Corporate Governance - Regulatory Requirements

Corporate Governance under Companies Act 2013 and SEBI(LODR)


Composition of Board : Independent directors, Non-Executive directors, Committes - as per new companies act 2013 and SEBI 

NEW COMPANIES ACT ENVISAGES GREATER EMPHASIS ON GOVERNANCE THROUGH THE BOARD AND BOARD PROCESSES


The significant changes with respect to board of directors are as follows :
  • CA 2013 introduces significant changes to the composition of the boards of directors.
  • Every company is required to appoint 1 (one) resident director on its board.
  • Nominee directors shall no longer be treated as independent directors.
  • Listed companies and specified classes of public companies are required to appoint independent directors and women directors on their boards.
  • CA 2013 for the first time codifies the duties of directors


INDEPENDENT DIRECTORS
CA 1956 did not require companies to appoint an independent director on its board. Provisions related to independent directors were set out in Clause 49 of the Listing Agreement (“Listing Agreement”).
a) Number of independent directors: As per the Listing Agreement, only listed companies were required to appoint independent directors. The number of independent directors on the board of a listed company was required to be equal to (i) one third of the board, where the chairman of the board is a non-executive director; or (ii) one half of the board, where the chairman is an executive director. However, under CA 2013, the following companies are required to appoint independent directors:
(i) Public listed company: Atleast one third of the board to be comprised of independent directors; and
(ii) Certain specified companies that meet the criteria listed below are required to have atleast 2 (two) independent directors:
·         Public companies which have paid up share capital of INR 100,000,000 (Rupees one hundred million only);
·         Public companies which have a turnover of 1,000,000,000 (Rupees one billion only); and
·         Public companies which have, in the aggregate, outstanding loans, debentures and deposits exceeding INR 500,000,000 (Rupees five hundred million only)
b) Qualification criteria:
(i) CA 2013 prescribes detailed qualifications for the appointment of an independent director on the board of a company. Some important qualifications include:
·         he / she should be a person of integrity, relevant expertise and experience;
·         he / she is not or was not a promoter of, or related to the promoter or director of the company or its holding, subsidiary or associate company;
·         he / she has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors during the 2 (two) immediately preceding financial years or during the current financial year;
·         a person, none of whose relatives have or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors amounting to 2 (two) percent or more of its gross turnover or total income or INR 5,000,000 (Rupees five million only), whichever is lower, during the 2 (two) immediately preceding financial years or during the current financial year.
(ii) CA 2013 also sets forth stringent provisions with respect to the relatives of the independent director.
Key Takeaways: It is evident from provisions of CA 2013 that much emphasis has been placed on ensuring greater independence of independent directors. The overall intent behind these provisions is to ensure that an independent director has no pecuniary relationship with, nor is he provided any incentives (other than the sitting fee for board meetings) by it in any manner, which may compromise his / her independence. In view of the additional criteria prescribed in CA 2013, many listed companies may need to revisit the criteria used in appointing their independent directors.
Observations: CA 2013 proposes to significantly escalate the independence requirements of independent directors, when compared to the Listing Agreement:
·         The CA 2013 requires an independent director to be a person of integrity, relevant expertise and experience; it fails to elaborate on the requisite standards for determining whether a person meets such criteria. Companies (acting through their respective nomination and remuneration committees) would be able to exercise their own judgment in the appointment of independent directors, diluting the “independence” criteria.
·         While the Listing Agreement provided that an independent director must not have any material pecuniary relationship or transaction with the company, CA 2013 states that an independent director must not have had any pecuniary relationship with the company. Further, the Listing Agreement stipulated earlier that an independent director should not have had such transactions with the company, its holding company etc., at the time of appointment as an independent director, while CA 2013 extends this restriction to the current financial year or the immediately preceding two financial years. However, this provision in the Listing Agreement has been aligned with the CA 2013 by means of the circular issued by the Securities and Exchange Board of India (“SEBI”) dated April 17, 2014 titled Corporate Governance in Listed Entities- Amendments to Clauses 35B and 49 of the Equity Listing Agreement (“SEBI Circular”)1. The SEBI Circular has brought the provisions of the Listing Agreement in line with the provisions of CA 2013, and would be applicable from October 01, 2014. Further, the disqualification arising from any pecuniary relationship in the previous 2 (two) financial years under CA 2013 may be unreasonably restrictive, as there may be situations where a pecuniary transaction of the proposed independent director may safely be considered to be of a nature which does not affect the director’s independence, for instance, a person proposed to be appointed as an independent director may be the promoter or director of a supplier (or a counter-party to an arm’s length transaction) which has in the past (either during or for a period prior to the two immediately preceding financial years) been selected by the company through an independent tender process.
c) Duties of independent directors: Neither the Listing Agreement nor the CA 1956 prescribed the scope of duties of independent directors. CA 2013 includes a guide to professional conduct for independent directors, which crystallizes the role of independent directors by prescribing facilitative roles, such as offering independent judgment on issues of strategy, performance and key appointments, and taking an objective view on performance evaluation of the board. Independent directors are additionally required to satisfy themselves on the integrity of financial information, to balance the conflicting interests of all stakeholders and, in particular, to protect the rights of the minority shareholders. The SEBI Circular however, states that the board is required to lay down a code of conduct which would incorporate the duties of independent directors as set out in CA 2013.
Key Takeaways: CA 2013 imposes significantly onerous duties on independent directors, with a view to ensuring enhanced management and administration. While a list of specific duties has been introduced under CA 2013, it should by no means be considered to be exhaustive. Independent directors are unlikely to be exempt from liability merely because they have fulfilled the duties specified in CA 2013, and should be prudent and carry out all duties required for effective functioning of the company.
d) Liability of independent directors
Under CA 1956, independent directors were not considered to be “officers in default” and consequently were not liable for the actions of the board. CA 2013 however, provides that the liability of independent directors would be limited to acts of omission or commission by a company which occurred with their knowledge, attributable through board processes, and with their consent and connivance or where they have not acted diligently.
Key Takeaways: CA 2013 proposes to empower independent directors with a view to increase accountability and transparency. Further, it seeks to hold independent directors liable for acts or omissions or commission by a company that occurred with their knowledge and attributable through board processes. While CA 2013 introduces these provisions with a view of increase accountability in the board this may discourage a lot of persons who could potentially have been appointed as independent directors from accepting such a position as they would be exposed to greater liabilities while having very limited control over the board.
e) Position of Nominee Directors
·         While the Listing Agreement stated that the nominee directors appointed by an institution that has invested in or lent to the company are deemed to be independent directors, CA 2013 states that a nominee director cannot be an independent director. However, the SEBI Circular in line with the provisions of CA 2013 has excluded nominee directors from being considered as independent directors.
·         CA 2013 defines nominee director as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by the Government or any other person to represent its interests.
Key Takeaways: The concept of independent director was introduced as part of the CA 2013 with a view to bring in independent judgement on the board. A director, once appointed, has to serve the interest of the shareholders as a whole. Directors appointed by private equity investors shall also be covered under the definition of nominee directors, and would no longer be eligible for appointment as independent directors.




