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A new era in Corporate Governance

Foreword

The Companies Act, 2013 (‘2013 Act’),

enacted on 29 August 2013 on accord of

Hon’ble President’s assent, has the potential

to be a historic milestone, as it aims to

improve corporate governance, simplify

regulations, enhance the interests of minority

investors and for the first time legislates the

role of whistle-blowers. The new law will

replace the nearly 60-year-old Companies Act,

1956 (‘1956 Act’).

The 2013 Act provides an opportunity to

catch up and make our corporate regulations

more contemporary, as also potentially to

make our corporate regulatory framework a

model to emulate for other economies with

similar characteristics. The 2013 Act is more

of a rule-based legislation containing only 470

sections, which means that the substantial part

of the legislation will be in the form of rules.

There are over 180 sections in the 2013 Act

where rules have been prescribed.

Pallavi J Bakhru

Director

Grant Thornton Advisory Pvt. Ltd.

“The Companies Act, 2013 strives to

strengthen the corporate governance system

in dynamic Indian companies by significantly

enhancing the role and responsibilities of

the Board of directors and making them

more accountable for their actions. By

mandating a woman director on the board, it

intends to make the top deck in

organisations more gender diverse. This law

has set a new benchmark in corporate

governance for other economies to

emulate.”

To facilitate the ease of implementation, a

phased approach is being followed by the

Ministry of Corporate Affairs (‘MCA’).

Accordingly, 282 sections have been notified

and are in force as of 1 April 2014. Final Rules

for 21 chapters have also been released by the

MCA, and the rules for the remaining chapters

continue to be in draft stage. The final Rules

are also applicable w.e.f. 1 April 2014.

The 2013 Act contains a number of provisions

which have significant implications on

Governance of the companies. With the

revision of clause 49 of the Listing

Agreement, effective 01 October 2014, the

applicability of some of the compliances for

listed companies have been accelerated a bit

and have also become complex in some of the

cases. In this bulletin we analyse some of the

key provisions and have identified certain

action steps and challenges associated with the

implementation of these provisions for the

companies to consider.

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Foreword

The board of directors is the most important

decision making body of a company. Its

independence is indispensable in ensuring

high standards of corporate governance. The

Companies Act, 2013 has raised the bar for

the boards in India.

The New Act has made several significant

changes, which seek to redefine the board

governance in India. the new concepts have

been introduced such as women directors on

the boards to bring in gender diversity, small

shareholder director, performance evaluation,

corporate social responsibility and class

actions; the internal financial controls and risk

management oversight of the boards have

been strongly emphasised; disclosures have

been enhanced in board’s report to

shareholders, additional rigor has been added

to strengthen the Directors’ Responsibility

Statement; and the Independent Directors

have been entrusted with new responsibilities

to make their role more objective and

purposeful.

Overall, the New Act aims to raise the

governance profile of Indian companies and

their boards, at par with the roles and

responsibilities assumed by boards globally.

Corporate governance norms are dynamic in

nature and require reconfiguration periodically

to keep pace with the changing business

climate.

To provide the holistic outlook regarding

Independent Directors & Women Directors

under Companies Act 2013, ASSOCHAM, in

partnership with Grant Thornton India LLP

has come out with a study paper on “A new

era in Corporate Governance”.

I am sure this study will give a rich insight and

adequate knowledge to all the stakeholders.

We also wish to acknowledge the contribution

made by the expert research team of Grant

Thornton India LLP for their untiring

efforts in preparing an extensive in-depth

comprehensive report.

D. S Rawat

Secretary General

ASSOCHAM

Structure of the Board

Appointment of directors

The 1956 Act provided that the limit for

maximum number of directors be based on its

articles or twelve whichever is lower. The 2013

Act provides that the company shall have a

maximum of fifteen directors on the Board of

Directors (‘Board’) and appointing more than

fifteen directors would require approval of

shareholders through a special resolution.

The 1956 Act did not prescribe any academic

or professional qualifications for directors.

The 2013 Act provides that majority of

members of Audit Committee ('AC') including

its Chairperson shall be persons with ability to

read and understand the financial statements.

The 2013 Act provides for appointment of at

least one woman director on the Board for

such class or classes of companies as may be

prescribed. A transitional period of one year

has been prescribed to companies for

compliance with this provision.

The 2013 Act provides that a company should

have at least one director who has stayed in

India for a total period of not less than 182

days in the previous calendar year.

The 1956 Act required that a public company

can have one director elected by small

shareholders; however, as per the 2013 Act,

this provision is applicable for listed

companies only.

The 2013 Act required prescribed class of

companies to have whole-time KMP, including

MD, CEO, CS and CFO. This was not

required under the 1956 Act.

• Increasing the maximum limit of directors

would bring in more flexibility and enable

companies to get more experienced and

competent personnel at the Board level.

• Providing for the qualification of the AC

members would enable the company to have

quality people on the board to make the

board's functioning more effective.

• The prescribed minimum women

representation on company board, is a step

towards making the top deck more gender

sensitive. Companies must also bear in mind

that whilst women directors can be executive

they do not need to be independent.

• The 182 days limit, which shall be computed

on a proportional basis for calendar year

2014, is consistent with the Income Tax

(“IT”) Act for determining the residential

status of a person.

• Now, the unlisted public companies would

not be required to get a director appointed by

small shareholders.

• The OPC provision enables removing

nominee/ representative directors which

were appointed to meet the minimum

director limit and as such did not provide any

benefit to the company’s structure

• Similar requirements for woman directors

have been introduced under revised listing

agreement.

• However, the date of appointment of

woman director has been recently deferred

from 1 October 2014 to 1 April 2015.

Key provisions Impact analysis

5


Appointment of directors (Contd.)

The 2013 Act introduces a new category of a

company, One Person Company (“OPC”),

which should have at least one director.

