Corporate Governance

CS T. Anil Kumar
M.Sc., LL.B.,M.B.A.,F.C.S.
Practicing Company Secretary ,
Hyderabad
&
Adjunct Faculty
Institute of Public Enterprise,
Hyderabad.
What is Corporate Governance?
Corporate Governance is a reflection of

-The Company’s Culture (Beliefs, values, behaviors –

Employees & Management interact within and outside)

- Policies (What Organizations Do & how it can be done, influence and

determine corporate action)

- Relationship with Stake Holders (Building

relationships, Striking a balance with all of them )

- Commitment to values & ethical business

conduct (Choosing between what is right and what is wrong)
 Corporate Governance Includes
 Disclosure of information regarding financial
situation, performance, ownership & governance of
the Company are an important part of Corporate
Governance.

 Involves all areas of Management (Actions plans,

internal controls, performance measurement)

 Governance means in Latin “Gubernare”.

Which means “to steer” like steering a ship,
which gives a direction to the ship. (BOD is the primary
stakeholder influencing CG)
Examples . .
 Corporate Collapses like Satyam, Enron in
2002 have required emphasis on
Corporate Governance.

 The Enron tragedy brought in Sarbanes-

Oxley Act in July 2002 in USA while
Satyam brought in Compulsory rotation
of auditors
 Definition
 Standard & Poors defined Corporate Governance:
“The way in which a Company organizes &
manages itself to ensure that all financial
stakeholders receive their share of a
Company’s earnings & assets”

o Institute of Company Secretaries of India (ICSI)

“Corporate Governance is the application of best
Management Practices, Compliance of Laws
in true letter and spirit and adherence to ethical
standards for effective management and
distribution of wealth and discharge of social
responsibility for sustainable development of
all stakeholders.”
 Adrian Cadbury’s Definition
(Chairman of Cadbury & Schweppes & pioneer in CG in 1992)

 “Corporate Governance is concerned with

holding the balance between economic & social
goals & between individual & communal goals.

 The governance frame-work is there to encourage

the efficient use of resources & equally to require
accountability for the Stewardship (Taking care) of these
resources.

 The aim is to align as nearly as possible the interests

of individuals, corporations & society.”
The Need for Corporate Governance
 Corporations a congregation of various
stakeholders – customers, employers, investors,
suppliers, Government, society, Banks etc.
- Fairness to all the Stakeholders in its
dealings.

 In Global business, the interests of investors are

to be taken to attract capital from across various
countries.
The Need for Corporate Governance …..

 The best human capital is to be tapped &

retained.

 Collaborations & Joint Ventures are possible

when fair practices are followed.
 Ethics & Conduct
 Corporate Governance is about ethics & conduct of
Ethical business.
- Ethics is a code of values & principles that
makes a person choose between right &
wrong keeping aside self interest.

 Corporate Governance is beyond the legislation.

The Legal framework gives guidance to the process
of Corporate Governance but Corporate
Governance has to go beyond it.
 Ethics & Conduct ………..

 The mindset & ethical Standards of

management are of high importance

 Boards are accountable to the shareholders

and the society at large.
Obligation to Society
 National Interest ; Projects in the interest of nation.
 Political Non Alignment.
 Legal Compliances
 Rule of Law – Impartial Enforcement of Law
 Honest & Ethical Conduct of Board & Senior Officers
 Corporate Citizenship (businesses are socially responsible for meeting
legal, ethical and economic responsibilities placed on them by shareholders )
 Ethical Behavior – by the Corporates.
 Social Concerns (Social evils/problems)
 Corporate Social Responsibility (Limited social objectives)
 Environment friendliness (Green marketing, recycling)
Obligation to Society
 Healthy & Safe working conditions
 Competition (Adverse effect on competition in India.)
 Trusteeship (Corporates trustees of economy for the welfare of the
people in general)
 Accountability (Responsibility for the actions done)
 Effectiveness & Efficiency (Efficiency refers to how well
something is done, effectiveness refers to how useful something is.)
 Timely Responsiveness
 Should uphold the name of the country.
Obligation to Investors
 Towards shareholders, bonus, dividend

 Transparency

 Financial Reporting Records

 Shareholders Participation.
Obligation to Employees

 Fair Employment Practices ( fair, merit-based and non-

discriminatory.)
 Equal Opportunities Employer. (The Equal Remuneration Act,
1976 (ERA),, IDA is that it prohibits commission of unfair labour
practices, Industrial Employment Standing Orders Act, 1946 (IESOA
 Encouraging Whistle Blowing
 Humane Treatment (Merciful, kind, tender, compassionate,
gentle, sympathetic; benevolent.)
 Participation (WPM, Workers Committees)
 Empowerment ( Encourage what they are best in)
 Equity & Inclusiveness (The Protection of Women Against Sexual
Harassment at the Workplace)
Obligation to Customers

 Quality of Products & services

 Products at affordable prices

 Customer Satisfaction
Why is good Corporate Governance
important?

