The Companies (Amendment) Act, 2000 has inducted good corporate governance [CG] leading to more transparent, ethical and fair business practice to be adopted by corporates at large. The following are the provisions which have brought good CG:

  1. Section 217(2AA) dealing with Directors’ Responsibility Statement [DRS] to be included in the Directors’ Report

  2. Section 292A bringing in constitution of Audit Committee

  3. Section 274(1)(g) debarring a person to act as a Director of a company if default in filing Annual Return/Accounts or repayment of deposits/interest/debentures/dividend has taken place

  4. Section 275 providing for appointment of a person as a Director in a maximum of 15 companies

  5. Clause 49 of the Listing Agreement of the Stock Exchanges providing for promoting and raising the standards of CG in respect of listed companies.

  6. Corporate Governance Voluntary Guidelines, 2009 released in December, 2009 by the Ministry of Corporate Affairs for voluntary adoption by the Corporate Sector

Directors’ Responsibility Statement [DRS] [Section 217 (2AA)]

The Directors’ Report is required to include a DRS on the following aspects:

  1. Applicable accounting standards have been followed in preparation of the annual accounts along with proper reasons/explanations for material departures.

  2. Accounting policies as selected are consistently applied.

  3. Judgments and estimates are made in a reasonable and prudent manner to ensure true and fair view of the state of affairs at the end of financial year and of the profit or loss for that period.

  4. Adequate accounting records are maintained in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the company and for preventing and detecting frauds and other irregularities.

  5. Annual accounts have been prepared on a Going Concern basis.

Constitution of Audit Committee [Section 292A]

It is provided that every public company having paid-up capital of ` 5 crores or more to constitute a Committee of the Board known as the Audit Committee. The following are the salient features:

  1. The Audit Committee to consist of a minimum of 3 Directors such that 2/3rd of the strength to be other than managing/whole-time Directors.

  2. Functions of an Audit Committee to be in accordance with the terms of reference specified in writing by the Board.

  3. The members of the Audit Committee to appoint Chairman of the Audit Committee.

  4. Annual Report of the Company to disclose the composition of the Audit Committee.

  5. The auditors, internal auditors and the finance director to attend/participate Audit Committee meetings without any right to vote.

  6. The Audit Committee to have periodical discussions with the auditors regarding internal control systems, scope of audit, observations of auditors, review of half-yearly annual financial statements and to ensure compliance of internal control systems.

  7. The Audit Committee to have authority to investigate on any matter referred to by the Board of Directors and have full access to information contained in the records of the company and also have power to seek external professional advice as expedient.

  8. All recommendations of the Audit Committee on any matter relating to financial management and audit reporting to be binding on the Board. If the Board does not accept any recommendations, it is required record its reasons in writing and communicate the same to the shareholders.

  9. The Chairman of the Audit Committee to attend every AGM to provide clarifications on matters relating to audit.

  10. Default in compliance with Audit Committee provisions to render the company/every officer in default liable to imprisonment up to 1 year and fine up to ` 50,000/- or both.

Disqualification of Directors [Section 274(1)(g)]

The Companies (Amendment) Act, 2000 has inserted clause (g) to section 274(1) of the Companies Act, 1956 providing for the following:

A person would not be eligible to be appointed as a Director if such person is a Director of a public company which:

  1. has not filed its annual returns/accounts for continuous 3 years commencing on/after 1-4-1999; or

  2. has failed to repay its deposits/interest/debenture redemption on due date or failed to pay dividend and such failure continues for more than 1 year.

Such a Director not to be eligible to be appointed as a Director of any other public company for a period of 5 years from the date of the above referred default.

This restrictive provision is not be applicable to:

  1. a special Director appointed by BIFR under section 10(4) of SICA.