For the first time, duties of the directors are

defined under the 2013 Act.

As per final Rules:

• Listed companies and other public

companies having paid-up capital of Rs

100 crore or more or turnover of Rs 300

crore or more within six months from the

date of incorporation under the Act have

to appoint a woman director

• Listed company and every other public

company having a paid-up share capital of

Rs 10 crore or more to have whole-time

KMP.

• Listed company and every other company

having a paid-up share capital of Rs 5 crore

or more shall appoint a whole-time

company secretary.

• For calendar year 2014, number of days for

resident director shall be calculated on

proportionate basis.


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Way forward

Disqualification of directors

The 2013 Act includes the following additional

grounds of disqualification:

• A person who has been convicted of an

offence dealing with related party

transactions at any time during the past five

years

• Similar to the public companies under the

1956 Act, the directorship in private

companies has also been brought under the

ambit of disqualification on ground for

non-filing of annual financial statements or

annual returns for any continuous period

of three years, or failure to repay deposits

(or interest thereon) or redeem debentures

(or interest thereon) or pay declared

dividend and such failure continues for

more than one year

• Director to vacate office if he remains

absent from all the board meetings held

during 12 months

The 2013 Act makes directors’ disqualification

more stringent, including more scrutiny around

related party transactions.

The 2013 Act brings in more stringent

provisions to include such disqualification for

the private companies as well, thereby bringing

more discipline in the Board for private

companies.

02 | Disqualification of Directors

• Private companies to review the director's

disqualification and ensure compliance for

their existing directors

• Private companies to consider including

disqualification of directors as a part of its

articles of association

01 | Appointment of Directors

• Companies must put in place a

mechanism to assess and periodically

monitor foreign travel of its directors so as

to ensure that at least one director meets

the 182 days criterion for being considered

as a resident in India

• Companies should actively start looking

for a woman director considering they

have only a short period to comply with

this requirements of the 2013 Act



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Independent directors (‘ID’)

Under 1956 Act, there was no requirement to

have IDs. However, under the Listing

Agreement, the Board of listed entities having

non-executive chairman and executive

chairman should comprise of at least one-

third and one-half of the Board as ID

respectively. The 2013 Act proposes that the

Board of listed entities should comprise at

least one-third of the Board as ID.

Transitional Period

The 2013 Act also provides one year period

from the enactment to comply with this

requirement.

Other provisions with respect to IDs are

discussed in detail in the following paragraphs.

This provision brings in the ID requirements

and monitoring under the 2013 Act.



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Board functioning

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Way forward

Board functioning


The 1956 Act provided that notice of every Board

meeting should be given in writing. However, it

did not specify the period of notice. The 2013 Act

provides that a minimum of seven days notice to

the Board is required to call a Board meeting.

The company may give a shorter notice to transact

urgent businesses, provided at least one ID is

present at the meeting. In case of absence of ID

from such a meeting, decisions taken at the

meeting to be circulated to all the directors and to

be made final only on ratification by at least one

ID.

The 2013 Act intends to provide the Board sufficient

time to prepare for the meeting.


The 1956 Act required at least one Board meeting

to be conducted in every three calendar months

and four such meetings in a financial year. Further,

Listing Agreement requires at least four meetings

in a year with a maximum time gap of four months

between two meetings.

The 2013 Act, consistent with the Listing

Agreement requirement, provides that the

company should have at least four meetings in a

year with a maximum time gap of 120 days

between two meetings.

The 2013 Act also requires that the first Board

meeting of the company be held within thirty days

of incorporation of the company.

The provision makes the requirements for frequency

of Board meeting similar for public and listed

companies.

Companies may need to frame a policy as to what would qualify as an urgent business and

related time window for transacting such urgent business in order to comply with the seven-day

notice period requirement. For example, the items could include – completion of statutory audits

and reports thereon.


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Board functioning

Conduct of the Board meeting

Participation in the Board meeting through

prescribed video conferencing or other audio

visual means is recognised, provided such

participation is recorded and recognised.

However, the Central Government (‘CG’) may

prescribe matters to be discussed at a

physically convened Board meeting.

As per final Rules:

MCA has prescribed following items to be

discussed at a physically convened Board

meeting only:

• the approval of the annual financial

statements (including consolidated financial

statements);

• the approval of the Board’s report;

• the approval of the prospectus;

• the AC Meetings for consideration of

accounts; and

• the approval of the matter relating to

amalgamation, merger, demerger,

acquisition and takeover

The provision of conducting the Board

meetings through electronic means would bring

in more ease to the Board's functioning.


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Board functioning

Audit committee

The 1956 Act required public companies

having paid-up capital of more than Rs 5

crore to constitute AC, consisting of

minimum three directors and two-third of

total members to be directors other than

Managing Director (“MD”) or Whole Time

Director (“WTD”) of the company. Further,

similar to the 1956 Act, listed entities are

required to constitute AC with two-third of

the members to be IDs. Listing agreement

also states that all members of the AC should

be financially literate and at least one should

have accounting or financial management

expertise.

As per the 2013 Act, AC made mandatory for

listed companies and other prescribed classes

of companies.

Further, such prescribed class of public

companies, shall constitute AC within 1 year

from 1 April 2014 or appointment of IDs,

whichever is earlier.

The 2013 Act provides that AC should consist

of minimum of three directors with IDs

forming majority. Further, the chairperson and

the majority of the members of the AC

should have the ability to read and understand

the financial statements (referred as

“financially literate” under the Listing

Agreement).

The 2013 Act dispenses with the requirement of

constituting the audit committee of the Board

in case of certain unlisted public companies.

The roles and the activities of the audit

committee have been specifically provided

under the 2013 Act.

Pre-approval of all RPTs by the Audit

Committees is a significant change in the

current practice.