Good Corporate Governance is associated with

prosperous companies.

 Infosys:
Corporate Governance for Infosys means ensuring
maximum Shareholders value, legally & ethically
while ensuring fairness to every stakeholders-
Customers, Employers, Investors, Government.
Principles of GOOD Corporate Governance;

Fairness (equal treatment to minority shareholders and stakeholders)

Accountability (obligation and responsibility and to give an explanation

or reason for the company’s actions and conduct. Board s action like risk
management, reporting, internal controls etc)

Responsibility ( Board Representatives and trustees of the Company

exercise the powers with due diligence)

Transparency (openness and willingness to disclose financial

performance figures which are truthful and accurate)
SEBI (Listing Obligations & Disclosure
Requirements) Regulations2015
 Regulations prescribe different Disclosure Requirements for
different types of listed securities
 Broad Features of the Regulations
 Applicability of the Regulations
 Common Obligations to Be Performed By Listed Entities
 Quarterly Compliances Including Time Thereof
 Events Requiring Prior Intimation
 Events Requiring Intimation within 24 Hours of Occurrence of
Event
 Composition of Board and Its Committees Thereof
 Related Party Transaction
 Agendas of Board Meeting As Per Regulation
 Agendas of Audit Committee Meetings
 Agendas to Be Placed At Upcoming General Meeting
CG & Companies Act, 2013 – Way forward.
Composition of Board of Directors
 Woman director Sec 149(1)
Public Ltd = 3-15, Private = 2 -15, More than 15 – Special
Resolution
&

At least one woman director for

- listed company.
- Company having
i) Paid-up capital of Rs. 100 Cr or more, OR
ii) Turnover of Rs. 300 Cr or more.

If you want something said ask a MAN and if you want something done
ask a WOMAN – Margeret Thatcher (1780 NSE Co listed – 1730 present,
50 still do not have, 40% Cos will have to appoint independent woman
directors if Kotak Committee recommendations are to be accepted.
Norway, France have about 40% women on Board while Japan & Korea
have about 2-3%)
CG & Companies Act, 2013 – Way forward.
Composition of Board of Directors
 Resident Director Sec 149 (3)

◦ At least ONE Resident Director who has stayed in India

for a period of more than 182 days during the previous
year.

Most of the times, the foreign companies use their subsidiaries here in India just for
the purpose of asset management.

In addition to it, most of the times, foreign nationals simply incorporate the
company and leave it to their authorized representatives.
Independent Director (ID)
- For Listed Companies
1/3 of the total number of Directors to be independent for all listed
Companies. Cos where Chairman is executive then 1/2shall be ID

- For other Public Companies ;

- Rs. 10 Cr Paid up Capital OR
- Rs. 100 Cr Turnover OR
- Rs. 50 Cr of Outstanding loans , Debentures & deposits

Code for Independent Directors [Schedule IV]

The code lays down certain critical functions like safeguarding the interest of
all stakeholders, particularly the minority holders, harmonizing the conflicting
interest of the stakeholders, analyzing the performance of management,
mediating in situations like conflict between management and the
shareholder's interest and etc.

Data Bank of Independent Directors (Sec 150)

Independent Directors
Limits as to Independent Director
 An individual shall not serve as an independent director in
more than 7 listed companies.
 Further, any individual who is also serving as a whole-time
director in any listed company shall not serve as an
Independent director in more than 3 listed companies.

Maximum tenure of independent directors

The maximum tenure of an independent director in office
up to 5 consecutive years, followed by a reappointment for
another term of up to 5 consecutive years on passing of a
special resolution by the company.
On completion of the said maximum tenure of 10 years, an individual shall
be eligible for appointment again as an independent director in that
company only after a cooling-off period of 3 years
Performance evaluation of
Independent Directors
The Nomination Committee shall lay down the evaluation criteria for
performance evaluation of independent directors.
Performance evaluation shall be done by the Board of Directors and shall
form the basis for determination of reappointment of the independent
director.
A separate meeting of the ID is to be held every year Clause VII
The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole;
(b) review the performance of the Chairperson of the company, taking into account the
views of executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the
company management and the Board that is necessary for the Board to effectively and
reasonably perform their duties.
Other issues that may involve the management or the executive directors of the
company and which is likely to have an impact on the reputation to the company which
includes: i) Any reporting of deviation in the ethical or governance issues
ii) Any reporting of insider trading issues
iii) Any reporting on critical whistleblower incident
Training of independent directors

Training of independent directors shall be done

and that the company shall provide suitable
training to independent directors to familiarise
them with the company, their roles, rights,
responsibilities in the company, nature of the
industry in which the company operates, business
model of the company, etc.