  2. Default of privately placed bonds/debentures of Public Financial Institutions (Circular No. 5/2003 dt. 14-1-2003).

Clause 49 of the Listing Agreement

The SEBI inserted Clause 49 in the Listing Agreement in January, 2000 to enforce compliance with Corporate Governance standards as amended in 2004 and further amended in 2008 and again in 2010. The highlights are:

I. Board of Directors

A. Composition of Board

  1. Non-executive directors not to be less than 50% of the total board.

  2. Independent directors

  1. Where the Chairman is a non-promoter, non-executive director, at least one-third of the Board to comprise of independent directors

  2. Where the Non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least 50% of the Board of the company to consist of independent directors.

  3. Where the Chairman is an executive director, at least 50% of the Board to comprise of independent directors.

B. Non-executive directors’ compensation and disclosures

  1. All fees/compensation, if any paid to Non-executive directors, including independent directors, to be fixed by the Board of Directors with previous approval of shareholders in general meeting.

  2. The shareholders’ resolution to specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate.

  3. Prior approval of shareholders in general meeting to not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 1956 for payment of sitting fees without approval of the Central Government.

C. Other provisions as to Board and Committees

  1. The board to meet at least four times a year, with a maximum time gap of four months between any two meetings. The minimum information to be made available to the board is given in Annexure– I A to clause 49.

  2. A director to not be a member in more than 10 committees or act as Chairman of more than 5 committees across all companies in which he is a director.

  3. Every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

  4. The Board to periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.

  5. An independent director who resigns or is removed from the Board of the Company to be replaced by a new independent director within a period of not more than 180 days.

D. Code of Conduct

  1. The Board to lay down a code of conduct for all Board members and senior management of the company and post the same on the website of the company.

  2. All Board members and senior management personnel to affirm compliance with the code on an annual basis. The Annual Report of the company to contain a declaration to this effect signed by the CEO.


A. Qualified and Independent Audit Committee

  1. Minimum 3 directors to be members with two-thirds being independent directors.

  2. All members to be financially literate and at least one member having accounting or related financial management expertise.

  3. The Chairman of the Audit Committee to be an independent director and to remain present at the AGM to answer shareholders’ queries.

  4. The Chairman of the Audit Committee to be present at Annual General Meeting to answer shareholder queries.

  5. The Audit Committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company.

  6. The Company Secretary to act as the secretary to the committee.

B. Meeting of Audit Committee

The Audit Committee to meet at least four times in a year with gap of not more than four months between two meetings. The quorum to be higher of two members or one-third with minimum of two independent members present.

C. Powers of Audit Committee

The powers of the Audit Committee to include:

  1. To investigate any activity within its terms of reference

  2. To seek information from any employee

  3. To obtain outside legal or other professional advice

  4. To secure attendance of outsiders with relevant expertise, if necessary

  5. A very elaborate role is prescribed for the Audit Committee in Clause 49.

D. Role of Audit Committee

The role of the Audit Committee to include the following:

  1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

  2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees.

  3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors.

  4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference specified particulars.

  5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval.

  6. Reviewing, with the management, the statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter.

  7. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.

  8. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.

  9. Discussion with internal auditors, any significant findings and follow up thereon.

  10. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.

  11. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.

  12. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors.

  13. To review the functioning of the Whistle Blower mechanism, in case the same is existing.

  14. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person heading the finance function or discharging that function) after assessing the qualifications, experience and background, etc. of the candidate.

  15. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

E. Review of information by Audit Committee


The Audit Committee to mandatorily review the following information:

  1. Management discussion and analysis of financial condition and results of operations;

  2. Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;

  3. Management letters/letters of internal control weaknesses issued by the statutory auditors;

  4. Internal audit reports relating to internal control weaknesses; and

  5. The appointment, removal and terms of remuneration of the Chief internal auditor to be subject to review by the Audit Committee.

III. Subsidiary Companies

  1. At least one independent director of the holding company to be a director on the Board of a material non-listed Indian subsidiary company.

  2. The Audit Committee of the listed holding company to also review the financial statements, in particular, the investments made by the unlisted subsidiary company.

