Corporate Governance Reforms in India

IMT NAGPUR 2010-12

CORPORATE GOVERNANCE

Reforms in Corporate Governance in India started after the liberalization of Indian Economy in 1991.

IMT NAGPUR 2010-12

Corporate Governance
Year 1998 1999 2001 2002 2003 2005 Name of Committee/Body Confederation Industry of Areas/Aspects Covered

Indian Desirable Corporate Governance A Code Birla Corporate Governance

Kumar Mangalam Committee

RBI Report of the Advisory Corporate Governance Group Naresh Chandra Committee Statutory Audit , Auditor-Client Relationship & Role of ID

Narayana Murthy Committee Corporate Governance J.J. Irani Committee Company Law Governance
IMT NAGPUR 2010-12

&

Corporate

Corporate Governance in India

Desirable Corporate Governance Code

First initiative in India By Confederation of Indian Industry. Framed a voluntary code of corporate governance, to be applicable for listed cos.

IMT NAGPUR 2010-12

Corporate Governance in India

Kumar Mangalam Birla Committee
Constituted by SEBI (capital market regulator). Committee recommendations culminated in the introduction of Clause 49 of the Listing Agreement to be complied by all Listed Cos. in India.

IMT NAGPUR 2010-12

Corporate Governance in India

RBI Report of the Advisory Group on Corporate Governance
Constituted by RBI (banking regulator). Report of the committee contained several recommendations on corporate governance especially applicable for Public Sector Banks.

IMT NAGPUR 2010-12

Corporate Governance in India

Naresh Chandra Committee
Consequent to the debacle of Enron & World Com in US in 2001, followed by passing of stringent SOX Act, GOI Constituted by GOI. Scope of the Committee:

Auditor Client Relationship, Rotation of Statutory Audit Firms, Partners, Determination of Audit Fees, Non-Audit Services.

IMT NAGPUR 2010-12

Corporate Governance in India

Narayana Murthy Committee
Constituted by SEBI. Scope of the Committee: To Review Performance of the

CG in India.

IMT NAGPUR 2010-12

Corporate Governance in India

JJ Irani Committee
Constituted by GOI.

To make a simplified company law including the provisions of the corporate governance.

IMT NAGPUR 2010-12

Corporate Governance in India

Legal and regulatory framework of Corporate Governance in India is mainly covered in: 1. Company Law, 2. SEBI Guidelines, 3. Listing Agreement.

IMT NAGPUR 2010-12

Corporate Governance Norms as Per Company Law

IMT NAGPUR 2010-12

DISCLOSURE UNDER COMPANY LAW

1. Company Registration under ROC;

2.
3. 4. 5.

Compliance Related Filing (Annual Return, Annual

Changes

Report)
(Change in capital structure, Increase in Auth Capital, Change of Regd. Office, Change of the objects of the company, Change of the MOA & AOA)

Charge Management (Creation, Modification and Satisfaction of Charge) Change of Management

(Appointment, Re-appt., Resignation,

Removal of Director/MD/WTD)

IMT NAGPUR 2010-12

DISCLOSURE UNDER COMPANY LAW

1. A copy of Annual Report shall be sent to all the shareholders 21 days before the date of the AGM.

2. Same has to be filed with the ROC within 30 days of the AGM.

IMT NAGPUR 2010-12

TRANSPARENCY UNDER COMPANIES ACT

The documents (MOA, AOA, Forms, B/S & P&L A/c, Annual Return) filed with ROC are Public documents and can be inspected by any member of the public.

IMT NAGPUR 2010-12

COMPLIANCE WITH AS

Every P&L A/c & B/S of the Co. shall mandatorily comply with the AS.

IMT NAGPUR 2010-12

DIRECTORS RESPONSIBILITY STATEMENT

AR shall also include a Directors Responsibility statement that :
1. AS had been followed in the preparation of Annual A/c; 2. Appropriate accounting policies have been applied on consistent basis; 3. B/S & P&L A/c give a true and fair view of the state of affair of the Co.; 4. Directors had taken proper & sufficient care for the maintenance of adequate accounting records for safeguarding the assets of the company.

IMT NAGPUR 2010-12

DIRECTORS RESPONSIBILITY STATEMENT

Tech Mahindra 2010-11.pdf

IMT NAGPUR 2010-12

Separation of Role of CEO & Chairman

In India, there is no legal provision which requires the separation of the Role.

IMT NAGPUR 2010-12

AUDIT COMMITTEES
Every Public Co. having a paid- up capital of Rs. 5 Cr. or more shall constitute AC.
1. At least 3 directors. 2. Two of the members of the Audit Committee shall be directors other than MD or WTD.

IMT NAGPUR 2010-12

Board's sanction for Contracts in which Directors are interested

Except with the consent of the BOD of a Co.,
1. A Director of the Co. 2. His relative, 3. A Firm in which such a director is a partner, 4. A Pvt. Co. of which the director is a member or director, shall not enter into any contract with the Co.

In case of a Co. having a paid-up share capital of not less than Rs. 1 Cr, Previous Approval of the CG is required.

IMT NAGPUR 2010-12

INTERESTED DIRECTOR NOT TO PARTICIPATE

No Director of a Co. shall, take any part in the discussion or vote on,
any contract or arrangement entered into if he is in any way, concerned or interested in the contract or arrangement.

