Second Generation

Reforms
&
Corporate
Presented by:
Governance

51-Sachin Sharma
52-Avi Kathuria
53-Ramit Gahlaut
54-Deepanshu
Gupta
55-Anurag Singh

Introduction:
IN July 1991,India has taken a series of measures to
structure the economy and improve the BOP position. The
new economic policy introduced changes in several areas.
The policy have salient feature which are:
1.Liberlisation (internal and external)
2.Extending Privatization
3.Globalisation of the economy
Which are known as LPG . (liberalization privatization
globalization)

LPG

Liberalization is a very broad term that usually refers to

fewer government regulations and restrictions in the
economy in exchange for greater participation of private
entities
Privatization means transfer of ownership and/or
management of an enterprise from the public sector to the
private sector .It also means the withdrawal of the state
from an industry or sector partially or fully. Privatization is
opening up of an industry that has been reserved for public
sector to the private sector.
Globalization implies integration of the economy of the
country with the rest of the world economy and opening up
of the economy for foreign direct investment by liberalizing
the rules and regulations and by creating favorable
socioeconomic and political climate for global business.

REASONS FOR IMPLEMENTING LPG

Large and growing fiscal imbalances.(Gross fiscal deficit

rose to 12.1% of GDP in 1991)
Growing inefficiency in the use of resources.
Low foreign exchange reserves.($1.2 billion in January
1991)
High inflation rate.(13.87% in year 1990-91)
The low annual growth rate of Indian economy stagnated
around 3.5% from 1950s to 1980s, while per capita income
averaged 1.3%.

NEED FOR SECOND GENERATION REFORMS

SECOND GENERATION REFORMS

Second generation reforms are more than a response to the fact that
weak markets and institutions reduce gains from privatization and
market opening.

Second-generation reforms can contribute to a longer-term,

comprehensive alignment of state, market, and civil society, which
is required to maximize the potential benefits of vigorous market
competition.

It mandates from state to find ways to effectively protect other

collective interests through better institutions and policy tools,
market incentives, and cooperation with civil society.

CORPORATE GOVERNANCE IS

The system of rules, practices and processes by which a company is

directed and controlled.
Corporate governanceessentially involves balancing the
interests of the many stakeholders in a company - these include its
shareholders, management, customers, suppliers, financiers,
government and the community.
Safeguards against corruption and mismanagement, while
promoting fundamental values of a market economy in a democratic
society.
A sincere commitment to creating and sustaining an ethical
business culture in public and private sectors.

SEBI AND CLAUSE 49

Clause 49 of the Listing Agreement to the Indian stock exchange comes into
effect from 31 December 2005. It has been formulated for the improvement
of corporate governance in all listed companies.

SEBI asked Indian firms above a certain size to implement Clause 49, a
regulation that strengthens the role of independent directors serving on corporate
boards.

It specified the minimum number of independent directors required on

the board of a company.
The setting up of an Audit committee, and a Shareholders Grievance
committee, among others, were made mandatory .
Separate Report on Corporate Governance to be a part of Annual
Report.
Certificate is to be obtained by the company from the Auditor or
Practicing Company Secretary.

AMENDMENTS

On

17th April 2014 SEBI amended Clause 49 of the

Listing Agreement. This came into effect on 1st
October 2014.

Some
1.

of the key changes are:

Appointment of a Woman Director

2. Tenure of Independent Directors
3. Formal letter of appointment to Independent
Directors
4. Performance evaluation of Independent Directors
5. Separate meeting of Independent Directors &
Training of IDs
6. Succession Plan for Board/Sr. Management

7. Compulsory whistleblower mechanism

8. Constitution of Nomination and Remuneration
Committee
9. Disclosure in Annual Report about Remuneration
Policy and evaluation criteria
10. Related Party Transactions
11. Compulsory Electronic Voting for all shareholders
resolutions (new Clause 35B)

HIGHLIGHTS OF THE NEW

AMENDMENTS
1.

.
.

.
.

.
.

.
.

Widening the Definition of Independent Director-

ID shall mean a non-executive director (i.e., not MD, WTD) other than
nominee
director of the Company: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. apart from receiving director's remuneration, has or had no
pecuniary
relationship with the company,

Limit on number of Directorships

- As Independent Director (if he is not WTD in any listed
co.) -- maximum seven listed cos.
- As Independent Director (if he is WTD in any listed
co.) -- maximum three listed cos.
Maximum Tenure of Independent Directors (ID) An Independent Director shall hold office for a term upto five
consecutive years on the Board of a Company and shall be eligible
for
re-appointment for another term of upto 5 consecutive years on
passing of a special resolution by the Company.
Provided that a person who has already served as an ID for five
years
or more in a company as on October 1, 2014 shall be eligible for
re-appointment, on completion of his present term, for one more
term of
upto five years only.

2. Role of Audit Committee

1. Formulation of the criteria for determining qualifications, positive

attributes and independence of a director and recommend to the Board a
policy, relating to the remuneration of the directors, key managerial
personnel and other employees;

2. Formulation of criteria for evaluation of IDs and the Board;

3. Devising a policy on Board diversity;

4. Identifying persons who are qualified to become directors and who may
be appointed in senior management in accordance with the criteria laid
down, and recommend to the Board their appointment and removal. The
company shall disclose the remuneration policy and the evaluation
criteria in its Annual Report.

3. Disclosures:
A.

Related Party Transactions

1.

Details of all material transactions with related parties shall be disclosed

quarterly along with the compliance report on corporate governance.

2.

The company shall disclose the policy on dealing with related party
transactions on its website and also in the Annual Report.

B.

Disclosure of Accounting Treatment

1.

A company has followed a treatment different from that prescribed in an

Accounting Standards, the management of such company shall justify
why they believe such alternative treatment is more representative of the
underlined business transactions.

2.

Management is also required to clearly explain the alternative

accounting treatment in the footnote of financial statements.

4. DISCLOSURE IN ANNUAL REPORT

The following shall be disclosed in the Annual
Report:
(1) Training imparted to IDs
(2) Establishment of Vigil Mechanism (Also in
Board Report)
(3) Remuneration Policy and the evaluation
criteria

REPORT ON CORPORATE
GOVERNANCE

- There shall be a separate Section on Corporate

Governance in the Annual Report of the Company with a
detailed Compliance Report on Corporate Governance.
- Non-compliance of any mandatory clause to be
specifically highlighted. (Suggested list including nonmandatory requirements is appended to Clause 49)
- A Qtly. Compliance Report is to be submitted to SEs
within 15 da ys of the close of the Qt r.

SATYAM SCAM

The scale of the scandal and the auditing firms neglect

brought to light glaring loopholes in the regulatory and legal
framework dealing with the directors and the auditors of
companies. Eventually, it led to changes in the law
(i) the voluntary adoption of international financial reporting
standards;
(ii) the appointment of chief financial officers by audit
committees based on qualifications, experience, and
background; and
(iii) the rotation of auditors every five years so that familiarity
does not lead to corporate malpractice and mismanagement.
After Satyam, aggrieved Satyam stakeholders in the United
States were able to initiate class action suits against the
company and its auditors for damages. The same remedy is
now available to Indian stakeholders.