  3. The minutes of the Board meetings of the unlisted subsidiary company and a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company to be placed at the Board meeting of the listed holding company.

IV. Disclosures

A. Disclosures

The following disclosure requirements are specified:

  1. Basis of related party transactions

  2. Disclosure of Accounting Treatment

  3. Risk assessment and minimization procedures to the Board

  4. Proceeds from public issues, rights issues, preferential issues, etc.

  5. Remuneration of Directors

  6. Management Discussion and Analysis report

  7. Brief resume of the Director and other specified particulars at the time of his appointment or re-appointment

  8. Disclosure of relationships between directors inter se

  9. Quarterly results and presentations to analysts to be put on company’s web-site

  10. Annual Report on Corporate Governance to the Shareholders, suggested list of items to Be included in Annexure I C, and Quarterly compliance report to the Stock Exchange within 15 days from close of the quarter as per the format given in Annexure IB.

B. Shareholders/Investors Grievance Committee

  1. This Committee is be formed to specifically look into the redressal of shareholders and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends, etc.

  2. To expedite the process of share transfers, the Board to delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority to attend to share transfer formalities at least once in a fortnight.

V. CEO/CFO certification

The CEO; i.e., the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO; i.e., the whole-time Finance Director or any other person heading the finance function discharging that function to certify to the Board specified particulars.

VI. Report on Corporate Governance

  1. A separate section on Corporate Governance to be included in the Annual Reports of company, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted to be specifically highlighted. The suggested list of items to be included in this report is given in Annexure IC and list of non-mandatory requirements is given in Annexure ID to clause 49.

  2. The companies to submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given in Annexure IB. The report to be signed either by the Compliance Officer or the Chief Executive Officer of the company.

VII. Compliance

  1. The company to obtain a certificate from either the auditors or practising company secretaries regarding compliance of conditions of corporate governance as stipulated and annex the certificate with the directors’ report sent annually to all the shareholders of the company and the Stock Exchanges.

  2. The non-mandatory requirements given in Annexure ID may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance)/non-adoption of the non-mandatory requirements to be made in the section on corporate governance of the Annual Report.

VIII. Non-Mandatory Requirements

The non-mandatory requirements are specified in Annexure ID to Clause 49 that include:

  1. A non-executive Chairman may be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties.

  2. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company.

  3. The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment.

  4. A half-yearly declaration of financial performance including summary of the significant events in last six months, may be sent to each household of shareholders.

  5. Company may move towards a regime of unqualified financial statements.

  6. A company may train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

  7. The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend /continue the terms of appointment of non-executive directors.

  8. The company may establish a Whistle Blower Policy.

Corporate Governance – Voluntary Guidelines 2009

The ‘Corporate Governance – Voluntary Guidelines 2009’, has been released in December 2009 for voluntary adoption by the Corporate Sector have taken into account the recommendations of the Task Force set up by Confederation of Indian Industry (CII) under Chairmanship of Shri Naresh Chandra in February, 2009 to recommend ways to further improve corporate governance standards and practices. The voluntary guidelines address a number of current concerns in the area of corporate governance. These guidelines do not substitute any extant Law or regulation but are essentially for voluntary adoption by the corporates.

While it is expected that more and more corporates should make sincere efforts to consider adoption of these guidelines, there may be genuine reasons for some companies in not being able to adopt them completely. In such a case it is expected that such companies should inform their shareholders about the guidelines which the companies have not been able to apply either fully or partially.

Over a period of time these guidelines will progressively converge towards a framework of best corporate governance standards and practices. After considering the experience of adoption of these guidelines by Indian corporate sector and consideration of relevant feedback and other related issues, the Government may initiate the exercise for review of these guidelines for further improvement after one year.

[Note: A copy of the ‘Corporate Governance – Voluntary Guidelines, 2009’ can be accessed at the following link] – Corporate Governance Voluntary Guidelines 2009

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