The company shall disclose the details of such

training imparted in the annual report
Small Share Holder Director
 A listed Company may on notice of not less than 1000 small
shareholders or 1/10 of such shareholders whichever is lower have
a small shareholder director appointed by them. (Small
shareholder is one who holds less than Rs. 20,000 nominal (face)
value of shares)

 Can be considered under independent director quota provided he

is eligible and gives a declaration.

 Tenure is for three years and can not be further reappointed.

 To not hold position of small shareholder director in not more

than two companies.

Navin Pandya in M&M sent a notice but lost in the voting.

Ramji Lal, CIL sent a notice but did not attend the meeting.
Disqualification of Directors
 Disqualifications for appointment of a
Director
◦ Is of unsound mind
◦ Un discharged insolvent ( Insolvency Act, 1920)
◦ Convicted of an offence involving imprisonment of not less
than 6 months and not less than 5 years have elapsed since
the expiry of the sentence.
◦ Disqualified by an order of the Tribunal/Court, which is in
force.
◦ Not paid calls and six months have elapsed since the last
day fixed for the payment of the call
◦ Convicted of an offence u/s 188 of the Act dealing with
related party transactions at any time during last 5 years
◦ Does not possess a DIN
Disqualification of Directors ......
 Disqualification for re-appointment
◦ If he is director of a company which
 Has not filed financial statements/annual return for 3
financial years
 Defaulted in payment of interest on deposits/dividend or
repayment of deposits or redemption of debentures.
◦ Disqualification for 5 years from the date of default
(Names of 2,24,733 Companies struck off & 3,09,619 disqualified from acting
as directors)

Rule 12 A of the Companies (Appointment and Qualification of Directors ) Rules,

2014 require DIR 3 KYC to be filed before 5th Sept, 2018 with fine of Rs. 500 and
DIN gets deactivated and to activate it Rs. 5,000 fine is to be paid. A yearly exercise.
Duties of Directors

Shall act in good faith, promote the objects of

the company, act in the best interests of the
stakeholders, exercise due and reasonable
care skill and diligence and independent
judgement, avoid conflict of interest, not
achieve or attempt to achieve any undue gain,
and shall not assign his office.
Appointment of Director
 First Directors ;
In case no provision made in Articles for the
appointment of first directors the subscribers to
the Memorandum shall be the First Directors.
In One Person Company (OPC) the member shall
the first director.

All directors are to be appointed by the

shareholders.
DIN number is to be obtained before becoming a
Director and submitted to the Company along with
a declaration that he is not disqualified from
becoming a director .
Director retiring by Rotation
 Directors Retiring by Rotation; (Sec 152)
Unless Articles provide not less than 2/3rd of the
Directors shall retire by rotation.

1/3rd of the above shall retire at every Annual General meeting

and shall be those who have been longest in office.

 Resignation of Directors

◦ Company as well as director to notify ROC with detailed reasons

◦ Effective from the date of resignation specified or receipt of the

resignation, whichever is later
DIN by Directors
 Directors Identification Number (DIN)
- DIN to be applied to the Central Government and
within one month the same would be allotted

- Directors are prohibited from having more than

ONE DIN

- Director to intimate the DIN number to the

Company within one month of his becoming a
Director and also give his consent in Form DIR 2

- Company to furnish the DIN number to the

ROC within 15 days of receiving and also within 30 days
file the consent of Director with ROC in Form 12
Directors other than retiring ones
 Directors being appointed other than retiring Directors

- A Director who is not a retiring Director can be

appointed if 15 days before a general meeting he or
any other person has sent a notice in writing along
with a deposit of Rs. 1.00 lac gets elected in the
meeting.