While on most matters, the committee has a monitoring/oversight role, on valuation of undertakings / assets, the primary responsibility seems to be that of the Audit Committee.


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Way forward

Board functioning

Audit committee

The role of the audit committee includes the

following activities as per the 2013 Act:

a)the recommendation for appointment,

remuneration and terms of appointment of

auditors of the company

b)review and monitor the auditor’s

independence and performance, and

effectiveness of audit process

c)examination of the financial statement and

the auditors’ report thereon

d)approval or any subsequent modification of

transactions of the company with related

parties

e)scrutiny of inter-corporate loans and

investments

f)valuation of undertakings or assets of the

company, wherever necessary

g)evaluation of internal financial controls and

risk management systems

h)monitoring the end use of funds raised

through public offers and related matters

The revised Listing Agreement enlarges the

role of the audit committee to now

additionally also include:

a.review and monitor the auditor's

independence and performance, and

effectiveness of audit process

b.approval of the appointment of the

CFO/equivalent review the functioning of

the Whistleblower policy

The audit committee shall have the authority

to investigate into any matter in relation to the

items specified above or any such matter

referred to it by the Board.

As per final Rules, the threshold for constituting audit committee is as follows:

•Every other public company:

-having paid up capital of Rs 10 crore or more;

or

-turnover of Rs 100 crore or more; or

-outstanding loans or borrowings or debentures;

or

-deposits exceeding Rs 50 crore or more,

as on the date of last audited financial

statement.

• Unlisted public companies to revisit the

need to continue with an audit committee

requirement

• Audit committees would need to devise a

mechanism to:

- form a policy for recommendation and

appointment of auditors of the company

- review and monitor the auditor’s

independence related matters

- approval and/ or modification of the

related party transactions

- valuation of undertakings or assets of

the company

- evaluation of internal financial controls

and risk management systems

• Audit committee may seek external expert

support to assist them in complying with

their responsibilities

Key provisions

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Board functioning

Nomination and Remuneration Committee

The 1956 Act did not provide for the

constitution of a Nomination and

Remuneration Committee.

Under the revised Listing Agreement, listed

entities shall constitute a Nomination and

Remuneration Committee and such committee

should consist of minimum of three directors,

all of whom should be non-executive directors

and at least half shall be independent

directors.

Further, the chairperson of a company could

be appointed as a member, but not a

chairperson of such committees.

The 2013 Act requires all listed companies and

other prescribed classes of companies to

constitute Nomination and Remuneration

Committee that formulates the criteria for

selection of the directors, a policy relating to

the remuneration for the directors, Key

Managerial Personnel (“KMP”) and other

employees. Such committee should consist of

three or more non-executive directors and at

least one-half of the members should be IDs.

As per final Rules:

Threshold for nomination and remuneration

committee

• Every other public company (i) having paid

up capital of Rs. 10 crore or more; or (ii)

turnover of Rs. 100 crore or more; or (iii)

outstanding loans or borrowings or

debentures or deposits exceeding Rs. 50

crore or more, as on the date of last

audited financial statement.

• Such prescribed public companies shall

constitute nomination and remuneration

committee within 1 year from 1 April 2014,

or appointment of IDs, whichever is earlier.

This provision will result in mandatory

requirement to constitute Nomination and

Remuneration Committee for prescribed class

of companies. This may result in change in

practice for several companies.

The 2013 Act does not provide any transitional

period for compliance with the constitution of a

Nomination and Remuneration Committee.


14

Board functioning

Corporate Social Responsibility (CSR) Committee

The 1956 Act did not mandate a company to

spend on CSR activities and consequently,

there is no requirement to constitute a CSR

Committee.

The 2013 Act provides that a company

meeting certain conditions, should constitute a

CSR Committee of the Board, consisting of

minimum of three directors.

The CSR Committee should consist of a

minimum of one ID.

The CSR committee should formulate and

monitor CSR policies and discuss the same in

the Board’s report.

This new committee will frame and monitor the

CSR policy of the company and matters

incidental thereto.

The CSR policy would specify the projects and

programs to be undertaken and also their

execution modalities and implementation

schedules.


15

Way forward

Board functioning

Corporate Social Responsibility (CSR) Committee

As per final Rules:

Criteria for constituting CSR committee is as

follows:

•net worth of Rs 5,000 crore or more, or

•turnover of Rs 1,000 crore or more or

•net profit of Rs 5 crore or more during any

financial year

The 2013 Act intends to provide the Board

sufficient time to prepare for the meeting.

Stakeholders Relationship Committee

The 1956 Act did not require the constitution

of Stakeholders Relationship Committee. The

revised Listing Agreement requires

constitution of the Stakeholders Relationship

Committee to consider and resolve the

grievances of the security holders of the

company.

The 2013 Act requires that a company with

more than 1000 shareholders, debenture

holders, deposit holders and other security

holders at any time during the financial year

shall constitute a Stakeholders Relationship

Committee to resolve their grievances.

The 2013 Act does not prescribe the number

of members of such committee consistent

with the Listing Agreement, however provides

that a non-executive director should be the

chairman of such committee.

The provisions are now same under the 2013

Act and revised Listing Agreement for listed

companies.

This provision applies to non-listed entities also,

meeting certain prescribed conditions and hence

will be a significant change in practice.

CSR Committee

All companies will need to determine the applicability of the CSR criteria and also the activities

that may constitute CSR activities under the 2013 Act, to ensure compliance.

Stakeholders Relationship Committee

A non-listed company with more than 1000 share/debenture or security holders to form

stakeholders relationship committee and include one non-executive director.