COMMITTEES OF THE BOARD
CA 2013 envisages 4 (four) types of committees to be constituted by the board:


a) AUDIT COMMITTEE: Under CA 1956, public companies with a paid up capital in excess of INR 50,000,000 (Rupees fifty million only) were required to set up an audit committee comprising of not less than 3 (three) directors. Atleast one third had to be comprised of directors other than Managing Directors or Whole Time Directors. CA 2013 however, requires the board of every listed company and certain other public companies to constitute the audit committee consisting of a minimum of 3 (three) directors, with the independent directors forming a majority. It prescribes that a majority of members, including its Chairman, have to be persons with the ability to read and understand financial statements. The audit committee has been entrusted with the task of providing recommendations for appointment and remuneration of auditors, review of independence of auditors, providing approval of related party transactions and scrutiny over other financial mechanisms of the company.
b) NOMINATION AND REMUNERATION COMMITTEE: While CA 1956 did not require companies to set up nomination and remuneration committee, the Listing Agreement provided companies with theoption to constitute a remuneration committee. However, CA 2013 requires the board of every listed company to constitute the Nomination and Remuneration Committee consisting of 3 (three) or more non-executive directors out of which not less than one half are required to be independent directors. The committee has the task of identifying persons who are qualified to become directors and provide recommendations to the board regarding their appointment and removal, as well as carry out their performance evaluation.
c) STAKEHOLDERS RELATIONSHIP COMMITTEE: CA 1956 did not require a company to set up a stakeholder’s relationship committee. The Listing Agreement required listed companies to set up a shareholders / investors grievance committee to examine complaints and issues of shareholders. CA 2013 requires every company having more than 1000 (one thousand) shareholders, debenture holders, deposit holders and any other security holders at any time during a financial year to constitute a stakeholders relationship committee to resolve the grievances of security holders of the company.
d) CORPORATE SOCIAL RESPONSIBILITY COMMITTEE (“CSR Committee”): CA 1956 did not impose any requirement on companies relating to corporate social responsibility (“CSR”). CA 2013 however, requires certain companies to constitute a CSR Committee, which would be responsible to devise, recommend and monitor CSR initiatives of the company. The committee is also required to prepare a report detailing the CSR activities undertaken and if not, the reasons for failure to comply.
Key Takeaways: CA 2013 sets out an advanced framework for board functioning by division of core board functions and their delegation to committees of the board. While the audit committee and the nomination and remuneration committee provide the back end infrastructure for boards, the stakeholder’s relationship committee and CSR Committee have been entrusted with the task of interaction with key stakeholders. Irrespective of their function, each of the committees would act as a “check and balance” on the powers of the board, by ensuring greater transparency and accountability in its functioning.
III. BOARD MEETINGS AND PROCESSES
The key changes introduced by CA 2013 with respect to board meetings and processes are as under:
·         First board meeting of a company to be held within 30 (thirty) days of incorporation;
·         Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board meetings may be given by electronic means. However, board meetings may be called at shorter notice to transact “urgent business” provided such meetings are either attended by at least 1 (one) independent director or decisions taken at such meetings on subsequent circulation are ratified by at least 1 (one) independent director.
·         CA 2013 has permitted directors to participate in board meetings through video conferencing or other audio visual means which are capable of recording and recognising the participation of directors. Participation of directors by audio visual means would also be counted towards quorum.
·         Requirement for holding board meeting every quarter has been discontinued. Now at least 4 (four) meetings have to be held each year, with a gap of not more than 120 (one hundred and twenty) days between 2 (two) board meetings.
·         Certain new actions have been identified, that require approval by directors in a board meeting. These include issuance of securities, grant of loans, guarantee or security, approval of financial statement and board’s report, diversification of business etc.
·         Approval of circular resolution will be by a majority of directors or members who are entitled to vote on the resolution, irrespective of whether they are present in India or otherwise.
Key Takeaways: In the backdrop of global corporate transactions, the changes relating to participation of directors by audio visual and electronic means are a welcome step, aimed at keeping pace with technological advancements.
CONCLUSION
CA 2013 has introduced significant changes regarding the board composition and has a renewed focus on board processes. Whilst certain of these changes may seem overly prescriptive, a closer analysis leads to a compelling conclusion that the emphasis is on board processes, which over a period of time would institutionalize good corporate governance and not make governance over-dependent on the presence of certain individuals on the board.




Executive Summary

● In terms of structure and composition of boards and its committees, Indian corporate governance regulations have evolved towards international best practices, although there have been some departures.

● The minimum percentage of independent directors required on the Board varies across
countries, with India’s Clause 49 requirements comparing quite favourably with international
best practices.
● India’s regulations, however, fall short of international best practices in two important areas:
• Firstly, while it is an international best practice to have separate nomination and
remuneration committees, Indian regulations require a combined committee.
• Secondly, as per international best practices, executive directors are not allowed to be a
part of the Audit Committee and the Remuneration Committee, because of the
possibility of self-review by management and obvious conflict of interest. In India,
however, executive directors are allowed in both these committees.
Professor, Indira Gandhi Institute of Development Research

I. Introduction
It is well known that the structure and composition of the corporate board and its committees, particularly with respect to the presence of independent directors, have a significant bearing on the board’s effectiveness. In this respect, since the
notification of the now famous Clause 49 (CL49) Regulations on February 21, 2000, corporate governance regulations in India have rapidly evolved. As part of the evolution of CL49, two important revisions were made on October 29, 2004
and April 8, 2008, respectively. Finally, following the enactment of the Companies Act, 2013, the updated version of CL49 was notified on April 17, 2014. Based on the industry response, some provisions in CL49 were amended and the

SEBI (Listing Obligations & Disclosure Requirements) Regulations were notified on September 2, 2015.
The revisions that were made to governance regulations in India represent an effort towards moving towards international
best practices. This Quarterly Briefing studies the evolution of the CL49 regulations and compares and contrasts the
current provisions with governance regulations existing in mature economies of US, UK and Australia, and in the
emerging economies of South Africa and Singapore.

II. The Board of Directors
Although the original version of CL49 in India had a detailed prescription regarding the composition of the Board of
Directors, it defined independent directors perhaps ambiguously. Independent directors were defined as “…. Directors who, apart from receiving director’s remuneration, do not have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its subsidiaries, which in the judgment of the board (emphasis added), may affect the independent judgment of the director (SEBI 2000).”

The 2004 version of CL49 saw a significant change, with the definition of independent directors moving towards international best practice by itemizing an objective checklist of conditions that a director has to satisfy to be deemed
independent. These conditions made it very similar to the “bright line” testsfor independence of directors under the NYSE listing standards. These tests are now widely used by many countries in their definition of independent director.
Further, the 2008 revision of CL49 brought companies having a promoter (or a person related to the promoter) as Chairman, even if non-executive, under a stricter requirement entailing presence of a larger number of independent
directors on the Board. This seemed sensible, given the institutional setup in India, where promoter-controlled companies dominate the corporate landscape, and thereby tilt the balance of power in the board towards the management.

