Corporate Governance refers to the set of system, principles and processes by which a company is governed.
Corporate Governance is based on principles such as
– Conducting the business with all integrity & fairness,
– Being transparent with regard to all the transactions,
– making all necessary disclosures,
– Complying with applicable Law,
– Accountability & responsibility towers the stakeholder.
Clause 49 of “Listing agreement” deals with the complete guidelines for corporate governance. Following are the provisions, a company, must comply to implement effective corporate governance.
In order to comply with clause 49(1) a company must adhere with some following principles.
1. Right of Shareholder- As shareholders are the ultimate owner of the company, the company should seek to protect and facilitate the exercise of right of shareholders. A company must always be transparent with its shareholders and shareholders should have all the rights regarding General Meeting such as information about meeting, participate, Vote and questioning in GM etc.
2. Role of stakeholders- A company must take care of stakeholder’s right and encourage cooperation between company & stakeholders. Their rights can be by Mutual agreement or by Applicable law or statute.
3. Disclosure & Transparency- It is the obligation on company to be transparent with its stakeholders by giving disclosures of all material matters on timely basis. Disclosure can be regarding financial position, Performance, ownership and Governance etc. Non disclosure of Material Matter is Strictly Prohibited.
4. Responsibility of Board- Members of the Board should disclose their interest in company and in any individual transaction and contract. They should also maintain the rule of confidentiality. They should also perform their key function such as preparation of major action plan, corporate Strategy, execution of Board, and effective financial Performance.
1. Composition of Board
|Chairman||Executive Director||1/2 of Board shall be Independent Director|
|Chairman||Non-Executive Director||1/3rd of Board shall be Independent Director|
2. Independent Director
Independent director shall mean “Non-Executive Director” other than Nominee Director, and shall be person who in opinion of board possesses integrity, relevant expertise & knowledge.
An independent Director shall not be
Rules related to Independent director
i. Limit on Membership of Director- A person cannot be Independent director
-In more than 7 Companies,
– If whole time director then maximum 3 companies.
ii. Maximum Tenure- Independent Director can hold office for a term up to five consecutive years, and eligible for re-appointment of one more term.
If he has served for more than 5 years as on 1.10.2014 then he shall be eligible for reappointment for one another term and shall be eligible for reappointment after the expiry of three years.
iii. Formal Letter for Appointment- A formal letter of appointment shall be given to independent director and, brief profile of him shall be publish on the website.
iv. Performance Evaluation – Nomination committee shall lay down & disclose the criteria for performance evaluation and it shall be done by all board members except whose evaluation is being done. The term of the director shall be decided as per the performance evaluation.
v. Separate meeting of Independent Director- All the independent directors shall have at least one meeting in a year to
– Review the performance of Non-Independent director,
– Performance of Chairperson,
– Effectiveness of Board
vi. Training- Company shall provide suitable training to Independent Director.
3. Non executive Director’s Compensation & Remuneration
4. Other Provision of Board & Committees
5. Code of Conduct
Every person is responsible for such act of omission which had occurred within his Knowledge.
6. Whistle Blower Policy
The audit committee is a committee of the board of directors responsible for oversight of the financial reporting process, selection of independent auditor, receipt of audit results from both internal & external auditors. The committee assists the board to fulfil its corporate governance and overseeing responsibilities in relation to an entity’s financial reporting, internal control system.
At least four meeting in a year shall be held by audit committee with maximum time gap between two meetings shall not be more than 120 days. Quorum shall either two members or 1/3rd members of the committee which shall be higher but at least two independent directors must be present.
Powers of Audit Committee
Role of Audit Committee
Nomination & Remuneration Committee shall be constituted by company which shall comprise
The role of the committee is to formulate the criteria for determining qualification, positive attributes and Independence of Directors, Recommendation of remuneration policy. The committee shall also formulate criteria for person in management who deserves to be a director.
At least one independent director must be the director of Material Non Listed Subsidiary Company. Audit Committee shall review the financial performance of subsidiary in order to have a good control or view of subsidiary company. Board of Holding must review all significant transactions and arrangements between holding & subsidiary, all MATERIAL SUBSIDIARIES shall be disclose to stock exchange.
Material Subsidiary means
A company shall lay down procedure to inform board members about risk management, assessment and minimization procedure. The board shall be responsible for framing, implementing & monitoring the management plan. Company shall also constitute risk management committees
Related Party Transactions:-
A related party transaction is
Parties are considered to be related if one party has the ability to control the other party & exercise significant influence over other party.
Forms of Related Party
Related Party shall be
Other provisions regarding Related Party Transaction
Related party transaction considered material if
All related party transactions requires previous approval from audit committee & all material related party transaction shall require previous approval from shareholders.
For good corporate governance company should make all necessary disclosures. It is also a responsibility on management to make disclosures of all material matters which all stakeholders are suppose to know. Stakeholders like creditors and customers can not attend meetings so the disclosure is only way through which they can get information.
Disclosure can be of following matters
Any managing director, CFO or whole time finance director, who is in discharging of finance function, must certify to the board that the financial statements have been reviewed by him and present the true & fair view and do not contain any material untrue statement or misstatement.
He also indicate to auditor or audit committee if
Report on corporate governance-:
A company must give a separate section on Corporate Governance in annual report, where all the disclosures regarding compliance & non compliance with mandatory requirement and the extent to which non mandatory requirements have been adopted.
Quarterly compliance report shall be given to stock exchange within 15 days from the date of closure.
Compliance- Company shall obtain Annual Activity Certificate from auditor or practicing company secretary, about the compliance of the clause 49 of Listing Agreement.
The main motive of this clause is that company should be fair with its stakeholders. Everything in the company must be done effectively & fairly. Since the Stakeholders have social & financial interest in the company hence company is bound to provide a safeguard to their interest.
If we compare this new amended clause with the previous clause of Companies act 1956 we will see that this new clause seek for better transparency and safeguarding of interest of stakeholder’s as new detailed provision of Independent Director has been inserted, role of Audit Committee has enhanced etc. Compulsion of at least One Women Director represent that ministry is working for the Women Empowerment.
(This Article on “CORPORATE GOVERNANCE” was being written by taking reference of Listing Agreement and companies act, 2013 and companies act, 1956. Special thanks to CA Sanjay Aggrawal for inspiring me for writing. Miss Taruna Makkar & Swati Takkar helped me a lot in preparation of this article. I seek your valuable reviews & suggestion regarding this article on Email- [email protected] )