- The deposit would be refunded in case he gets

elected or obtains 25% of the total valid votes.
Different Directors
 Additional Director (Board can appoint a person
provided he holds office till the conclusion of the Annual
General Meeting)

 Alternate Director (Board may appoint any other person

as an alternate for the Director who has not been office
for a period of more than THREE months and he is out of
India (On the original Director returning back the
alternate Director ceases)

 Casual Vacancy Director – In case of death or resignation

of Director

 Nominee Director (Board may appoint persons

nominated by Governement, FI, Banks)
Board Meetings
 Board Meetings
◦ First Board meeting within ONE month of Incorporation,
FOUR meetings in a year and not more than 120 days
should elapse between two meetings.
◦ Meeting thru person or Video Conferencing or other
audio visual mode which can be captured and stored.
- Chairman & Company Secretary responsible for
- security and identification of the members
- record proceedings and prepare minutes
- safekeeping of tapes
- no person other than Directors are present in meetings
- the system is clear and there are no breakdown
- Differently abled person is allowed to have a person on
request to the Board.
(Companies (Meetings of Board and its Powers )Rules, 2014
Notice of Board Meetings
 7 days Notice in writing to be given to the Directors

 Shorter notice may be given in case of urgency but one

independent director should be present. If no
independent director is present, resolutions should be
circulated for approval of all the directors and at least
one independent director should ratify it.

 Officer who is to give notice has not complied shall pay

a fine of Rs. 25,000/=
Quorum of Board of Directors
 Quorum
◦ One third of its total strength or two directors whichever
is higher.
◦ Any fraction of a number to be rounded off as one

◦ In case of absence of independent directors, decisions

taken at such meetings to be circulated to all directors and
shall be final only on ratification by at least one
independent director

◦ Voting by non-interested directors only. Where the

number of interested directors exceeds two thirds of the
total strength, such number of directors who are non-
interested and not being less than two shall form the
quorum
Nomination and Remuneration Committee
 Applicable to listed company and other prescribed class of
companies
 Constitution : Minimum 3 non-executive directors, majority
of whom shall be independent directors. Chairperson of the
company can be a member but not the chairperson of the
committee.
 Functions include:

◦ Identification of qualified Directors and Senior

Management Personnel
◦ Relationship of remuneration to performance
is clear meets the benchmark
◦ Recommend policy for remuneration
 Remuneration policy to be disclosed in the Directors’
Report
Stakeholders Relationship Committee
 Applicable to a company having more than one
thousand shareholders, debenture-holders and
any other security holders
 Constitution : to be decided by the Board of
Directors. Chairperson shall be a Non-
executive director
 Functions include considering and resolving the
grievances of security holders
Audit Commitee
 Applicable to listed company and other prescribed class of
companies
 Constitution : Minimum 3 directors, majority of whom shall
be independent directors
 Majority of the members shall have ability to read and
understand financial statements
 Functions include
◦ Recommend appointment and terms of appointment of auditors
◦ appraisal of effectiveness of audit process, review auditor’s independence and
performance
◦ Examination of financial statements and auditor’s report thereon.
◦ Approval / subsequent modification of related party transactions
◦ scrutiny of inter-corporate loans and investments,
◦ evaluation of internal financial controls and risk management systems.
 Vigil mechanism in place
Auditors
Section 139 (2) of the Companies Act, 2013, read along
with the Rules states :
i) A listed company or
ii) All unlisted public companies having paid up
share capital of Rs.10 crore or more;
iii) All private limited companies having paid up
share capital of Rs.50 crore or more;
iv) All companies having having public
borrowings from financial institutions, banks
or public deposits of Rs.50 crores or more

Shall not appoint or reappoint

a. an individual as auditor for more than one term of
5 consecutive years; and
b. an audit firm as auditor for more than two terms of
5 consecutive years:
Corporate Social Responsibility
 Applicable to every company having
◦ net worth of rupees five hundred crore or more; or
◦ turnover of rupees one thousand crore or more; or
◦ a net profit of rupees five crore or more
during any financial year.
Shall constitute a Corporate Social
Responsibility Committee of the Board
consisting of three or more directors, out of
which at least one director shall be an
independent director.
 LODR

 Listing Regulations to include

- Review and monitor the auditor’s independence and
performance, and effectiveness of audit process;
- approval or any subsequent modification of transactions
of the company with related parties;
- scrutiny of inter-corporate loans and investments
- valuation of undertakings or assets of the company,
wherever it is necessary; and
- evaluation of internal financial controls and risk
management systems.
Continued..
- Internal Audit to be proactive:
Clear defined role & be independent & to
report to Audit Committee.