The latest version of CL49, notified on April 17, 2014, and further amended on 15 September 2014, preserved the Board composition as was specified in the 2008 version, but introduced the provision of having at least one woman director on
the Board. This is one aspect in which India’s regulation differs from other nations.
The current version of India’s CL49 regulations stands out among other nations by having separate specifications with respect to non-executive directors and independent directors (Table 1). However, on the issue of whether the Board
Chairman should be an independent or non-executive director, the CL49 regulations refrain from taking a definitive
view (as in UK and Australia). Instead, it requires presence of a higher number of independent directors in the board in
case the company has an executive Chairman than if it has a non-executive Chairman (similar to Singapore). Further,
a comparison of Board composition across countries shows that India’s CL49 regulations compare very well with
international best practices.

Companies Act 2013 (India)

 Composition: At least one third of total directors must be independent; at least one
woman director must be present

Chairman: Separation of offices of CEO and Chairman required unless articles of the
company permit otherwise or the company does not have multiple businesses

SEBI Clause 49, 2014 (India)

Composition: Not less than 50% non-executive; at least one third independent
when Chairman is non-executive and at least half when Chairman is executive or
promoter; at least one women director must be present

Chairman: Separation of offices of CEO and Chairman advised.

III. Committees of the Board
III.1 The Audit Committee
The original CL49 regulations (SEBI, 2000) required the audit committee to have a minimum of three members consisting of only non-executive directors, with independent directors forming a majority and the Chairman an independent
director. The first amended CL49 (SEBI, 2004) removed the non-executive director requirement and instead specified that the audit committee should have a minimum of three members with two-thirds of them being independent.

Thus,with this revision, executive directors were allowed to be present in Audit Committee. It may be noted however that the increase in the requirement of independent directors from majority to two-thirds did not make any material difference in audit committees which had three members.
October 2015 | No. 11

A comparison of the composition of audit committee across countries shows that allof them require the audit committee to consist entirely of non-executive directors with many countries making an even stricter requirement of only independent
directors (Table 2). India’s CL49 regulations stand out in sharp contrast to this. Hence, this is one area in which India seems to lag behind international best practices in corporate governance.

III.2 The Remuneration Committee

The original CL49 regulations of February 21, 2000 did not require companies to have a mandatory remuneration committee. Instead the requirement was non-mandatory in nature. The Companies Bill of 2009 turned this non-mandatory
provision into a mandatory requirement and specified that every listed company shall constitute a remuneration committee consisting of only non-executive directors, out of which at least one should be an independent director (Clause 158).
It, however, did not explicitly require the Chairman of the remuneration committee to be an independent director.

The Companies Act, 2013 modified the provisions of the Companies Bill of 2009 with two important changes. First, it changed the committee name to the Nomination and Remuneration Committee, thereby expanding the functions of the
committee, and second, the requirement of independent directors was increased from at least one to at least half (Section
178). The SEBI notification of April 2014 made an addition to the provisions of the Companies Act, 2013 by further
requiring the Chairman of the Nomination and Remuneration Committee to be an independent director.
A cross country comparison of regulations relating to size and composition of remuneration committee  shows that the CL49 regulations are near the best practices. However, one rider was added in the Companies Act, 2013, which
was also carried forward in the SEBI 2014 regulation which led to deviation from international best practices. This rider allowed the chairperson of the company (whether executive or non-executive) to be appointed as a member of the
Nomination and Remuneration Committee, but could not chair the committee. This departs sharply from the regulations under the NYSE Code, the UK Code, and the code in Singapore.

III.3 The Nomination Committee
In the original CL49 regulations, there was no mention of constitution of a Nomination Committee even as a nonmandatory
requirement. The Standing Committee on Financewas the first to mention the requirement of a Nomination
Committee in its Report of August 31, 2010. However, instead of requiring a separate nomination committee, it
recommended the creation of a Nomination and Remuneration Committee; this recommendation was finally enacted
into law under the Companies Act, 2013, as outlined earlier.
Cross country comparison shows that all countries have a separate Remuneration Committee and a Nomination
Committee. India’s CL49 regulation stands out as the only one to have a combined one.

IV. Discussion
In light of the above observations, are majority of the corporate governance regulations in India at par with international best practices? The answer is clearly ‘no’. Are we moving towards best practices? Here, the answer is decidedly mixed.
Measures such as tightening the definition of independent directors, requiring greater presence of independent directors in promoter-chairman companies and mandating the presence of woman director on the Board are certainly moves towards international best practices. However, allowing executive directors to be present in the Audit Committee and creating a combined Nomination and Remuneration Committee(NRC), where executive directors are allowed, are deviations from international best practices and need to be eschewed. Allowing executive members in NRCs, for example, basically
means that executive directors can have a say in deciding their own compensation!
The departure from best practices is unfortunate for at least two reasons. First, the requirement of a combined
Nomination and Remuneration Committee, where executive directors are allowed, was enacted in 2013 - several years
after international best practices had already been established where in these two committees were mandated to be
kept separate. Second, the discussion on the removal of the provision allowing executive directors to be part of the
audit committee had begun in 2009 following the report of the CII task force on corporate governance chaired by
Naresh Chandra, but nothing in this respect has happened yet. This inaction is happening at a time when the case for
an independent Audit, for which the audit committee is critical, has been firmly established and recognized worldwide.
Of course, adopting international best practices does not mean that governance regulations must mimic the regulations
of other countries. Best practices can be modified to suit the institutional conditions of a specific country as is advocated
under the notion of “functional convergence.” However, some of the deviations in India do not seem to be based on
arguments of functional efficiency, but rather reflect the pulls and pressures that could possibly have their roots in the
dominance of promoter-owned companies with concentrated ownership structures.
This in turn raises a difficult governance dilemma in India. Promoters of Indian companies having majority ownership
may insist that final decision making power in important committees ought not to rest overtly with outside directors. This
perhaps explains the rather frequent use of the “at least half” or “at least fifty percent” rule in several clauses relating
to presence of non-executive or independent director while most other countries uniformly use the word “majority” in
their specification. This slight difference in specification can potentially make a huge difference in governance of those
companies that have even-sized boards headed by an executive Chairman, who may have a decisive say in case of
voting ties. However, regulations that reduce effective say of independent directors in promoter controlled companies
goes against the very grain of good governance. Besides, this may lead to the market discounting those companies
because of their heightened governance risk, thereby resulting in higher cost of capital and slow down of growth of
those companies.

V. Way Forward

Creating the most ideal governance setup is a difficult task. Nevertheless, the preceding discussion suggests that it is possible to further strengthen the evolving governance framework in India. Hopefully with some appropriate modifications in line with the earlier discussion, especially that of constituting the audit and the remuneration committee with only non-executive directors and consistently using the word “majority” in place of “at least half” or “at least fifty percent,” the Indian governance regulations can become a model code for other countries to follow.

Duties and Liabilities of Director specified under new companies act 2013

Synopsis :


Companies Act 2013 provides for the following duties:
-          To act in accordance with co.’s AoA;
-          Act in good faith;
-          Exercise his duties with due care and diligence.
-          A director shall not involve in any conflicting interest with the company
-          Achieve or attempt to achieve any undue advantage;


New companies Act 2013: Duties of Directors defined

The new law has defined the duties of directors more precisely vide Section 166 which were earlier implied duties arising out of general law requirements of trusteeship and agency .

