

March. Option to maintain books in electronic formshould be given to companies. Books of accounts should bepreserved by a company for a period of seven years.

9.4 Companies should have the option to keep records outside thecountry also along with safeguards providing for access andproduction of such records if needed.

9.5 Small Companies should be given exemptions/relaxations in respectof disclosures relating to financial statements.

Continued


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9.6 The financial statements should be signed byMD/CEO/CFO/Company Secretary, wherever applicable,even if they were not present in the meeting which approvedthe financial statements. All directors present in relevantmeeting to sign financial statements. Dissenting director alsoto sign with dissent note.

9.7 Listed companies should put full financial statements ontheir websites. Companies should be allowed to use

electronic means for circulation of financial statements.Revision of financial statements should be allowed only inextreme situation such as those dictated by change in law.

9.8 The Companies (Transfer of Profits to Reserves) Rules, 1975and The Companies (Declaration of Dividend out of Reserves)Rules, 1975 may be done away with. Provisions relating topayment of Interest out of capital [existing section 208] may bedeleted.

Continued

9 9 Wh C l G b i f d i i h


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9.9 When Central Govt approves any basis of depreciation, thereneed not be any restriction of writing off of 95% of cost of the assetover a specified period. The Act should provide flexibility in respectof rates of depreciation for infrastructure or similar projects.

9.10 Rotation of auditors not be mandated in Law. Auditor tobe prohibited from performing certain non-audit functions/servicesto be specified in Law/rules. Disqualification of auditors to besuitably mentioned in the Law/rules. Basic duties and liability ofauditors should be in the Act itself. Quantification of penalty for

auditors to be prescribed. 9.11 The committee felt that since statutory audit is conducted by the

statutory auditor appointed by the C&AG in the manner directed byhim, the test/supplementary audit is superfluous, as it would duplicateaudit work already done by statutory auditor. Further, where any

directions are given by the C&AG to the Statutory Auditor not inaccordance with the Accounting Standards, the Statutory Auditormay be required to mention the same in the notes to accounts.

Continued

9 12 I b d d d d


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9.12 Investors to be educated to understandfinancial statements. Shareholdersassociations to be enabled to take partactively in this regard.

9.13 Enabling provisions for empoweringCentral Government to order Cost audit in

certain cases should be retained.Government approval for appointment ofCost Auditor for carrying out such audit isnot necessary. Special Audit need not becontinued.

Continued

10 M g d A lg ti


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10. Mergers and Amalgamations10.1 A single forum for approval of mergers and

acquisition schemes in a time bound manner to be provided.The concept of Deemed approval concept to be provided incases where the different regulators do not intimate theircomments timely. In stead of existing requirement ofseparate reports from Registrar of Companies (ROC) andOfficial Liquidator (OL) in respect of affairs of the company,provisions should be made for time bound responses from

them in response to notices.10.2 Valuation of shares of companies involved in

schemes of mergers and acquisition by independentregistered valuers (rather than court appointed valuers)should be made mandatory.

10.3 In view of inconsistency in approach followed byvarious Courts/State Governments, there is need to clarify issueregarding payment of stamp duty on Court Orders sanctioningschemes of merger/acquisition.

Continued

10 4 The concept of Electronic registr sho ld be


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10.4 The concept of Electronic registry should beevolved. Jurisdictional issues vis--vis stamp duty shouldbe resolved to enable single registry. Further, the Actshould provide for compulsory registration of all property ofcompany above a certain value.

10.5 Contractual mergers and Cross Border mergersand acquisition may be suitably addressed in the new Act.Specific provisions needed for allowing merger of listedcompany with an unlisted company and vice versa.Mergers among associated companies, private companiesor companies where no public interest is involved, shouldbe allowed through a less stringent framework.

10.6 Subject to safeguards relating to liquiditytest/security pool, any Corporate Debt Restructuring (CDR)proposal approved by 75% of secured creditors in valueshould be sanctioned, notwithstanding the minority dissent.

Continued

10 7 Th d fil h f d i


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10.7 The need to file separate scheme for reductionof capital simultaneously with the scheme for mergersand acquisition should be avoided.

10.8 instead of existing provisions of section 396,provisions should be made to empower CentralGovernment to approach Court/Tribunal for suitableorder for amalgamations of two companies in public

interest.10.9 The fees paid by Transferor Company on theauthorised capital should be available as a set off to thetransferee company upon the sanction of the scheme.

10.10 A Non obstinate provision to be introduced toensure that the assets and liabilities of transferor companyabsolutely vest in the transferee company notwithstandinganything to the contrary in any other law.

Continued

11 Investigation


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11 Investigation11.1 Instead of separate provisions for both inspection and

investigation under the Act, a single comprehensive process ofinvestigation, may be provided for, including powers to inspect.

Comprehensive framework for carrying out investigation to bespecified in Law.

11.2 The liability for compliance of Law should be on thecompany management. This should be combined with a systemof oversight through random scrutiny of documents.

11.3 On the basis of technical scrutiny, the Registrar mayhave the power to call for any other relevant information,documents or records as required under Law.

11.4 The Govt may appoint an officer of the Govt or anyprivate professional as inspector to carry out investigation.

11.5 The Serious Frauds Investigation Office (SFIO) shouldbe strengthened. A separate statute may be framed for SFIO.SFIO should also assist in capacity building for similarorganization that may be set up at state level.