- Legal Compliance:
Compliance checklists report to the
Board.
 Continued..
 Code of Ethics/ Whistle Blower Policy/Vigil
Mechanism
- Have documented code of ethics to be
extensively circulated amongst staff.
Whistle Blower Policy
Any unethical practices going on can be reported to the
Audit Committee.
Whistle Blower
An employee who discloses in good faith any unethical
& improper practice or alleged wrongful conduct to the
Audit Committee in writing.
Continued..
 Disclosures

- Under listing argument

- Related party disclosures by
management.
- Contracts & arrangement
- Changes in accounting policies.
Insider Trading
Insider Trading is the buying , selling or dealing in
securities of a listed company by any person who has
access to sensitive in the Company.
Eg director , member of management , employee of the company , or by any other
person such as internal auditor , advisor , consultant , analyst etc, who has
knowledge of material inside information which is not available to general public.

Regulation 3 of the SEBI (Insider Trading) Regulations

1992, seeks to prohibit dealing, communication and
counseling on matters relating to, insider trading.

Rajat Gupta-Raj Rajrathnam

Kotak Committee
 Appointed by SEBI with Uday Kotak as Chairman and 21 members
to study better Corporate Governance practices on 2nd June, 2017

 176 page report submitted to SEBI on 11th October, 2017

 Out of 80 odd recommendations (of the Kotak panel), 40 were

accepted without modification, 15 with modifications, eight were
referred to government and other departments and 18 were
rejected.

 Most of the changes will be effective April 1, 2019, and April 1,

2020.
Kotak Committee Report
Separation of the roles
Roles of chairman and managing director
at listed firms should be separated and
chairmanship should be limited to only
non-executive directors.

Listed firms with more than 40% public

shareholding should have separate roles
of chairperson and MD/CEO with effect.
Minimum board strength
 Minimum strength of Board should be increased
to 6 members and at least one woman should be
appointed as independent director.

 At least five board meeting for listed firms should

be held in year up from current practice of four
meetings.

 Firms’ board should at least once a year discuss

succession planning and risk management.
Independent Directors
 At least half of board members to be
independent directors at listed
companies, while all directors must attend
at least half of board meets.

 Public shareholders’ nod must be

mandatory for non-executive directors
over 75 years of age.
Shareholder meeting and cash flow
statement
 Top 100 firms by market capitalisation
should webcast shareholder meeting and
all listed firms should have cash flow
statement every six months.

 It should be mandatory disclosure of

quarterly consolidated earnings by listed
firms
Credit ratings

Updated list of all credit ratings obtained

by the listed entity must be made available
at one place, which would be very helpful
for investors and other stakeholders
Minimum remuneration
 Independent directors must get
minimum remuneration of
Rs 5 lakh per annum and
Rs 20,000-50,000 sitting fees for each board
board meet.

It should be mandatory for firms to seek public

shareholders’ approval for annual remuneration
of executive directors from promoter family if
amount is above Rs 5 crore or 2.5% of firm’s net
profit .
Minimum remuneration
Separation of the roles: Roles of chairman
and managing director at listed firms
should be separated and chairmanship
should be limited to only non-ex...

........
Series of Scams In India

Harshsad Mehta Scam 1992 Involvement of Banks & stock

Market nose diving after the reform
1991.
Transnational Companies 1993 Transnational Companies allotting
shares at huge discounts & trying
to gain control.
Investors Lost Rs. 5,000 Crores.
Disappearance of 1994 Companies raised about Rs.
Companies 25,000 Crores by about
3900 Companies & vanished.
Plantation Companies 1995 Plantation Companies made
investors believe for huge returns
on the schemes. Investors lost
Rs. 50,000 Crores.
NBFC 1997 NBFC formed & then vanished
Investors lost Rs. 50,000 Crores
Mutual Funds 1998 Banks & mutual fund Companies
raised about Rs. 15,000 crores but
all flopped
IT Scam 2000 Companies changed to infotech.
Ketan Parekh 2001 Price rigging.
 The Worst Global Frauds….

• Accounting fraud of showing “Lease” as

“Sales”
• Overstated revenues: US$ 6 Bn

• Accounting fraud to show increased

profits

• Claimed revenues in 2000: US$ 101 Bn

 The Worst Global Frauds….

• Accounting fraud of boosting earnings

• Understated Expenses by : US$ 74.5 Bn
• Assets boosted up by : US$ 11 Bn

• Accounting fraud to show Non-existent

Bank deposits

• Fraud size: Rs. 7,100 Cr

Could we have a discussion and share your valuable
experiences