 A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company’ and ‘A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain he shall be liable to pay an amount equal to that gain to the company’; 
 
 DUTIES/LIABILITY OF DIRECTORS, AND INDEMNIFICATION BY COMPANIES, UNDER THE CA1956
2.1. The CA1956 has not codified the law relating to duties of directors but in all cases all directors must ensure compliance with the provisions of the CA1956 and other applicable laws. Further, under the CA1956 the directors of Indian companies are subject to common law duties. Thus, a director has fiduciary duty towards the company. 
2.2. As per s.5 of the CA1956, for violation of the provisions of the CA1956 the managing director/ whole time director (director who is in whole time employment of the company) / manager (who is so appointment in accordance with the provisions of the CA1956) and the company secretary, if any, are responsible in first instance. In the absence of aforesaid categories of officers, prosecutions should be against all other directors of the company unless the directors have authorised any other person to make compliance with that provisions of the CA1956 and such person has accepted any such authorisation. The Master Circular No. 1/2011 dated 29 July 2011 of the Ministry of Corporate Affairs, Government of India ("MCA") consolidating the provisions relating to prosecution of directors under the CA1956 has clarified that Registrar of Companies should take extra care in examining the cases where following directors are also identified as 'officer who is in default' under s.5 of the CA1956:
a.     For listed companies (companies of which shares are listed at Indian stock exchange), Securities and Exchange Board of India requires nomination of certain Directors designated as Independent Directors.
b.    For public sector undertakings, respective Government nominates directors on behalf of the respective Government.
c.     Various public sector financial institutions, financial institutions and banks having participation in equity of a company also nominate directors to the board of such companies.
d.    Directors nominated by the Government under s.408 of the CA1956.
The MCA has also directed the Registrar of Companies that none of the above directors shall be held liable for any act of omission or commission by the company or by any officer of the company which constitute a breach or violation of any provision of the CA1956 which occurred without his knowledge attributable through board process and without his consent or connivance or where he has acted diligently in the board process.  The MCA did however not say that such directors should not be prosecuted at all and rightly so. Consequently, all the directors of a company may be liable for any violation of CA1956 unless they prove that they acted diligently and violation took place without their consent / knowledge / connivance.  
2.3. It is pertinent to note that s.201 of the CA1956 restricts a company to indemnify its directors.  According to s.201 of the CA1956 a company can indemnify its directors of any liability incurred by him in defending civil or criminal proceedings only if he is acquitted or discharged.  Except as aforesaid, s.201 of the CA1956 renders void all the provisions in the company's constitution or in any agreement indemnifying a director against any liability that would attach to him in respect of any breach of duty or trust or negligence.  It is noted that if premium of D&O policy to protect the directors is paid by a company, then also directors will be covered by s.201 of the CA1956 and may not be entitled to benefit of D&O policy. 
3. DUTIES/LIABILITY OF DIRECTORS, AND INDEMNIFICATION BY COMPANIES, UNDER THE CA2013
3.1. The CA2013 has like other modern laws codified the duties of the director of Indian companies. The proposed s.166 of the CA2013 mention the duties of the director as under:
a.     A director shall act in accordance its constitution document, i.e., articles of association.
b.    A director shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
c.     A director shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
d.    A director shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
e.     A director shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
3.2. The CA2013 has widened the definition of the 'officer who is in default' to include key managerial personnel (chief executive officer and chief financial officer) and shadow directors. Interestingly, the CA2013 has proposed that every Indian company must have at least one director who stayed in India for a total period of not less than 182 days in the previous calendar year. Notably, the CA1956 has no such provision and this proposed change will require the resident Indian director to be more careful as he will be first one to be caught in case of violation by an Indian company.
3.3. The CA2013 has no provision corresponding to s.201 of the CA1956 meaning thereby that there is no restriction on the companies to indemnity its directors under the CA2013. The only reference to the provisions of indemnity to directors is given in s.197 of the CA2013 stating that the premium paid on insurance policy shall be treated as part of the remuneration of the officers only if such officer is found guilty.
4. COMPARISON BETWEEN OLD AND NEW LAW RELATING TO DIRECTORS
4.1. It is noted that the CA2013 has deleted the phrase "or any other Act" existing in first proviso to s.291 of the CA1956 dealing with the powers of the board in corresponding new s.179 of the CA2013. According to a ruling of the Indian apex court, the existence of the aforesaid phrase in the CA1956 required the board of director to comply with other applicable laws while they exercise any power on behalf of the company. Though it is unclear whether the board of directors is liable to comply with other applicable laws but the deletion of above phrase makes it clear that the directors cannot be prosecuted under the CA20012 for non-compliance with the provisions of any law other than the CA2013. It would be an irony that the company law that gives the board authority to exercise the power on behalf of a company does not requires the board to comply with the provisions of other applicable laws while they exercise such a power on behalf of a company.
4.2. Though the CA2013 has however widened the definition of the 'officer who is in default' to include key managerial personnel (chief executive officer and chief financial officer) and shadow directors, but unlike old definition in the CA1956 that includes 'all the following officers', the new definition says 'any of the following officers' and thus apparently absolving the liability of other officers of the Company.
4.3. It is noted that despite increasing instances of frauds and violation by the companies, the CA2013 has radically changed the provisions of indemnity to directors by the companies as now there is no restriction on companies to indemnify its directors. This change will perhaps make the CA2013 the only law in the world not restricting the company to indemnify its directors.
5. LIABILITY OF DIRECTORS OF PRIVATE COMPANIES UNDER THE INCOME TAX ACT, 1961
While discussing the liabilities of the directors under Indian laws, the provisions of s.179 of the Income Tax Act, 1961 ("ITA1961") are also noticeable. S.179 of the ITA1961 is applicable only to private companies. The liability of the directors of a private company for the payment of tax due from the company is made joint and several if tax cannot be recovered from the company. This section however enables a director to establish that the non-recovery of tax is not attributable to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of a company to avoid such a liability. The burden to establish this rests on the director concerned and only if the burden is discharged that director can be exempted from the tax liability of a company imposed on him by s.179 of the ITA1961.
6. CONCLUDING REMARK: The CA2013 though discussed for more than four years appears to be a part of reform agenda of the Indian Government. A number of measures to protect the investors' interest have been incorporated in the CA2013 but the Indian government has offered more to the directors and companies as a number of provisions favourable to the companies and its directors are being incorporated in the CA2013 by diluting the existing legal provisions. It might also be possible that though the CA2013 has been passed by the lower house of Indian Parliament, it is amended by the upper house of the Indian Parliament and then sent back to the lower house of the Indian Parliament's approval again.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Adopted from

http://www.mondaq.com/Last Updated: 22 January 2013





 COMPANIES ACT 2013 : EVALUATION OF THE BOARD

Under Section 134(3)(p) of the 2013 Act, the Board of every listed company and other public companies with paid-up capital of Rs 25 crore or more shall report the annual performance evaluation of individual directors, the Board and its committees.
This concept is not new, as many developed countries have successfully implemented it through rules such as ‘comply or explain’.
Individual and collective assessment of the Board is integral to the overall success of an organisation, as it assists the directors and the Board in fulfilling their responsibilities towards maximising stakeholders’ wealth. However, the 2013 Act and the draft rules released until now did not provide any guidance for such performance evaluation.
Thus, one might infer that rather than being prescriptive, the Ministry perhaps wants to offer Board members the flexibility to design the evaluation process.
In view of the large number of companies that are likely to be covered by this provision, it is strongly felt that risk profile and other relevant characteristics should have driven the applicability.
An effective performance evaluation involves significant ongoing effort and cost to drive the Board towards excellence, and many believe the cost may outweigh the benefits for many small companies.