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Board's Report

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Board's Report

Board’s report and responsibility statement

The 2013 Act seeks to make the board's

report more informative with extensive

additional disclosures like:

•Extracts of the annual return in prescribed

form

•Recommendations of the audit committee

that are not accepted by the Board and

reasons therefore

•A statement on declaration by the IDs on

their compliance being IDs

•Policy developed and implemented by the

company on CSR

•In case of a listed company, statement

indicating the manner in which annual

evaluation has been made by the Board of its

performance, its committee and individual

directors

•Development and implementation of risk

management policy

•Policy on director’s appointment and

remuneration, ratio of remuneration to each

director to the median employee’s

remuneration

•Material changes and commitments, affecting

company’s financial position subsequent to the

year end; to which the financial statements

relate and the date of the reports

•Related party transactions not in the ordinary

course of business and not at arm’s length

basis

The 2013 Act has included the following

additional matters in the Directors’

responsibility statement:

-in case of a listed company, the directors had

laid down internal financial controls to be

followed by the company and they are

adequate

and operating effectively

-the directors have devised proper systems to

ensure compliance with all applicable laws and

such systems are

The provision increases the responsibilities and

improves transparency of the functioning of the

Board.

The disclosures may also contain information that is

commercially sensitive and accordingly companies

will need to develop the disclosures carefully.

The requirements on internal financial controls:

- are similar to global requirements; and

- may require significant efforts and costs to

ensure compliance

- to ensure orderly and efficient conduct of

business) appear to be onerous, and can be

read to cover:

• not just financial reporting aspects, but also

operational areas

• looks at efficiency of operations

• requires conformation of operating

effectiveness


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Way forward

Board’s report and responsibility statement (Continued)

As per the final Rules:

•Every listed Company and every other public

company having a paid up capital ≥ 25 crore

at the end of the preceding financial year

shall include a statement on the annual

evaluation

•The Board report should contain the names

of Companies which have become or ceased

to be the subsidiaries, joint venture or

associate company

•The details relating to deposit accepted,

remained unpaid or where default in

repayment.

•The details in respect to internal financial

controls with reference to financial

statements

•For the financial year commencing on or

before 1 April 2014 , disclosures under the

board report shall continue to be governed

by the provisions of the 1956 Act.

The final Rules have introduced the

requirements of reporting on internal financial

controls with reference to financial statements.

The final Rules do not indicate its applicability

with respect to listed companies only (governed

by the 2103 Act though); therefore, this

requirement seems to be applicable to unlisted

companies only. Hence, the scope of reporting

seems to be narrower for unlisted, as compared

to listed companies.

• Companies to obtain additional information on transactions to be reported to and approved

by the Board

• The Board to devise a mechanism to evaluate its own annual evaluation and events

occurring post year end

• The "internal financial controls" and its monitoring by the board in the 2013 Act will require

companies to set up appropriate mechanism/ processes/ systems to be able to give such

declarations

Board's Report


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Independent Directors

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Qualification and composition of independent directors

The concept of ID has been introduced and

defined under the 2013 Act as a director

other than a managing director or a whole-

time director or a nominee director, who:

• is a person of integrity and possesses

relevant experience

• is not a promoter/a relative of a promoter

(or director) of the company or its

holding/subsidiary/associate company and

does not have pecuniary relationship with

the company/its

holding/subsidiary/associate company /

promoters/directors of the company

during the current financial year or during

the two immediately preceding financial

years

• whose relatives do/did not have pecuniary

relationship amounting to two percent or

more of the gross turnover or total income

or Rs 50 lakh or such higher as may be

prescribed, whichever is lower with the

company/its holding/subsidiary/associate

company / promoters/directors of the

company in the current financial year or

during the two immediately preceding years

• is not a KMP or whose relative is not a

KMP, of the company or its holding/

subsidiary/associate in the last three years

• has not been an employee or partner in a

firm of auditors or company secretaries or

cost auditors of the company/its

holding/subsidiary/associate company or

in a legal/consulting firm that has or had

any transaction with the company /its

holding /subsidiary/associate company

amounting to 10% or more of the gross

turnover of such firm

• does not hold more than 2% (individually

or with his relatives) of the total voting

power

The definition of the term "IDs" as given under

the 2013 Act is now same as that provided

under the revised Listing Agreement, except for

providing the age limit of more than 21 years as

mandated by the latter.

This difference may result in a director being

qualified as an ID under the 2013 Act, however

disqualified as per the Listing Agreement.

As per the revised listing agreement a director

will not be independent if he has any material

pecuniary relationships with the company and

others. This provision is different from the 2013

Act which prohibits all the pecuniary

relationships.

Wider relationships now covered in determining

independence of a director.

Other measures are aimed at mitigating actual or

perceived threats to independence and

objectivity of directors.

The fixed tenure is aimed at protecting the

tenure of IDs.

The Act also provides much needed clarity on

the liability of IDs, which is very welcome.



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Qualification and composition of independent directors

Listed companies shall have at least one-third

of the total number of directors as IDs and

the CG may prescribe the minimum number

of IDs for any class of public companies.

This requirement is to be complied within 1

year:

•by existing listed companies from the date of

enactment of the 2013 Act ; and

•by the prescribed class of public companies

from the date Rules are notified.

As per Final Rules:

Threshold for public companies– (i) share

capital of Rs 10 crore or more or turnover of

(ii) Rs 100 crore or more or (iii) aggregate,

outstanding loans or borrowings or

debentures or deposits exceeding Rs 50 crore,

as per the latest audited financial statement


Key provisions

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Term of appointment and other requirements

The ID shall be appointed for a term of up to

five years and be eligible for re-appointment

subject to certain conditions for two such

terms. Thereafter, the ID shall be eligible for

appointment after a cooling off period of

three years, subject to certain conditions.

Tenure of an ID already served on the board

as on the date of commencement of the 2013

Act shall not be counted for calculating his

maximum tenure.

An ID can also be appointed for a period of

less than 5 years, however that period shall be

counted as one term.

Alternate director of an ID can be appointed

if such an alternate director is also an ID.