Continued

12 Offences and Penalties


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12. Offences and Penalties12.1 The Law should encourage compliance through self-

regulation. It should clearly define the rights of stakeholders andmeans of redressal of their grievances. State to discharge an

important responsibility not only in framing the Law but also in itseffective implementation, enforcement and administration.12.2 There is need for a regime of penalties commensurate

with the offences. Penalties regime for corporate should be in thenature of monetary fine since company being an artificial economicperson cannot be imprisoned.

12.3 The liability of the Board of directors to be clear and absolute. Aclear regime for identification of Officers-in-default also to benecessary. Specific rules for fixing criminal liability in appropriatecases should be framed. The liability of CEOs/CFOs/CompanySecretaries as well as other officers of the company who are in defaultto be specifically provided for. The professionals advising thecompanies on various matters also to be held liable if found not to bediligent or law compliant.

Continued

12 4 The Company Law to provide for an in-house structure for


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12.4 The Company Law to provide for an in-house structure forlevying non-discretionary monetary penalties only (i.e. in respect ofoffences not involving imprisonment). Central Government (and itsofficers) to be vested with powers to levy such monetary penalties.Mechanism to transfer eligible proceedings from courts to in-housestructure to be suitably provided for.

12.5 The penalties may be classified in the form of two self-contained schedules one for monetary penalties and the other forthose involving imprisonment, with or without fine. The Law to laydown the maximum as well as minimum quantum of penalty for

each offence. The Law to provide for suitable deliverance inrespect of repeats offences.12.6 In case of fraudulent activities/actions, provisions for

recovery and disgorgement to be suitably provided for. The issue ofPhoenix problem to be suitably addressed through a combinationof disclosures, insolvency processes and disqualification ofdelinquent directors. The Law to provide for lifting of the corporateveil to check any fraudulent activity.

12.7 Law to provide for special powers to compel filing of documents,with enhanced penalties for persistent default.

Continued

13 Restructuring and Liquidation


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13. Restructuring and Liquidation 13.1 An effective insolvency system is an important

element of financial system stability. There is a need for

an effective Insolvency framework, which enablesresolution of insolvency in a timely and efficient manner.Corporate insolvency may be addressed throughCompanies Act. A separate Insolvency law is notnecessary at present.

13.2 A definitive and predictable time frame isneeded for rehabilitation and liquidation process.13.3 The law should strike a balance between

rehabilitation and liquidation process. It should providean opportunity for genuine efforts towards revival. Onlywhere revival/rehabilitation is not feasible, winding upshould be resorted to.

Continued

13 4 Both debtors and creditors should have fair


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13.4 Both debtors and creditors should have fairaccess to insolvency system. Rather than net wortherosion principle, test for insolvency should be default inpayment of matured debt on demand within aprescribed time [liquidity test]. Debtors seekingrehabilitation should be able to approach Tribunal onlywith a draft scheme. Creditors being at least 3/4 th invalue may also file scheme.

13.5 A limited standstill period is essential forgenuine business restructuring to be regulated throughTribunals Orders during which there is prohibition onunauthorized disposition of debtors assets andsuspension of actions by creditors to enforce their

rights. The law should provide for appropriateprohibitions on certain Debtors rights [transfer, sale ordisposing of assets etc.] subject to certain exemptionson initiations of insolvency.

Continued

13 6 There should be duty on companies to convene


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13.6 There should be duty on companies to convenecreditors and shareholders meeting on default inpayments to creditors to consider suitable steps to

protect interest of stakeholders, preserve assets andadopt necessary steps to contain Insolvency.13.7 The debtor assets should be subjected to

supervision or management of impartial, independent,

and effective Administrator.13.8 Provisions should be made for setting up ofCommittee of secured creditors to safeguard theirinterest and provide a suitable platform for creditors participation in the process. The law should alsoprovide for mechanism to recognize and record claimsof unsecured creditors.

Continued

13 9 A Panel of Administrators and liquidators should


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13.9 A Panel of Administrators and liquidators shouldbe prepared and maintained by an independent bodyout of experienced and knowledgeable InsolvencyPractitioners. Private professionals should play ameaningful role in all aspects of insolvency process.The law should encourage and recognize concept ofInsolvency Practitioners.

13.10 The law should prescribe a flexible but

transparent system for disposal of assets efficiently andat maximum value. Secured creditors claim shouldrank pari passu with workmen. Public interests,Government claims should not get precedence overprivate rights. Revival plan should be required to be

approved by secured creditors holding 3/4th

of totalvalue to be binding on all creditors.Continued

13 11 Establishment of NCLT would provide a major initiative for


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13.11 Establishment of NCLT would provide a major initiative forinsolvency system reforms in the country and should be enabledquickly. NCLT should have general, non intrusive and supervisoryrole. The Tribunal should adopt a commercial approach to dispute

resolution observing the established legal principles of fairness inthe process. Selection of President and Members of the Tribunalshould be such so as to enable a wide mix of expertise for conductof its work.

13.12 Provisions relating to rehabilitation cess should be

replaced by the concept of Insolvency Fund [Fund] with optionalcontributions by companies. Government may make grants for theFund and provide incentives to encourage contributions bycompanies to the Fund. Companies which make contributions tothe Fund should be entitled to certain drawing rights in the event of

insolvency. Administration of the Fund should be by anIndependent Administrator. Insolvency Fund should not belinked/credited to Consolidated Fund of India.

Continued

13 13 A it bl f k f C


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13.13 A suitable framework for CrossBorder Insolvency which provides for

rules of jurisdiction, recognitions of foreign judgments, co-operation and assistanceamong courts in different countries andchoice of law is required. TheGovernment may consider adoption ofUNCITRAL Model Law on Cross BorderInsolvency with suitable modifications atan appropriate time.

power point presentation of session xiii & xiv

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