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Corporate Governance under

Clause 49 oI Listing Agreement


(As Revised on October 29, 2004)
Compliance & CertiIication
Provisions, Issues & Safeguards
(Seminar in Vadodara on Dec. 17, 2005)
By Mahavir Lunawat
Corporate Secretarial, RIL
istory Sequence oI Events
Accounting Scams
US Sarbanes Oxley Act, 2002
Narayana Murthy Committee on Corporate
Governance
Amendments to Clause 49 oI the Listing
Agreement
August 26, 2003
October 29, 2004
Outline
Board Structure
Subsidiary Check
Board Procedure
Compensation oI Non Exec Directors
Audit Committee
Policies/Codes - Code oI Conduct, Risk Mgt.,
Compliance Report
CEO/CFO CertiIication
Disclosures
Other Provisions
Non-Mandatory Provisions
Board Structure
Exec. and Non-Exec. Directors |49.I(A)(i)|
Optimum Combination
At least 50 - Non-Exec.
on-Exec. Director may have a tenure not
exceeding, in aggregate, a period oI 9 years
Issues Issues
Safeguards Safeguards
Board Structure - Issues
Optimum` ?
Max No. oI Non-Executive Directors
What iI 100
Term oI Non Executive Directors` OIIice
From when ?
Senior Directors?
Board Structure - SaIeguards
Optimum Combination Company`s
discretion
Balanced Board
Term oI Non-Executive Directors` OIIice
Board`s call
Disclosure oI adoption / non-adoption
Board Structure
Independent Directors Number |49.I(A)(ii)|
Non-Exec. Chairman - 1/3rd Independent
Exec. Chairman - 1/2 the Board Independent
(CP -SpeciIied Cos.(net worth 5 cr / turnover
20 cr) - Min. 7 Directors, Majority
Independent)
Board Structure contd.
Independent Directors - DisqualiIications |49.I.(A)(iii)|
Those Non-Exec. Directors not disqualiIied on any oI 6
grounds -
Material Pecuniary Relationship
Related to promoters/management
olding oI Executive Post in the Company in last 3 years
Partner/Executive oI Audit/Legal Firms associated in last 3
years
Material Transactions which may aIIect independence
Substantial Shareholding (CP Attributes`)
Institutional Directors - Whether Investing or Lending -
considered Independent
Issues Issues
Safeguards Safeguards
Board Structure - Issues
Prov. as to No. oI Independent Directors -
lacks harmonisation.
Very wide Monitoring ?
UndeIined Terms
Materiality ?
Related` ?
Executive ?
Board Structure - SaIeguards
Concept oI Materiality` to be judged Irom
the director`s point oI view.
Institution oI System to determine and
ensure independence Initial as well as
periodic.
Relevant disclosures eg. list oI relatives`.
Subsidiary Check
olding Company Board Composition shall apply
At least 1 Independent Common Director
(Applicable to Material non-listed Indian
Subsidiary`)
Audit Committee oI olding Co. to review Fin.
Statements, incl. Investments oI unlisted subsidiary.
Unlisted subsidiaries` Board minutes & their
periodic statement oI signiIicant transactions &
arrangements to be placed beIore olding Company
Board. |49.III|
Issues Issues
Safeguards Safeguards
Material non-listed ndian
subsidiary
"material non-listed ndian subsidiary : An unlisted
subsidiary, incorporated in ndia, whose turnover or net
worth exceeds 20% of the consolidated turnover or net
worth respectively, of the listed holding company in the
immediately preceding accounting year.
"significant transaction or arrangement : Any individual
transaction or arrangement that exceeds or is likely to
exceed 10% of the total revenues 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.
[Explanations to 49.]
Subsidiary Check - Issues
DeIinition oI subsidiary`?
Overseas/JVSubsidiaries ?
Common Independent Directors
Problems
Status oI Employees/Directors nominated by
olding Co.?
SEBI - Going Beyond
Review oI Board Minutes, Fin. St.,
Investments :
What would the term Review` mean?
Goes against Cos. Act/AOA
JV/Non wholly-owned Subsidiaries -
Prejudicial to Shareholders Interest
Concept oI Separate Entity` - ignored.
Subsidiary Check Issues contd..
Subsidiary Check - SaIeguards
Subsidiary` As per the Companies Act
Subsidiary Monitor Periodic ReIerencer
Review
Periodicity - Quarterly
Board Procedure
Number & Frequency oI Board Meetings |49.I(c)(i)|
At least 4 times a year, max. gap - 3 mths.
