Creating Value that is not only profitable to the business but sustainable in the long-term interests of all stakeholders necessarily means that businesses have to run – and be seen to be run – with a high degree of ethical conduct and good governance where compliance is not only in letter but also in spirit.

– Excerpt from the Study of Corporate Governance in India

Good governance has always been an important element in human interactions and in an increasingly uncertain global climate has now become an imperative. Business and economy are closely aligned to the fortunes and well-being of people which makes corporate governance a subject of great importance.

MAJOR CHALLENGES IN CORPORATE GOVERNANCE

  • Conflict between the Dominant & Minority shareholders
  • The dilemma of micro-management
  • Companies to implement Corporate Governance Reform measures
  • Real Independent Directors
  • Regulatory Oversight including multiplicity of regulators
  • Linkage of Good Governance to Good Performance
  • Risk assessment, Management & Mitigation
  • Integrity and ethical behavior

Corporate Governance Reforms in India now stand at an interesting crossroads, and the future development of the next generation reforms, and in their implementation during the current decade, will decide how effective, they are for Indian business.

The Companies Act 2013 envisages radical changes in the area of Corporate Governance and is set to have far-reaching implications. The new regime is expected to significantly change the manner in which corporates operate in India. While the bar for corporate governance has been raised, the penal consequences have been exponentially increased with a large number of sections reserving provisions for the prosecution of directors, officers in default and key managerial personnel. There is a clear shift towards closely monitoring unlisted public companies and large private companies with enhanced compliance requirements encompassing disclosures, transparency and governance procedures.

Key areas of impact

While there are changes across the board, the key impact areas in the area of corporate governance include the following:

  1. Board structure and responsibility
  • Enhanced responsibility for the board and its committees
  • Specified unlisted companies to have independent directors; mandatory code for Independent Directors
  • Mandatory woman director for certain companies.
  • Mandatory key managerial personnel (Key Managerial Personnel) – Chief Executive Officer/ Managing Director/Whole Time Director , Chief Financial Officer and Company Secretary
  • Performance evaluation of board and individual members

2. Disclosures and reporting

  • Enhanced disclosures and assertions in Directors’ Report – risk management, internal control for financial reporting, legal compliance, RPT, CSR, etc.
  • Compulsory consolidation of accounts; summary statements of associates / Joint Ventures / subsidiaries
  • Disclosures of shareholding pattern
  • Disclosures for public money lying unutilized

3. Risk, controls and compliances

  • Boards now obligated to report on the following:
    • Development and implementation of risk management policy
    • Systems to ensure compliance to all applicable laws and their operating effectiveness
    • Internal financial controls and their operating effectiveness (for listed companies)
  1. Secretarial compliances
  • Stricter yet forward-looking procedural requirements for board proceedings:
    • Minimum 7 days notice, board meetings permitted through electronic mode
    • Presence of at least one Independent Director must for board meeting at shorter notice
    • Gap between two meetings < 120 days
    • Compliance of ICSI Secretarial Standards have been mandatory

5. Related party transactions (Related Party Transaction), loans and investments

  • Scope of RPT significantly enhanced; concept of arm’s length pricing introduced
  • Central government approval not required, however, heavy penalties for non compliance
  • Related Party Transaction disclosure in Directors’ Report along with justifications
  • Stricter requirements for loans and investments including private companies

6. Audit and auditors

  • Enhanced restrictions on appointment and rotation of auditors
  • Statutory auditors prohibited from providing certain services
  • Enhanced powers and role of auditors
  • Mandatory internal audit and secretarial audit for prescribed class of companies
  • Auditors to report on internal financial controls and their operating effectiveness

7. Corporate social responsibility

  • Prescribed class of companies to:
    • Form a CSR committee with at least one Independent Director
    • Form and approve a Corporate Social Responsibility policy
    • Endeavour to spend at least 2% of net profits
    • Directors to explain inability to spend in the directors’ report

The above has been compiled by CS Reema Jain, an Associate Member of ICSI. Her areas of interest include Corporate and Allied Laws and advisory services. For any queries or suggestions, she can be approached at reemajaincs@gmail.com, 9953299308.

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