IMT NAGPUR 2010-12

Passing of resolutions by postal ballot

A Co. obtain the approval of the shareholders through Resolution passed by means of a postal ballot for following business:
1.Alteration of the Objects of the Co.; 2.Alteration of AOA; 3.Buy Back of Own Shares; 4.Issue of Shares with differential Rights; 5.Change in the Regd. Office of the Co.; 6.Sale of the substantial assets of the Co.; 7.Giving Loan or Guarantee or Security in excess of the Paid Up Share Capital and Free Reserves of the Co. postal_ballot_result_28_Dec10.pdf IMT NAGPUR 2010-12

LOANS TO DIRECTORS OR THEIR RELATIVES

Obtain Prior Approval of the CG before giving any loan to 1)Directors, 2)Relatives of the Directors; 3)Pvt. Ltd. Co.; 4)Firm

IMT NAGPUR 2010-12

Corporate Governance in India

Proposed Corporate Governance provisions under the New Companies Bill, 2011

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Class Action Suits
Co. Bill proposes to introduce the concept of class action suits for the first time in India.
It empowers small investors, depositors to seek relief. It is a handy weapon for small investors seeking relief from errant cos.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Class Action Suits
Lawsuits may be filed by shareholders, depositors or any persons representing the effected persons, if they are of the opinion that the management / directors or conduct of the affairs of the company is being conducted in a manner prejudicial to the interest of the company, its member or depositors.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Class Action Suits
Investors can claim damages or compensation or demand any other suitable action
for improper conduct, misleading statements and fraudulent or illegal acts by the co. or its directors.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Class Action Suits
Such suits can also be filed against
1) the auditors or 2) advisor or 3) consultant associated with the company.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Class Action Suits
The provisions for class action lawsuit will give more power to minority shareholders in redressing their grievances.
The proposed law requires at least 100 people to come together to act.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Class Action Suits
For eg.
3 years on, Indian investors are yet to get any meaningful compensation in Rs. 7000 crore satyam fraud. But the American counterparts, who owned ADR, have made the company agree to pay $125 million (Rs. 625 crores) in settlement due to a strong class action framework in the US.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Raising Money and Insider Trading It also proposes to tighten the laws 1) for raising money from the public and seeks 2) to prohibit insider trading by company directors or key managerial personnel

by treating such activities as a criminal offence and huge penalty.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Independent Director Every Listed companies BOD directors. = 1/3 Independent

Maximum Period of appt. = 2 terms * 5 years each.

Cooling off period = 3 years

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Remuneration of Independent Director 1) Sitting Fees and 2) Commission in the profits of the company only.

Prohibition of Stock Options.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Liability of NED / Independent Director
Held liable only for : Those acts of the company or its officers that 1. Violates cos. Act, if it was the result of the Board processes or 2. If it had occurred with his knowledge, consent or 3. Where he had not acted diligently.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Liability of NED / Independent Director
Not to be held liable for fraud or malpractices perpetrated by the management.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Liability of Independent Director
But corporate affairs ministry cannot provide overriding provisions in the Act that would provide the ID an immunity from prosecution under other laws.

That may still make many wary of taking an appointment as IDs.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Independent Director
Government has also proposed setting up a dedicated data bank of persons who can act as Independent Directors; Presumably the selection will have to be limited to these panelists.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Independent Director The current Bill requires that all resolutions in a meeting convened with a shorter notice should be ratified by at least one independent director. This could create an element of veto power by these directors, which will be unique to India.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Woman Director
The Bill also proposes the making of at least one woman director mandatory in the prescribed class or classes of company.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Statutory / External Auditors : Rotation of Auditors:
Maximum term for an individual auditors Cooling off period Maximum term for an auditor (if LLP) Cooling off period = 5 years = 5 years = 10 years = 5 years

Maximum term for auditing partner

= 3 year

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Statutory / External Auditors :
Company Name JP Associates Hero Motor Corp. Hind Lever Hindalco Statutory Audit Firm MP Singh & Associates A F Ferguson & Co. Lovelock & Lewes Singhi & Co. No. of Years 11 10 10 10

Jindal Steel
Larsen & Tourbo Maruti Suzuki Reliance Industries Sterlite Industries

SS Kothari Mehta & Co

Sharp & Tannan PWC Chaturvedi & Shah Chaturvedi & Shah
IMT NAGPUR 2010-12

10
10 10 10 10

Proposed CG provisions under the New Companies Bill, 2011

Statutory / External Auditors :

Restrictions on accepting non-audit jobs.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Liability of Statutory / External Auditors : In case of a failure to act diligently or in a case of fraud, the proposed law prescribes:

1) Civil, 2) Criminal and 3) Monetary fines

in proportion to the quantum of fraud.
IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Statutory / External Auditors
The issues relating to the rotation of auditors have been debated at length, though whether such rotation improves audit quality and independence is an open question (there is no
empirical evidence that conclusively proves either point of view).

Similarly, a common link for a number of corporate failures across the world has been a long-standing cosy auditor-client relationship.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Rotation of Statutory / External Auditors
Very few countries like Italy; Brazil; South Korea have stipulated the rotation of audit firms.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Rotation of Statutory / External Auditors
For: 1. Mutual relationship is the cause for the financial frauds at Satyam, and in helping the collapse of Lehman Brothers and demise of the Enron and WorldCom. 2. Good move from the perspective of the Independence of the auditors. 3. Intent of the law is to discontinue the association of the auditors with the co., so that they may not have the temptations to shield the shortcomings of the management from shareholders.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Rotation of Statutory / External Auditors
Against: 1. If you have audited a firms account for a no. of years, you will be able to understand its business better. 2. Quality of the audit will suffer.

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Rotation of Statutory / External Auditors

The another good option can be:

JOINT Auditors

IMT NAGPUR 2010-12

Proposed CG provisions under the New Companies Bill, 2011

Statutory / External Auditors The oversight framework for auditors is now moving away from the principles of self-regulation of the Institute of Chartered Accountants of India (ICAI) to a government body with the powers of a court.

IMT NAGPUR 2010-12

Thank You

IMT NAGPUR 2010-12