Companies Act 2013 is undoubtedly a bold move on the Government’s part. However, the concerns are manifold, including increased cost of compliances and low utility of the outcome.



Directors Responsibility Statement as per Companies Act 2013

Format of Directors responsibility statement under the companies act  2013 : 

 In pursuance of section 134 (5) of the Companies Act, 2013, the Directors hereby confirm that:

(a) Accounting standards :in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) Policies, Judgements and Estimates :the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the FINANCIAL year and of the profit and loss of the company for that period;

(c) Records :the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) the directors had prepared the annual accounts on a going concern basis; and

(e) Internal Controls :the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

(f) Legal Compliance :the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Notes:
1. Earlier provisions for Directors' Responsibility Statement were prescribed under sub-section (2AA) of Section 217 of the Companies Act, 1956
2. Point (f) is a new addition for applicable for all types of companies
3. The point (e) is also new addition applicable to listed company only, other companies may strike out that point.



proposals to discharge directors of liabilities that routinely appear on shareholder meetings’ agendas in many European markets

Shareholders' decision to discharge directors from liabilities will be void if it is made in breach of the 
law or the company's articles of association; 

Directors may be held liable for wilful misconduct, fraud or any criminal offences, notwithstanding 
any 'discharge of liabilities' granted by shareholders. (This statement does not fully apply to Sweden, 
where directors may be discharged of wilful misconduct; and Switzerland, where it only applies to the 
directors to the extent that they may become liable for such actions only vis-à-vis third parties under 
other bodies of law)

The granted discharge of liabilities is only valid if there have been no relevant omissions or 
misstatements in the annual report and accounts and other documents provided to shareholders. 

Discharge of liabilities granted by shareholders can release directors from liability to the company, 
but does not release directors from liabilities towards third parties (including shareholders). 

Markets where approval of the discharge of liabilities proposal is not binding and cannot shield 
directors from claims for damages: Austria, Germany, France and Spain

Markets where discharge from liabilities is binding and can hinder legal claims against directors: 
Belgium, Denmark, Finland, Greece, Luxembourg, the Netherlands, Portugal, Sweden and Switzerland. 

In Austria and Germany, discharge of liabilities resolutions are routinely proposed to general meetings of public 
companies; however, a granted discharge does not preclude shareholders from bringing a claim for damages 
against directors; thus, 'a discharge vote' only constitutes an expression of trust and does not appear to have 
legal implications. 

In France and Spain, directors cannot be exonerated from liability by the decision of the general meeting 
either, which means that any discharge granted by shareholders has no impact on the company's ability to 
bring claims against directors. Nevertheless, many companies continue to seek discharge of liabilities for their 
directors at general meetings. 

The constituents of the second group can be further divided into the following sub-groups: 
• Markets where discharge of liabilities approved by the general meeting is binding for all shareholders 
in the company: Finland, Greece, Luxembourg, the Netherlands and Portugal; 
• Markets where discharge from liabilities granted by the general meeting is only binding for those 
shareholders, who voted in favour of the proposal: Belgium and Switzerland; and 
• Markets where the binding nature of the discharge depends on the level of opposition to the 
proposal, even if the resolution was passed by the majority vote: Denmark and Sweden. 

In Finland, Greece, Luxembourg, the Netherlands and Portugal, a valid discharge granted by the general 
meeting would shield directors from claims for damages from the company. In Portugal, a waiver of the 
company's right to claim for damages requires the support of 90% of shareholders attending the meeting. 

In Belgium, if a discharge has been approved by the general meeting, only those shareholders who have not 
voted in favour of the discharge may claim damages from directors. In Switzerland, a discharge approved by 
the general meeting is effective not only vis-à-vis the company and those shareholders who consented to the 
resolution, but also those shareholders who acquired shares subsequently with knowledge of the resolution. 

Switzerland differs from other markets insofar as a valid discharge granted by shareholders shelters directors 
from liability claims arising from both intentional and negligent violation of their duties. It can hinder claims 
against directors notwithstanding the fact that such claims are based on wilful misconduct, fraud or any 
criminal offences (although directors may still become liable for such actions vis-à-vis third parties under other 
bodies of law). This is mitigated by the fact that voting privileges do not apply in the context of a discharge 
resolution. In addition, persons who participated in the management of the company (this may also apply to de 
facto directors) are excluded from voting their shares, which also applies to the extent that such a person acts 
as a proxy for another shareholder. Consequently, given the shareholding structure of Swiss companies, 
directors can often be discharged from liabilities by minority shareholders only. 

In Denmark and Sweden, a valid discharge shields directors from claims for damages from the company; 
however, a claim may be brought, notwithstanding the discharge, if holders of at least 10% of the company's 
issued share capital vote against the resolution. In Denmark, any shareholder may bring such a claim, whereas 
in Sweden 10% shareholding is required. 'Discharge resolutions' are not mandatory under Danish company law. 
A unique feature of the discharge mechanism in Sweden is the requirement for the auditor's report to contain 
recommendation on whether the directors should be granted discharge from liability vis-à-vis the company. 
Where the auditor becomes aware of any acts or omissions by directors, which may give rise to liability, such 
facts must be noted in the auditor's report. This also applies where the auditor, in the course of the audit, 
finds that a director has otherwise acted in contravention of the Companies Act, the applicable annual report 
legislation or the articles of association. 

In all the markets covered above, a failure to grant a discharge from liability does not have an 
immediate effect on the liability of directors, but merely leaves the possibility open for the company to initiate an action for liability. 

 Corporate social responsibility (CSR)  Vs Corporate Governance
 Corporate social responsibility

New Companies Act 2013 brought into rule book with effect from 1st April 2014
The government has notified the rules for corporate social responsibility (CSR) spending under the new companies law, putting in place the much-debated plan aimed at encouraging companies to spend a portion of their profits on projects that benefit society. Under the plan, companies above a certain threshold have to spend 2% of average profit of the previous three years on CSR activities specified by the government, which does not include political funding. Companies that are unable to do so have to give reasons for falling short.

The government has amended Schedule VII of the Act to include more activities under CSR than what had been defined earlier, but has withdrawn the discretion promised to boards earlier. "CSR will include all the programmes and activities undertaken by the board of directors... subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act," said the notification by the ministry on Thursday.

Areas that have been defined by the government in the CSR policy include eradicating hunger, poverty and malnutrition; promoting preventive healthcare and sanitation; and the Prime Minister Relief 's Fund, among others.

The policy will also consider measures for the benefit of armed forces veterans, war widows and their dependents, homes and hostels for women and orphans, oldage homes, day-care centres and other such facilities for senior citizens as coming under CSR.

"Including new items under CSR is a welcome move as it would help divert corporate spending to areas which are otherwise neglected," senior company law expert Vinod Kothari said.

"The CSR policy will now be different from conventional policy statements as the rule stipulates the requirement of listing the projects/programmes and also the monitoring process for such programmes," said Santhosh Jayaram, technical director, sustainability, KPMG India.