IDs should provide declaration at the date of

appointment and at the first meeting of the

Board in every FY confirming that he meets

the criteria of independence unless there are

changes in the circumstances since last

declaration. Currently, under the Listing

Agreement there is no such requirement to

provide any declaration.

In the 1956 Act, an ID may be remunerated

by way of grant of stock options in addition

to fees/ commissions. The 2013 Act and the

revised Listing Agreement provide that the ID

should not be remunerated by grant of stock

options.

The mandatory rotation period is a significant

change in practice and is aimed at improving

objectivity of the ID. The availability of

qualified personnel to act as ID could pose

challenges in implementation of these

provisions.

It is also noted that there is no requirement for

ID rotation in other developed countries.

The provision is aimed at addressing objectivity

of the IDs. However, the 2013 Act does not

specify the implication of outstanding stock

options granted previously to IDs.

With the prohibition of granting stock options

to IDs under the revised Listing Agreement also,

this appears to be consistent now with the 2013

Act.

The 2013 Act provides a guide to professional

conduct for IDs which will provide confidence

to the investor community, particularly minority

shareholders, regulators and companies in the

institution of the independent directors.

As per revised Listing Agreement, the

provisions for calculating the maximum tenure

of IDs, (including earlier served period) has

been made at par with all the provisions as per

the 2013 Act.


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Term of appointment and other requirements

The 1956 Act did not mandate laying down

the code of conduct. However, under the

Listing Agreement, listed companies are

required to have a code of conduct for all

Board members and senior management of

the company, which further mandates to

include the duties of IDs as laid down in the

2013 Act. The 2013 Act prescribes in a

separate schedule, on Code of conduct

applicable only for IDs.

The 2013 Act provides that CG is empowered

to notify any body or institute or association

to maintain a databank containing particulars

of the IDs such as name, address,

qualification.

The provision will improve the efficiency and

effectiveness in selecting qualified personnel.

The time frame during which the data bank has

to be prepared has not been defined.

Way forward

• Potentially, additional public companies may be identified for the requirement of inducting

IDs

• Companies to obtain information from IDs pertaining to them and their relatives to conclude

that the independence criteria is met annually

• Listed companies will need to assess how they would apply the stricter policy of

independence as per the 2013 Act and the requirements of the Listing Agreement

• Determine the course of action for directors that may not qualify as independent under the

2013 Act – such as nominee directors

• Companies will need to identify outstanding stock options previously granted to IDs and

determine the appropriate course of action

• The directors need to evaluate as to by when they need to get themselves registered with

the data bank



24

Code of Conduct for IDs.

The Schedule IV to the 2013 Act (Code of

Conduct for IDs), further provides for the

following:

Role of IDs

• Impartial judgment

• Strategic advisor to the company

• Watchdog for interest of stakeholders

• Moderate in the interest of the company in

conflict situations

• Transparency

• Innovative or creative suggestions for

better future prospects of the company

• Overview that the company is following

good governance policy.

Responsibilities of IDs

• Uphold ethical standards of integrity and

probity

• Act objectively and constructively

• Act in a bonafide manner

• Devoted and take balance decision

• Do not abuse the positions

• Refrain from any action that shall lead to

the loss of his independence

• Assist the company in implementing the

best corporate governance practices

Duties of IDs:

• To undertake appropriate induction and

regularly update and refresh their

knowledge, skills and familiarity

• Strive to attend all meetings of the board

of directors and board committees of

which he is a member.

• Participate constructively in the committee

of board of directors in which they are

chairperson or members

• Keep themselves best informed of the

workings of the company and the external

environment in which it operates

An ID of a listed company shall be governed by

the provisions of the 2013 Act (effective from 1

April 2014) and listing agreement (as amended

and effective from 1 October 2014), whichever

is more stricter in nature.



25


• Acting within his authority, assist in

protecting the legitimate interests of the

company, shareholders and its employees.

• Not to disclose confidential information,

including commercial secrets, technologies

and unpublished price sensitive

information etc. unless approved by board.

Manner of appointment:

• Appointment process of IDs shall be

independent of management;

• Appointment of IDs shall be approved by

shareholders.

• Appointment of IDs shall be formalised

through a letter of appointment.

• Terms and conditions of appointment shall

be open for inspection at the registered

office of the company and also posted on

company's website.

Reappointment:

• Reappointment of IDs shall be on the

basis of performance evaluation.

Resignation or removal:

• An independent director resigning from the

Board of the company shall be replaced by

a new independent director within a period

180 days from the date of such resignation.

• Where the company fulfills the requirement

of independent directors in its Board even

without filling the vacancy created by such

resignation or removal, as the case may be,

the requirement of replacement by a new

independent director shall not apply.

As per recent amendment in the listing

agreement:

• terms and conditions of appointment of an

ID shall be disclosed on company’s website.

• IDs shall familiarise themselves with the

company and other related aspects.



26


Separate Meetings:

Separate meetings of IDs should be held

without the presence of non-IDs and

members of management.

Meeting shall -

• Review the performance of the non-IDs

and board as a whole,

• Review performance of the chairperson of

the company

• Assess the quality, quantity and timeliness

flow of Information between the Company

Management and the Board.

Performance Evaluation:

• The performance evaluation of

independent directors shall be done by the

entire Board of Directors, excluding the

director being evaluated.

• On the basis of the report of performance

evaluation, it shall be determined whether

to extend or continue the term of

appointment of the independent director.


Key provisions

27

Emerging role of IDs

• An ID would be governed by the

provisions of both, the Act 2013 (effective

from 1 April 2014) and listing agreement

(as amended- effective from 1 October,

2014) (stricter of the two).

• Need for IDs aroused due to the need of

a strong framework of corporate

governance in the functioning of the

company.