(Cos. Act-Sec.285 - at least once in every quarter &
Min. 4 meetings in a year; CP- Max. Gap between two
consecutive meetings - 3 months.)
InIormation to be placed - Prescribed. |49.I(c)(ii)|
Committee Memberships/Chairmanships
Max No. 10 / 5 committees (Remuneration Committee
excluded) across all public companies excl. Sec.25 &
Ioreign cos. (Cos. Act /CP - Max no. oI directorships)
Issues Issues
Safeguards Safeguards
No. oI Meetings / Agenda Items What Systems ?
Committee memberships within limit ow to
ensure ?
Max. gap oI 3 months ow to be construed ?
Board Procedure - Issues
Board Procedure - SaIeguards
Illustrative List oI Board Agenda
Circulation & Monitoring
Register oI Committee Memberships /
Chairmanships
Month to be construed to mean a period oI
30 days.
Tentative Board Calendar
Compensation oI Non Exec Directors
Fee/Compensation to be Iixed by Board and
approved by shareholders in general meeting
(Cos.Act Prov.)
Limits to be set Ior max. no. oI Stock Options in a
year and in aggregate (SEBI Guidelines on ESPS/
ESOS)
|49.I.(B)|
Issues Issues
Safeguards Safeguards
Compensation oI Non Exec Directors
Issues
Approval Ior sitting Iee ?
Stock Options Prov. as to setting up oI limits
should instead be provided under the ESOS
Guidelines.
SaIeguards
Shareholders` Resolution in General Meeting
Audit Committee |49.II|
QualiIied & Independent Audit Committee
mandatory (Cos. Act / CP: where 5 cr. paid-up capital)
Members
Number
Min. 3, 2/3
rd
to be independent. (Cos. Act : Min 3. 2/3
rd
NEDs;
CP : Min 2 Ind., Max Ind. 3/4
th
, 2/3
rd
to be NEDs)
Eligibility
All Iinancially literate, i.e., able to read and understand basic
Iinancial statements.
At least 1 having accounting or related Iinancial management
expertise, satisIying any oI the Iollowing :
Experience in Iinance or accounting, or
Requisite ProIessional certiIication in accounting, or
Financial Sophistication
Audit Committee |49.II|
Chairman - An Independent Director, to be
present at AGM to answer shareholders`
queries. (Cos.Act / CP- Chairman to be
elected by the Members oI the Committee
Irom themselves)
Secretary - Company Secretary.
Invitees -
As the Committee considers Iit.
Finance Director, ead-Internal Audit, Rep oI Auditor
may be present. (Cos. Act / CP - Finance Director,
Auditor shall be present)
Audit Committee etc. |49.II|
Meetings : At least 4 & max. gap between two
meetings to be not more than 4 months.
Quorum : 2 members or 1/3rd - higher; with Min. 2
Independent.
Recommendations - Silent. (Cos. Act : Recommendations
re. F.M. incl. Audit Report - binding on the Board. Non-
acceptance - reasons to be recorded; communication to the
shareholders.)
Powers: Inclusive list
Role
Mandatory Review oI InIormation
Issues Issues
Safeguards Safeguards
Audit Committee - Issues
Financial Literacy - Needs Min QualiIication
Accounting & related F.M. expertise - too
wide, might have been made more clear &
exact.
CertiIication in Accounting only. Finance (like
CFA/MBA)?
No. oI years oI experience.
Audit Committee Issues contd.
Invitees
Needs armonisation
Should be restricted to the judgement oI the
Committee
Auditor - Diverse Requirement, Cost Auditor?
Decisions oI Audit Committee?
Review - what does it mean?
Periodicity - Not speciIied.
Audit Committee SaIeguards
ConIirmation disclosures Irom Audit
Committee members / proposed members
Minuting
Audit Committee Charter
Tentative Audit Committee meetings
calendar
Compliance Review
Board to periodically review |49.I.(C)(iii)|
compliance reports oI all laws applicable to the
company
steps taken by company to rectiIy instances oI
non-compliances.
Issues Issues
Safeguards Safeguards
In conIlict with Naresh Chandra Committee I & II.
Legal Compliance Report - too large
Review what does mean?
Going Beyond - Statutory Compliance other than
Securities Law perhaps outside SEBI`s ambit. -
Doctrine oI Colourable Legislation?
Compliance Review - Issues
Compliance Review - SaIeguards
Exhaustive Statutory Compliance Checklists
Summary Report covering compliance
conIirmations; non-compliance to be highlighted
alongwith reasons & steps Ior rectiIication thereoI.