Companies having a net worth of at least Rs 500 crore or a minimum turnover of Rs 1,000 crore or those with a net profit of at least Rs 5 crore are covered by this policy.

India Inc. doesn't seem to be too enthused about the latest rules. "Precluding the corporate boards from determining what would constitute CSR goes against the very premise of the Act, which is built on self-governance and enhanced disclosures," said Chandrajit Banerjee, director general of the Confederation of Indian Industry lobby group. 




Corporate Governance


Corporate Governance is a different concept from CSR. 

It is defined as system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community.

The focus is on increasing the role of corporate boards in company affairs. They are the people who set a company’s strategic aims and provide the leadership needed to put them into effect. 
This is also about  who should be on the board. The diversity debate comes to mind immediately, but that is only one aspect. It makes a good news item when a novel appointment has been made from outside the usual candidates.
But this is not just about diversity. At the same time, there is a lot of support for getting people with extensive experience and competence on board. This could be particularly meaningful in highly specialised industries. But it might risk board members getting too close to the operational management of the company.
Board members are collectively responsible for the long-term success of their company. They need to  effectively monitor the affairs and get the things done by executive management of the company.

Boards should not get swayed away by dominant individuals on boards or a "group-think" mentality in decision making. Indeed, the challenge is for a board member to be independent, bringing in a different viewpoint and wider experience, but at the same time working together to achieve the same objective.




Arguments against Mandatory CSR 

 So what’s wrong with CSR? Everything, I would say. By definition, what constraints growth in almost all the companies is capital. By diverting scarce capital towards activities other than productive ones, the bill would actually diminish the growth potential/ ability to sustain investments of these companies. Forget the 3 percent limit, even if it is 0.3 percent, the future investments would be less by that amount. It means less jobs, less output and less GDP growth than would otherwise be the case.

I would actually go onto say that the social responsibility of every company is to grow and produce more – ethically and legally. In the process of creating wealth for themselves, these companies serve the needs of the consumers and also create jobs uplifting the standards of the society without directly targeting the same i.e. what Adam Smith referred to as the invisible hand of the free market leading to the best outcomes for everybody concerned. One can easily see that the IT industry has lifted the living standards of millions of Indians just in the process of satisfying their customer needs. NRN has served the country through his act of creating Infosys much more than what he could have achieved in following his earlier ambition of starting an old-age home (or something like that).

So the karma of companies is to satisfy their consumers to the best of their abilities and in doing so, they create wealth for themselves and the society at large. In crippling the companies by acts such as CSR, the government is actually limiting the ability of the companies to serve the needs of the consumers and hence, the society.

I believe that the observation “that the road to hell is paved with the best of intentions” is valid for most government actions. This CSR is another classical example of the above.

Am I saying charity is bad? Not in the least. Plenty of companies have done admirable jobs of the same and even encourage employees to spend some time as part of their CSR initiatives. But as I said before, compassion is what you decide to do with your own money and legislating compassion is a horrible idea to begin with. CSR bill or no CSR bill – companies and individuals like Infosys, NRN, Premji and Tatas will do plenty – and probably far exceeding the CSR prescribed limits – that this bill really serves no purpose to the well-intentioned.

 To the crony capitalists, this bill would just provide another avenue to direct their CSR funding towards politically connected “social entrepreneurs” as a quid pro quo to some clearances. This is just opening another Pandora’s box to the already existing set of complex legislations and regulations in India and given the weak state of the economy, we could well do without one.

 Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services – an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at shanmuganathan.sundaram@gmail.com. FirstPost


 Sarbanes Oxley Act & Clause 49 of Listing agreement / Schedule IV of Regulation 32 SEBI LODR consisting of Reg 17 to 27


SOX – Sarbanes Oxley Act

Sarbanes Oxley Act is also known as ‘Public Company Accounting Reform and Investor Protection Act’, ‘Corporate and Auditing Accountability and Responsibility Act’, SOX & SARBOX.

Why SOX?

Due to the myriad of the corporate scandals, SOX was brought to establish investor’s confidence in the corporate governance and financial reporting process. Some of those Scams that led to the introduction of a newer and stronger Law were –

ENRON – It was the Seventh largest US based company. Due to a whistleblower, Sherron Watkins, it was investigated for its complex network of off-shore partnerships & accounting practices. It had used Special Purpose Entities (SPEs) to move debt off the balance sheet & transfer risk for their other business ventures. On investigation, Arthur Anderson (their Auditors), Skilling and Ken Lay (the principal officers) were charged for fraud & negligence.

WorldCom – It was the second largest US long distance phone company.  In 2002, SEC was suspicious for WorldCom’s increasing profits when other telecom industries were losing. On investigation it was found that it had inflated its revenue by wrong accounting practices. In 2004, finally it was declared bankrupt.

Tyco – In 1999, SEC investigated Tyco for its reporting anomalies. It was discovered that the CEO and CFO of Tyco had hoaxed multimillion dollars by way of bonuses and misuse of Employee Loan Programs.
In wake of the above scandals, SOX Act was introduced to
  • Strengthen the Internal Control Mechanisms
  • Ensure full disclosure in financial reports
  • Transact Corporate Governance with full transparency.

What is SOX?

The most important question is what is SOX and what are the provisions of SOX?
SOX came into force in July 2002 and derives its name from its architects i.e. Senator Paul Sarbanes and Representative Michael Oxley. It is a mandatory act & all public entities must comply with SOX.
In simple terms – SOX is a set of standards that all U.S. public companies and public accounting firms must comply & adhere with good quality financial reporting.

Important Sections of SOX

SECTION 302 – ‘Corporate Responsibility for Financial Reports’
This section makes it mandatory for the signing officers to certify that they have personally reviewed the statutory reports and are free from material misstatements and omissions. This has been included to bring an element of accountability on the part of top management, hence increasing the investors’ confidence in the reports.
Top management also needs to certify that they have reviewed the internal controls existing in the organization and that has been done within a period of 90 days before the reporting date.

SECTION 401 – ‘Disclosures in Periodic Reports’
With the Enron Scandal, attention was drawn towards the Off Balance Sheet items and how Special Purpose Entities (SPEs) were used to inflate the stock prices. So this section comes into play and requires financial statements to present true and fair view of entity’s position. It requires financial reports to include all the off balance sheet (OBS) transactions.

SECTION 404 – ‘Assessment of Internal Controls’
This section is one of the most important sections as it speaks of the detailed assessment of internal controls in financial reporting process. As per section 404, management and external auditor are required to report about the adequacy of internal controls and its operating effectiveness over financial reporting. Based on their detailed analysis “Internal Control Report” is generated annually and produced before the shareholders. They are also required to comment upon the IT issues related to accounting matters.
The costs involved with compliance of this section are very high which is justified with the long term results it brings by boosting the investors’ confidence in the entity.  

SECTION 802 – ‘Criminal Penalties for Altering Documents’
SOX impose strict penalties in case of violation. Any kind of alteration of original documents can lead to imprisonment up to 10/20 years depending upon the facts of the cases. Further penalties can be levied by way of imposition of fines as well.