• The 2013 Act provides a guide to

professional conduct for IDs which will

provide confidence to the investor

community, particularly minority

shareholders, regulators and companies in

the institution of the IDs.

• The Act 2013 makes the role of IDs very

different from that of other directors.

• The role IDs play in a company broadly

includes improving corporate governance

and the risk management of the company.

• Role of IDs is to take unbiased decisions

and to checks various decisions taken by

the management and majority stakeholders.

• An ID brings the accountability and

credibility to the board process.

• The Schedule IV to the Act 2013 (Code of

Conduct for IDs) states the detailed roles,

duties and responsibilities of IDs.

• Schedule IV requires separate meetings of

IDs which shall review the performance of

Non IDs, board, review the performance

of chairperson of the company.

• Schedule IV also laid down the manner of

performance evaluation of IDs.


Key provisions

28

Other provisions

29

Other provisions

Number of directorships

The 1956 Act provided for maximum

directorship of not more than fifteen

companies. Private companies, Unlimited

companies, Associations not carrying on

business for profit or which prohibit payment

of dividend, Alternate directorships and

Foreign companies were not considered for

this purpose.

The 2013 Act provides that a person cannot

have directorships (including alternate

directorships) in more than twenty companies,

including ten public companies. For this

purpose, directorship in private companies

that are either holding or subsidiary company

of a public company shall be regarded as a

public company.

The 2013 Act provides for one year period

from the enactment to comply with this

requirement.

The provision increases the number of

directorships from 15 to 20. However, it may

result in many directors already exceeding the

prescribed limits as the directorship in more

companies (excluding foreign companies) and

alternate directorships are counted for this

purpose now.

Increasing the maximum limit of directors

would bring in more flexibility and enable the

companies to get more experience and

competent personnel on the Board level.

Revised Clause 49 is more restrictive on the limit

at number of directorships for IDs i.e.

maximum 7 listed companies. Also, a whole time

director in any listed company can serve as an

ID in maximum of 3 listed companies.

Number of directorships

As per the 2013 Act, restriction on power of

Board to exercise specified powers with

general meeting approval extended to private

companies. In all cases, approval of

shareholders by a special resolution made

necessary. As per the 1956 Act, it was

applicable for the public companies and the

private companies being the subsidiary of the

public company and there was no mention for

the type of the resolution to be passed at the

general meeting.

The Board can act on certain prescribed matters

only after obtaining the consent of the members

by a special resolution.

Private companies would also require to ensure

and enlist the matters that could be transacted

by passing a special resolution.


30

Way forward

Other provisions

Resignation

Provisions with respect to resignation of a

director have been specifically provided under

the 2013 Act.

It is also mandated for a director to forward a

copy of his resignation along with detailed

reasons for the same to the Registrar in the

prescribed manner.

As per revised Listing Agreement, disclosure

which were required to be given on company’s

website or in annual report with respect to the

letter of resignation of directors is now done

away with for listing companies.

The shareholders and the regulatory bodies can

use this as a tool to assess the issues in

governance by monitoring the reasons for

resignation as provided by the directors.

• Companies and their directors will be required to identify their directorships and transition out

over the year if they exceed the limit

• Companies will also need to identify replacement directors – including IDs

• The companies need to consider updating their charter documents for incorporating the

provisions with respect to duties and resignation of the directors


31

Other provisions

Prohibition of insider trading

New clauses have been introduced with

respect to prohibition of insider trading of

securities and the definition of price sensitive

information.

No person including any director or KMP of

a company shall enter into insider trading

except any communication required in the

ordinary course of business or profession or

employment or under any law.

While the 1956 Act was silent on insider trading,

the 2013 Act on the other hand, lays down

provisions relating to prohibition of insider

trading with respect to all companies This is a

step towards harmonisation between the 2013

Act and the SEBI Act; more specifically for

listed companies

Any person who violates the clause will be

punished with a cash fine or imprisonment or

both.

Whistle Blower Mechanism

Every listed company and prescribed

companies need to establish a vigil mechanism

for directors and employees to report genuine

concerns.

As per final Rules, the companies accepting

public deposits and with borrowed money

from banks etc. exceeding Rs 50 crore are

covered for this purpose.

As per the revised Listing Agreement,

disclosure which were required to be given on

company’s website or in annual report with

respect to details of vigil mechanism is now

done away with.

Whistleblower mechanism accompanied by anti-

abuse mechanisms would be a step towards

better corporate governance.

Penalties

The 2013 Act proposes significant penalties

for directors for defaults in discharging their

duties. The instances for levying penalties have

increased substantially too. Concept and penal

provisions relating to officer in default is also

strengthened. Penalties and fine provided

under the 2013 Act are upto 3 times of the

amount involved and imprisonment for a term

upto 10 years.

This will help to make Company and it officers

in default more liable for their action.

Strengthening the provisions for officers in

default and further making the penal provisions

more rigorous are aimed at protecting the

stakeholders’ interest.


32

Way forward

Other provisions

Class Action (not yet notified)

Unlike the 1956 Act, the 2013 Act provides

for class action suits, allowing certain

members/depositors with common interest,

to file an application in the National Company

Law Tribunal against the company/its

management/its auditors or a section of its

shareholders for damages or compensation if

they are of the opinion that the management

or conduct of the affairs of the company are

being conducted in a manner prejudicial to

their interest

Class Action suit provides empowerment to

minority stakeholders to come together and seek

action against the management, advisors and

auditors of the company for any oppression or

mismanagement. However, in the absence of

significant anti-abuse provisions in the

implementation rules, this can be misused. The

new risks and liabilities will enforce more

responsibility into the role of a director.

