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.
- 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.
- 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.
- 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.
- 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.
Board of Directors-:
1. Composition of Board
- Optimum Combination of Executive & Non Executive Directors,
- Not less than 50% of the board should comprise Non-Executive Directors,
- At Least one Women Director,
- Where chairman is non executive Director as least 1/3rd of the board should comprise Independent Director, and if
- Chairman is executive director then ½ of the board should comprise Independent Director.
|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
- The promoter or relative of promoter of the company or its holding or subsidiary or associates company,
- A person who by himself or his relative have any pecuniary interest other than salary , directly or indirectly, with the company or its holding or subsidiary or associate company,
- A person neither himself nor his relative hold or has hold the position of KMP or Employee in the company or its holding or subsidiary or associates company, in any of three financial year immediately preceding the FY in which he is proposed to be appointed.
- A firm of
- Company Secretary,
- Cost Auditors, of the company or its holding or subsidiary or associates company or any legal firm which has transaction or amount more than 10% of the gross turnover of such firm.
- Holds together with his relative 2% or more of voting power,
- A chief officer or director or any NPO whose 25% of receipts comes from that company and any of it’s promote or director of the company or its holding or subsidiary or Associates Company.
- A material supplier, service provider or customer, or a lessor or lessee of the company.
- A person not less than 21 years of age.
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
- Compensation to non executive director shall be fixed by the board with previous approval of shareholders in GM.
- Resolution shall specify the maximum No. of stock option to Non Executive Director
- Independent director is not eligible for stock option.
4. Other Provision of Board & Committees
- Board shall meet at least 4 times a year with a maximum time gap between two meet shall not be more than 120 days
- A director shall not be
– A member in 10 committees,
– Chairman of 5 committee in which he is director
- Periodic Review of Compliance of law & regulation by board
- Removal, Resignation & reappointment of Independent Director.
5. Code of Conduct
- Board shall lay down the code of conduct,
- Board members and senior management personnel are bound to comply with that,
- Provision or codes are as per New Companies Act, 2013
Every person is responsible for such act of omission which had occurred within his Knowledge.
6. Whistle Blower Policy
- A vigil Mechanism , for actual or Suspected fraud or unethical Behavior shall be placed,
- Adequate safe guard shall be provided against victimization who avail the mechanism,
- The details of this mechanism shall be placed on company’s website
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.
- Minimum 3 directors shall be the members of Audit Committee,
- 2/3rd shall be the Independent Director
- All the members shall be financially literate & at least one member must have expertise in accounts & finance field.
- Chairman shall be Independent Director and must be present at annual general meeting.
- Company secretary shall act as secretary of committee.
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
- To investigate any activity within its terms of reference,
- To seek information from any employee,
- To obtain outside or legal advice,
- To secure attendance of outsider with relevant expertise, if any
Role of Audit Committee
- Overseeing the Financial reporting and disclosure process,
- Monitoring choice of accounting policies and principles,
- Overseeing hiring, performance and independence of the external auditor
- Oversight of regulatory compliance , ethics & whistle blower’s hotline
- Monitoring the internal control process,
- Overseeing the performance of internal audit function,
- Discuss risk management policies etc.
Nomination & Remuneration Committee:-
Nomination & Remuneration Committee shall be constituted by company which shall comprise
- At least three director,
- All shall be non executive,
- Half of the members shall be Independent Director.
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
- 20% of consolidated net worth is invested in the subsidiary company,
- 20% of the consolidated income coming from subsidiary company.
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
- Transfer of resources, services and obligations
- Between company & related party as sec. 2(76)
- Regardless of whether a price is charged.
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
- As define under section 2(76) of companies act, 2013
- KMP or relative of KMP of the company of its holding or subsidiary or associate company,
- Joint venture
Other provisions regarding Related Party Transaction
Related party transaction considered material if
- Aggregate transaction in a previous year exceeds 5% of total annual turnover, or
- 20% of the net worth of the company as per last audited financial statement.
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
- Related party transaction which is material in nature and policies for dealing with related party,
- Any accounting treatment, different from normal treatment & reason thereof,
- Remuneration to directors, facilities, perquisites etc given to directors. Any contract & arrangement entered into with them,
- Management disclosure and analysis report on various matters such as industry structure & development, opportunities and threats, segment wise or product wise performance, outlook, risk concern, discussion on financial performance.
transaction in which directors have personal interest shall also be disclosed
- In case of appointment of new or reappointment of director some information about it like brief resume of director, nature of expertise in specific area, no. of directorship in other companies
- If any director resigns then the resignation letter along with detailed reason shall be disclose on company’s website.
- Training imparted to independent director , vigil mechanism and remuneration policy shall be disclose in the annual report of the company
- When money rose through public issue, right issue, or preferential right, the company shall disclose their intended use & actual use, on quarterly basis.
A statement on annual basis shall also be prepared for the fund utilized for the purpose other than those for which they were being acquired.
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
- There is any material change in internal control system,
- Change in accounting policies,
- Knowledge of any fraudulent activity being noticed by them
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- firstname.lastname@example.org )