SOX in India

Indian SOX = Clause 49 of Listing Agreement
With the coming of SOX in U.S., India also took new corporate governance norms under Clause 49 of Listing Agreement which came into effect from 31 December 2005 and is mandatory for all listed companies. Some of the important provisions are as follows-
  1. As per the Clause 49, it is mandatory for a company with Executive Chairman, to have 50% independent directors on Board. If the company has no Executive Chairman, 1/3rd of the directors should be independent.
  2. CEO/CFO’s are required to assess internal controls and take corrective measures to check the deficiencies.
  3. CEO/CFOs are also required to certify the Financial Statements.
  4. All the companies are required to submit quarterly Compliance Reports at Stock Exchanges.
  5. A Compliance Certificate from auditors is to be obtained and annexed with Directors’ Report.
  6. Establishment of an Audit Committee.
  7. Clause 49 was revised to incorporate wider definition of independent directors and increasing the responsibility of audit committee.
  8. Whistle Blower Policy is to be set out to provide security to those who retaliate against wrong doers.
  9. Formal Code of Conduct is to be laid down for Board of Directors and Senior Management of the organization.
  10. Related Party Transactions are to be disclosed separately making the financial statements more transparent.
Thus, SOX is an essential law which has brought discipline in financial reporting process. The transparency brought by this act is boosting investor’s confidence that further helps building a strong capital market in the economy.



Listing Agreement in India : Holding company compliance requirements relating to its subsidiary Company
Clause 32:If you are a listed co.you cannt create subsidaries and keep them away from scrutiny like Enron did. Unlisted co's still scot free in india

·         Disclosure of loans/advances and investments in its own shares by their subsidiaries, associates etc. in the annual report of the Holding co.
·         The following disclosure requirements shall be complied by the companies in the Annual Accounts:
Sr. No.
In the accounts of
Disclosures of amounts at the year end and the maximum amount of loans/advances/investments outstanding during the year.
1
Parent
·   Loans and advances in the nature of loans to subsidiaries by name and amount.
·   Loans and advances in the nature of loans to associates by name and amount.
·   Loans and advances in the nature of loans where there is
(i)             no repayment schedule or repayment beyond seven years or
(ii)            no interest or interest below section 372A of the Companies Act, 1956 by name and amount
·   Loans and advances in the nature of loans to firms/companies in which directors are interested by name and amount.

2
Subsidiary
·   Same disclosures as applicable to the Parent company in the account of subsidiary company

d3
Parent
·   Investments by the loanee in the shares of the parent company and subsidiary company, when the company has made a loan or advance in the nature of loan.


Clause 41 I (e):

If the Company has subsidiaries:

               (i).  It may, in addition to submitting quarterly and year to date stand alone financial  results to the stock exchange also submit quarterly and year to date consolidated financial results; and

      (ii).  While submitting annual audited financial results prepared on stand-alone basis, it shall also submit annual audited consolidated financial result to the stock exchange


Clause 41 IV (m):

The company shall disclose the effect on the financial results of material changes, in the composition of the company, if any, including but not limited to business combinations, acquisition or disposal of subsidiaries and long term investments, any other form of restructuring and discontinuance of operations.

Clause 49 III:

Subsidiary Companies:

i.              At least one Independent Director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary company.
ii.             The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company.
iii.            The minutes of the Board meeting of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered in to by the unlisted subsidiary.

Explanation 1: The term "material non-listed Indian subsidiary" shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding account.

Explanation 2: The term "significant transaction or arrangement" shall mean any individual transaction or arrangement that exceed or is likely to exceed 10% of the total revenue or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year.

Clause 49 Annexure 1A:

Information to be placed before the Board of Directors regarding sale of material nature, of investments, subsidiaries, assets which is not in normal course of business.


SEBI  - Amendment to Listing Agreement : Wef 1.10.2014

The SEBI in its board meeting held on 13 February 2014 approved various amendments to the Listing Agreement regarding corporate governance norms for listed companies. The amendments align the Listing Agreement requirements with the Companies Act, 2013 and also provide for additional requirements to strengthen the corporate governance framework. Among other matters, the amendments include:
  • Exclusion of nominee Director from the definition of Independent Director.
  • Compulsory whistle blower mechanism.
  • Prohibition of stock options to Independent Directors.
  • Separate meeting of Independent Directors.
  • Performance evaluation of Independent Directors and the Board of Directors.
  • Prior approval of Audit Committee for all material Related Party Transactions (RPTs).
  • Approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting.
  • At least one woman director on the Board of the company.
  • Maximum number of Boards an independent director can serve on listed companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed company
  • Widening the definition of RPT to include elements of Companies Act and Accounting Standards
The amendments are applicable to all listed companies with effect from 1 October 2014. Read more