• The companies need to develop a mechanism for insider trading and price sensitive

information

• The prescribed companies also need to establish and monitor the whistle blower mechanism

• The companies need to prepare a strong mechanism to ensure adherence to the rules and

regulations as per the 2013 Act so as to avoid the rigorous penalties laid down under the

2013 Act


33

Related parties

34

Related parties

Related party transactions

As against the term “relative” defined under

the 1956 Act, the 2013 Act defines the term

“related party” for the first time. The term

''related party" under the revised Listing

Agreement has been recently amended to

refer to the definition as provided under the

2013 Act and the applicable accounting

standards.

The 1956 Act does not mandate specific

approval of the related party transactions

('RPTs') by the Board/ shareholders.

However, revised Listing Agreement requires

that all material RPTs shall also require

approval of the shareholders through special

resolution.

The 2013 Act proposes that all RPTs which

are not in the ordinary course of business or

not at arm’s length basis should be approved

by the Board.

The 2013 Act also proposes that for the

companies with the prescribed share capital,

no contract or arrangement or transactions

exceeding prescribed amount, shall be entered

into with its related party, unless, approved by

the shareholders of the company by way of a

special resolution. However, the related party

shareholders are not permitted to exercise

their voting rights, in such special resolution.

The 2013 Act and the revised listing

agreement further mandates that all related

party transactions shall require prior approval

of the AC.

However, the listing agreement provides a

relief by way of a conditional provision for

omnibus approval of related party

transactions instead of separate prior

approvals for individual related party

transactions.

In addition to the related parties identified under

the existing notified accounting standards, the

2013 Act proposes to include more related

parties than what has been considered for

disclosures in the financial statement.

Based on the size of capital or the size of

transactions, certain additional companies may

require prior approval of members for related

party transactions.

Company to demonstrate what's arm's length.

This would need to be in sync with domestic

transfer pricing requirements, as well.

For transactions involving promoter related

parties, only non-promoter shareholders can

vote.

Ordinary course of business not defined.

No transition period has been provided by the

2013 Act for existing loans and investments

through more than two layers of subsidiaries.

However, interpretation is to apply this

requirement only prospectively.


35

Related parties

Related party transactions (Continued)

The 2013 Act also proposes that a company

shall not make investments through more than

two layers of investment companies, unless

the investments are in an overseas company

and the company has overseas subsidiaries and

such layers are permitted under the local law

of the company being acquired or under the

law of the acquiring company.

Every contract or arrangement entered into

with a related party shall be referred to in the

Board's report along with the justification for

entering into such contract or arrangement.

MCA has clarified that contracts entered into

by the companies under the provisions of the

Act 1956 would not require fresh approval till

the expiry of original term of such contracts.

However, any modification made in those

contracts would require fresh approval under

the provisions of the 2013 Act.

Transactions arising out of compromises,

arrangements and amalgamations whether

dealt under 1956 Act/2013 Act will not attract

requirements of the new provisions under the

2013 Act.

As per the 2013 Act, a related party cannot

vote on the special resolutions in which such

related party is an interested party. However,

as per the recently amended provisions of the

revised Listing Agreement, all related parties

shall abstain from voting on any transaction,

irrespective of whether they are interested in

the transaction or not.


36

Way forward

Related party transactions

As per final Rules:

• The term 'relatives' include step

relationships and exclude second

generation lineal ascendants and

descendants

• Threshold for approval of RPTs by

shareholders through special resolution:

- Transaction or transactions to be entered

into: i. threshold amount determined as percentage

of turnover /net worth per last audited

financial statements, threshold varies

depending on the nature of related party

transactions

ii. relates to appointment to any office or place of

profit at a monthly remuneration exceeding Rs

2.5 lakh

iii. is for a remuneration for underwriting the

subscription of any securities or derivatives

thereof of the company exceeding 1% of the

net worth

• Turnover or net worth shall be on the basis

of the Audited Financial Statement of the

previous Financial Year

• In case of wholly owned subsidiary, special

resolution passed by the holding company

for entering into transactions between

wholly owned subsidiary & holding

company would be sufficient compliance

of these provisions

• Explanatory statement annexed to the

notice of General Meeting shall contain the

particulars regarding related party &

transactions

• Register for recording the contracts &

arrangements with related party in Form

MBP 4, shall be preserved permanently

'Related party' does not include independent

directors.

A director, other than independent directors or

KMP of the holding company or his relative

with reference to a company, shall be deemed

to be a related party.

Related parties

• Companies to identify all related parties

since the scope of such parties has been

expanded

• Companies need to identify whether the

expanded list of related parties is

consistent with the application requirement

of the accounting standard

• Companies to assess whether they are

covered in the expanded list as identified

by the 2013 Act to require member's

approval

• Resolutions requiring the approval of the

members would not have the voting of the

concerned related party voting on such

transaction


37

Corporate Social Responsibility

38


CSR Policies, implementation & Assessment

CSR Policy:

Applicability-

The companies fulfilling any of the following

criteria, during any financial year (means any

of the three preceding financial years):

• Net profit is Rs. 5 Cr. or more; or

• Net worth of Rs. 500 Cr. or more; or

• Annual turnover of Rs. 1000 Cr. or more.

Amount of Contribution

• At least 2% of the average net profit of the

past 3 financial years needs to be spent on

CSR activities as specified in Schedule VII.

Implementation:

The companies shall constitute CSR

committee of the board with 3 or more

directors, including at least 1 ID.

The mandate of the said CSR committee shall

be:

• to formulate and recommend to the board,

a CSR policy, which shall indicate the

activities to be undertaken by the company

as specified in Schedule VII;

• to recommend the amount of expenditure

to be incurred on the activities referred to

above;

• to monitor the CSR policy of the company

from time to time;

• to institute a transparent monitoring

mechanism for implementation of the CSR

projects or programs or activities taken by

the company.

• CSR being a voluntary contribution so far has

now been included in law.

• There may be reluctance in compliance,

especially in case of companies which are not

profitable, but fall under the designated

category.