Back-to-back conIirmations or direct reports
periodically
Compliance OIIicer
Periodicity May be monthly.
Code oI Conduct
Board to lay down a Code oI Conduct Ior Directors and
Senior Management
Explanation: 'senior management shall mean personnel oI the
company who are members oI its core management team
excluding Board oI Directors. Normally, this would comprise all
members oI management one level below the executive directors,
including all Iunctional heads.
Code to be posted on website
Such personnel to aIIirm compliance annually
Annual Report to contain Declaration signed by CEO.
|49.I.(D)|
Issues Issues
Safeguards Safeguards
Although based on Section 406 oI SOX Act, 2002,
no clue as to the contents.
Not even broad parameters provided.
What iI no website ?
Breach oI Code ?
Code oI Conduct - Issues
Code oI Conduct - SaIeguards
Exhaustive Code
Compliance OIIicer
Senior Management
Web-site / Annual Report
Provision Ior waiver / consequences oI
breach
Risk Management
Company to lay down procedures to inIorm
Board about risk assessment and minimisation
procedures.
Periodic Review oI Risk Control Framework
through means oI properly deIined Iramework.
|49.IV.(C)|
Issues Issues
Safeguards Safeguards
Too wide; practicability ?
Responsibility ?
Purpose ?
Periodicity ?
Risk Management - Issues
Risk Management - SaIeguards
Manual
Periodicity monthly / quarterly
Reporting to Board through Audit
Committee
Risk Manager
CEO & CFO CertiIication
CEO & CFO to certiIy to Board that
Reviewed Fin. Statements & Directors Report
No material untrue/ misleading statement
No omission oI material Iact
They present true & Iair view in compliance
with Accounting Standards and applicable laws
CEO & CFO CertiIication contd..
They are responsible Ior internal controls - have
evaluated their eIIectiveness - have disclosed to
Auditors deIiciencies, iI any and action.
have disclosed to Auditors and Audit Committee -
signiIicant Irauds iI any involving mgmt./ employees
no signiIicant changes in internal control and/ or
accounting policies during the year
|49.V|
(Cos. Act - Responsibility Statement)
Issues Issues
Safeguards Safeguards
Only an additional certiIication process
Dilutes overall Board`s responsibilities
Sec. 217(2AA) on Directors` Responsibility
Statement introduced by Amendment Act, 2000
OIIicer in deIault` concept ?
CEO & CFO CertiIication - Issues
CEO & CFO CertiIication -
SaIeguards
Back-to-back conIirmations
Periodicity annual
Audit Committee role A comIort
Related Party Transactions
To Audit Committee periodically
Summary Statement oI transactions with
Related Parties
Details oI material individual transactions with
related parties not in normal course
Management justiIication Ior transactions not
on arm`s length
|49.IV.(A)|
Issues Issues
Safeguards Safeguards
Related Party Transactions
Issues
Periodicity?
Material Individual Transactions ?
SaIeguards
Periodicity may be quarterly.
Materiality may be linked to quantitative limit
Auto systems
Disclosures |49.IV|
By Non-Exec. Directors - prior to appointment -
shareholding/ beneIicial interest (Cos. Act - Sec. 308
covers same Reg. 13(2) oI Insider Trading
Regulations)
Treatment diIIerent than in Accounting Standards
together with management explanation in Fin. St.
(Cos. Act - Sec. 211(3B) contains the same prov.)
Issue Proceeds
Quarterly disclosure oI uses/application oI Iunds raised by
PreIerential Allotment
Annual Statement oI Iunds utilised Ior purposes other than
stated purposes certiIied by statutory auditors
to the Audit Committee till such time, money raised is Iully spent.
Criteria oI making payments to NEDs - in Annual
Report or corporate website
Other Provisions
Shareholders Grievance Committee
Disclosure oI Directors` Remuneration
Mgmt. Discussion and Analysis Report
Shareholder InIormation on Website
Quarterly Compliance Report
Compliance Cert. Irom Auditors / Co. Secretaries
Non-Mandatory Provisions
OIIice oI Non-Exec Chairman
Remuneration Committee
alI-yearly perIormance
Regime oI unqualiIied Iinancial statements
Directors` training on corporate business model as
well as risk proIile etc.
NEDs` perIormance evaluation
Whistle blower policy
Extent oI adoption / non-adoption to be disclosed.
Amidst the plethora of stipulations & issues,
we Company Secretaries
in employment as well as in practice
have to excel and benchmark
our professional excellence
in the field of Corporate Governance
Your views are welcome at -
Mahavir.lunawatril.com, m_lunawat1rediffmail.com
Thank You '