Directors Report

The Directors Report is the part of Annual Report in which the details of Company has been mentioned. There is no restriction to put any matter in the Directors Report if the Directors have intention to mention there apart from legal provisions. In view of this various company put a lot of matters, issues and publications which are not mandatory for putting in the Directors Report but if directors do, they may.
In previous law there was a separate section 217 of the Companies Act, 1956. The whole section was related to the Report of Directors.
But in the Companies Act, 2013, a lot of sections make mandate to disclose the facts in the Director Report.  In this link, we are discussing the followings disclosures in brief:-
1-      SECTION 67 RESTRICTIONS ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT FOR PURCHASE OF ITS SHARES.
The disclosers in the Board Report shall be required in case of the voting rights not exercised directly by the employees in respect of shares to which the any scheme relates. The manner of reporting in the Board Reports shall be prescribed.
If the company or its officer shall not disclose the matter in the Board Report or violate the provisions of this section, they shall be penalized a sum of Rs. 5 lacs which is extended up to 25 lacs along with imprisonment for a term which is extended to three years.
2-      SECTION 92 ANNUAL RETURN
For every company, it is mandatory to prepare Annual Return for the previous financial years as per detailed in the Section 92 of the Act,
Under subsection (3) of this Section, it is also mandatory to enclose the extract of the Annual Return with Director Report. The extract of the Annual Return shall be prescribed and it is the part of Director Report.
3-      SECTION 131 VOLUNTARY REVISION OF FINANCIAL STATEMENT OR BOARD REPORT
Financial statement of the company or report of director shall be revised for period at least preceding three years, in any case, with the permission of Tribunal. In this connection, the revision shall be disclosed in the director report for the current year also.
4-      SECTION 134 FINANCIAL STATEMENT AND BOARD REPORTS ETC.
A.     Contents of Directors Report
The following contents are mandatory to mention in the Director Report
1-Extract under section 92
We have already discussed above, the extract shall be prescribed.
2-Number of meeting of Board of Directors
It is important information demanded by the Government, previously unlisted company need not to require make any information regarding it, but under the Companies Act, 2013 it is favorable, and it is mandatory for companies to put information about the Board Meeting. In that case, an unlisted company cannot play with the dates of meetings at least.
3- Directors Responsibility Statement
Some modification has been made since previously, the detailed is below mentioned.
4- Under section 149
Who may be an independent Director, the Section 149 (6) is clarified the following:-
An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. Or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total  voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
Considering the above points, it is a duty of an Independent Director to disclose every point in their statement which shall be annexed with the director Report.
5-      Disclosure in the Board Report u/s 149 (10),
Independent Director shall be appointed for a term of 5 years but it shall be re-appointed by passing of Special Resolution. In this regard, the company must disclose the appointment or re-appointment of Independent Director in the Board Report.
6-       Matters as per section 178 of the act, if applicable
The company shall disclose regarding the committee of Nomination, Remuneration and stakeholders relationship committee in the Board Report.
7-       Reservation and qualification on Auditor Report and Secretarial Report
The directors Report is also contained any reservation and qualification as marked by the Statuary Auditor of the Company in its Auditor Report and by the Company Secretary in whole time practice in its Secretarial Report.
8-      Loans and Guarantee under section 186
The details of Loans, Guarantee and investment shall be mentioned in the Director Report as per provisions of Section 186 of the Act
9-       Particular of Contract and arrangement under section 188
The company shall disclose in its report regarding all transaction which is related to related party.
Comment: – In previous laws, there is no requirement to disclose the above point no. 8 and 9, now it is mandatory to disclose. The sense of Director Report that the Directors disclose all loan, guarantee, investment, related party transaction themselves.
10-   state of company affairs
11-   reserve
12-  dividend
13-  material changes
14-  conservation, technology etc
15-   foreign exchange
Comment:- the aforesaid disclosures from 10 to 15 are remain same.
16-  Risk Management
In its Directors Report, a statement must be enclosed which shows the development and implementation of risk management policy of the company.  Under new Act, there is no meaning and definition of Risk Management. Hence, the statement which is enclosed the director report, may be following elements: – (the following points are just opinion)
1-Introduction
2-Meaning and definitions Risk Management
3-Types of Risks
4- Risk Management
5-Risk Assessment
6-Risk Identification Activities
7-Risk Handling
8-Monitoring and Reporting
9-Conclusion
17-  CSR
The director report shall be contained the policy, development and implementation of CSR project. What initiations have been taken by the Company? It shall also be disclosed in the Director Report.
18-  Formal Annual evaluation
A statement shall be attached with the Board Report which shall be indicated the performance of the Board and its committee and its individual directors. This clause shall be applicable only listed company or prescribed public limited company.
19-  other matter
In case, company has intention to disclose other matter, it may so.
B.      Attachment
The Director Report shall be attached with the Financial Statement of the Company.
C.      Director Responsibility Statement
The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—
(a) In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;
(c) The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(d) The directors had prepared the annual accounts on a going concern basis; and
(e) The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
D.     Signature
The Directors Report and its annexure shall be signed by the Chairperson of the Company where he is authorized by the Board.
In case of no authorization, Two Directors, one of whom shall be a managing director or by the Director where there is one director only
E.      Publication
A signed copy of Financial Statements along with its annexure etc shall be issued, circulated and published
F.       Penalty
In case of company makes default, it shall be penalized not less than Rs. 50000/- but which may be extended up to Rs.25 lacs
In case of default made by the officer, he shall be penalized by way of imprisonment for a term of three years or with fine not less than Rs. 50000/- but which may be extended up to Rs.5 lacs or both
5- SECTION 135 CORPORATE SOCIAL RESPONSIBILITIES
The section specially force that the Director Report must disclose the composition of Corporate Social Responsibility Committee.
SECTION 149 COMPANY TO HAVE BOARD OF DIRECTORS
Independent Director shall be appointed for a term of 5 years but it shall be re-appointed by passing of Special Resolution. In this regard, the company must disclose the appointment or re-appointment of Independent Director in the Board Report
SECTION 177 AUDIT COMMITTEE
The Board of Directors report shall disclose the composition of an Audit Committee. The composition of Audit Committee shall be disclose in the Board Report and in case of the board has not accepted any recommendation of audit committee, the same shall also disclose in the Board Report with reason.
Apart from above, every listed company or prescribed companies shall establish a vigil mechanism for directors and employs to report genius concern in such matter as may be prescribed.
Such mechanism shall be disclosed by the company on its website, if any, and in the Board of Directors Report
SECTION 178 NOMINATION AND REMUNERATION COMMITTEE AND STAKEHOLDERS RELATIONSHIP COMMITTEE
A Nomination and Remuneration Committee shall be constituted under this section for formulization the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.
Such aforesaid policy shall be disclosed in the Board of Directors Report
SECTION 188 RELATED PARTY TRANSACTIONS
The directors Report shall also be contained the related party transaction. Whatever transaction which is mentioned under this section, if the company transact, the disclosure shall be mandatory in the Director Reports along with the justification about each transactions. So that shareholder of the Company may be aware such transactions.
SECTION 197 REMUNERATION RELATED
Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.
Apart from above, if any director who is managing director or whole time director of the company receive any commission from company,  in that case, such director shall not be disqualified to take commission or remuneration from holding or subsidiary of its company.
In that case the disclosure in the Board Report shall also be mandatory
Section 204 Secretarial Audit for Bigger Companies
The Board of Directors shall be contained any qualification or observation or other remarks made by the company secretary in practice in his secretarial report.




CEO/CFO certificate as per listing agreement and directors responsibility statement as per companies Act 2013


Clause 49 of the Listing Agreement with Stock Exchanges,  provide that the CEO/ Managing Director and CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that:

(a) They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief :

(i) these statements do not contain any materially untrue statement or omit any
material fact or contain statements that might be misleading;

(ii) these statements together present a true and fair view of the company’s affairs and
are in compliance with existing accounting standards, applicable laws and regulations.

(b) There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct.

(c) They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

(d) They have indicated to the auditors and the Audit committee

 (i) significant changes in internal control over financial reporting during the year;
(ii) significant changes in accounting policies during the year and that the same have
been disclosed in the notes to the financial statements; and
(iii) instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system over financial reporting.

The CEO and CFO can provide this certificate to the Board only after they are satisfied that proper internal financial control systems have been laid down and they have been complied with.

Hence every CEO/CFO must take adequate care and precautions before they submit to the Board their certificate on financial statements .They can only issue such certificate if they Clause 49 of Listing Agreement – CEO/CFO Certification are sure that they believe that the contents of the certificate are true.

By certifying to the Board in the manner prescribed the CEO and CFO are indeed shouldering responsibility about financial statements, internal control system and its effectiveness, accounting policy etc. It is necessary for the CEO and CFO to take required steps before they can issue such wide certificate to the Board.

The above certificate need not be published in the Annul Report. However as a matter of good practice some corporates are publishing the same. The auditor issuing corporate governance certificate ensures that CEO/CFO certificate is placed before the board.


Directors Responsibility Statement as per Companies Act 2013

Format of Directors responsibility statement under the companies act  2013 : 

 In pursuance of section 134 (5) of the Companies Act, 2013, the Directors hereby confirm that:

(a) Accounting standards :in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) Policies, Judgements and Estimates :the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the FINANCIAL year and of the profit and loss of the company for that period;

(c) Records :the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) the directors had prepared the annual accounts on a going concern basis; and

(e) Internal Controls :the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

(f) Legal Compliance :the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Notes:
1. Earlier provisions for Directors' Responsibility Statement were prescribed under sub-section (2AA) of Section 217 of the Companies Act, 1956
2. Point (f) is a new addition for applicable for all types of companies

3. The point (e) is also new addition applicable to listed company only, other companies may strike out that point.