• Every company including its holding or

subsidiary and a foreign company fulfilling

the criteria, to contribute to CSR activities

based on the net profits of their Indian

operations.

• If a company ceases to be covered under the

eligibility criteria for three consecutive

financial years, it shall not be required to

comply with the said requirements till it again

meets the mentioned criteria. However, it is

advisable to continue with the CSR

Committee and Policy to help once the

company becomes eligible again.

• For two consecutive years if the company has

been in loss, but if the average net profit for

three years is positive, then the company is

required to spend 2% of the same. This

seems to be a demotivating factor for such

companies as they may not drive the CSR

programs religiously


39



CSR activities:

The company shall give preference to the local

areas around where it operates, for spending

the amount earmarked for CSR activities.

CSR activities include (listed in schedule

VII)

• eradicating extreme hunger and poverty

• promotion of education

• promoting gender equality and empowering

women

• reducing child mortality and improving

maternal health

• combating HIV, malaria and other diseases

• ensuring environmental sustainability

• social business projects

• contribution to the PM National Relief

Fund, etc.

• Slum area development

CSR activities shall not include activities:

• undertaken in pursuance of the normal

course of business of a company;

• activities that benefit only the employees

and their families;

• contribution of any amount directly or

indirectly to a political party; and

• CSR activities undertaken outside India.

The activities of CSR mentions the words

"means and includes but not limited to".

Therefore, the definition seems to be inclusive

and not exhaustive.

There shall not be any reverse flow of income

to the Company on account of the 2% of

average net profit spent.

There is a high probability that companies could

pick up CSR programs based on their interest

and not on the actual needs/requirements of

the stakeholders of the local vicinity within

which the Company operates – this may lead to

implementing CSR projects which are of no

need to the community

Certain specified expenditure incurred towards

administration of CSR activities including CSR

capacity building etc. are allowed to be counted

for the purpose of computation of CSR spent

of 5%.


40



Assessment:

CSR committee to identify the CSR activities

and prepare a draft CSR policy which shall be

presented to the board for approval.

Disclosures to be made by the Board in its

annual report w.r.t CSR:

• the CSR policy formulated and

composition of the CSR committee.

• average net profit of the last 3 years and

the contribution towards CSR in

percentage, on account of activities related

to Schedule VII.

• the name, nature of the CSR

projects/programs undertaken in line with

the amended schedule VII of the act

• locations where such programs/projects

are being executed/undertaken.

• manner in which the amount has been

spent by the company for every CSR

project defined in Schedule VII.

• amount outlay/budget of the project.

• amount spent on the project- direct

expenditure, overheads, cumulative

expenditure upto the reporting period and

amount spent directly or through

implementing agency.

• a responsibility statement- implementation

and monitoring of CSR policy is in

compliance with CSR objectives and policy

of the company.

• CSR project executed in collaboration -

separate reporting on the projects and

programs, attribution of the CSR based

investment and impacts.

• reasons for not spending 2% on CSR.

CSR Committee to identify the CSR activities,

and prepare a draft CSR policy which shall be

presented to the Board for approval.

The Board Report pertaining to the financial

year 2013-14 shall not include any disclosure

with respect to CSR.


41

42

The Associated Chambers of Commerce and Industry of India (ASSOCHAM)

5 Sardar Patel Marg, Chankyapuri, New Delhi – 110021

T: +91 11 4655 0555 (Hunting Line); F: +91 11 2301 7008/ 9; W: www.assocham.org

Southern Regional Office

D-13, D-14, D Block, Brigade MM,

1st Floor, 7th Block, Jayanagar,

K R Road, Bangalore – 560070

T: 080 4094 3251-53

F: +91 80 4125 6629

E: [email protected],

[email protected],

[email protected]

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4th Floor, Heritage Tower,

Bh. Visnagar Bank, Ashram Road,

Usmanpura, Ahmedabad - 380 014

T: + 91 79 2754 1728/ 29, 2754 1867

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E: [email protected],

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F 4, "Maurya Centre" 48,

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Kolkata - 700019

T: +91 33 4005 3845/41

F: +91 33 4000 1149

E: [email protected]

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503/D, Mandir Marg-C

Ashok Nagar

Ranchi - 834 002

M: +91 9835 040255

E: [email protected]

About ASSOCHAM

The Associated Chambers of Commerce and

Industry of India (ASSOCHAM), India's premier

apex chamber, covers a membership of over 4

lakh companies and professionals across the

country. ASSOCHAM, which started in 1920, is

one of the oldest Chambers of Commerce.

ASSOCHAM is known as the “knowledge

chamber” for its ability to gather and disseminate

knowledge. Its vision is to empower the industry

with knowledge so that they become strong and

powerful global competitors with world-class

management, technology and quality standards.

ASSOCHAM is also a “pillar of democracy” as it

reflects diverse views and sometimes opposing

ideas in industry group. This important facet puts

us ahead of countries like China and will

strengthen our foundations of a democratic

debate and better solution for the future.

ASSOCHAM is also the “voice of industry” – it

reflects the “pain” of industry as well as its

“success” to the government.

The Chamber is a “change agent” that helps to

create the environment for positive and

constructive policy changes and solutions by the

government for the progress of India.

As an apex industry body, ASSOCHAM represents

the interests of industry and trade, interfaces with

Government on policy issues and interacts with

counterpart international organisations to promote

bilateral economic issues. ASSOCHAM is

represented on all national and local bodies and is,

thus, able to proactively convey industry

viewpoints, and also communicate and debate

issues relating to public-private partnerships for

economic development.

The road is long. It has many hills and valleys – yet

the vision before us of a new resurgent India is

strong and powerful. The light of knowledge and

banishment of ignorance and poverty beckons us,

calling each member of the Chamber to serve the

nation and make a difference.

About Grant Thornton India LLP

43

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