Clause 49- New challenges

Presentation

by

Anil Sharma, FCA

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CORPORATE GOVERNANCE

Good governance- expectation of stakeholders Enhancing business performance and

accountability Governance code for corporate A structure within specific legal, regulatory and

institutional environment through which Objectives are set Means of attaining those objectives are determined performance monitoring is established Disclosure of timely and accurate information is ensured.

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CORPORATE GOVERNANCE

Historical perspective:

International OECD Task Force Sarbanes Oxley Act

National Amendments in the Companies Act Accounting Standards by ICAI SEBI initiatives

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CORPORATE GOVERNANCE- NEW CLAUSE 49

based on SEBI circular dated Oct, 2004, clause 49 of the listing agreements revised

by stock exchanges was to be implemented on or before 31st

march 2004 Extended upto 31st December, 2005

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Clause-49

Board of Directors Audit committee Remuneration of directors Board Procedure Management Shareholders Report on Corporate Governance Compliance

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1. Board of Directors

Composition- Executive & non-executive Not less than 50% to be non-executive Number of independent directors:

when there is non-executive chairmanat least 1/3rd

When there is executive chairmanat least ½ of the Board

Independent director has to be an non-executive director

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Independent director

a) does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management etc.

b) not related to promoters/ management at board level or at one level below the board

c) was not an executive of the company in the immediate three financial years.

d) Was not a partner or an executive of audit firm/ legal firms or consulting firms for last three years.

e) not a supplier, service provider customer or lessor- lessee.

f) not a substantial shareholder of the company holding over 2% of the share capital.

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NON-EXECUTIVE DIRECTOR- COMPENSATION AND DISCLOSURES.

Compensation/ stock options to independent directors to be approved by the board and prior approval of the shareholders is required

A compensation philosophy and statement of entitled compensation in respect of independent directors shall be published in annual report/ web site.

Disclosure on annual basis regarding the shares held by non-executive directors

non-executive directors to disclose their stock holding( both held by them or on beneficial basis) prior to their appointment

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TERM OF NON-EXECUTIVE DIRECTORS

shall not exceed nine years comprising of three terms of three years each running continuously.

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CODE OF CONDUCT

a code of conduct shall be prepared for board members and senior management which shall be posted on the website.

board members/ senior management to affirm compliance of the code and the annual report should contain such a declaration signed by chairman.

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Periodical Review by BOD

Board to make periodical review of compliance report of all laws applicable to the company and

Steps taken by the company to rectify instances of non-compliance

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2. AUDIT COMMITTEE

all members of the audit committee shall be financially literate with one member having accounting/ financial management expertise.

the term ‘financially literate’ and ‘accounting knowledge’ defined.

the ‘related party transaction’ will have the same meaning as contained in AS-18.

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ROLE OF AUDIT COMMITTEE

oversight of the company’s financial reporting processes and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services.

Review annual as well as quarterly financial statements with the management before submitting the same to BOD

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ROLE OF AUDIT COMMITTEE

discussion with external auditors before the audit commences about nature and scope of audit as well as post audit discussion to ascertain any area of concern.

reviewing the company’s financial and risk management policies.

to look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders(in case of non payment of declared dividends) and creditors.

Discussion with internal auditors any significant finding and follow up thereon

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AUDIT COMMITTEE : MANDATORY REVIEWS

financial statement / audit report / quarterly / half- yearly financial information.

MDA and results of operation legal compliance and risk management observations of statutory / internal auditors. appointment / removal of chief internal auditor. record of significant related party transactions

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POWERS OF AUDIT COMMITTEE

to investigate any activity within its terms of reference

to seek information from any employee to obtain outside legal or other professional

advice. to secure attendance of outsiders with relevant

expertise, if it considers necessary.

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3. WHISTLE BLOWER POLICY

company to have an internal policy on access to audit committee by employees on unethical and improper practice.

the policy to be communicated to employees and included in the HR manual.

company shall affirm that it has not denied any personal access to audit committee and has provided protection to whistle blowers from unfair termination etc.

the affirmation shall from part of the board report on corporate governance.

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4. SUBSIDIARY COMPANIES one independent director of holding company to be

on the board of non-listed subsidiary company. audit committee of the holding company shall review

financial statements / investments of subsidiary company.

board minutes of subsidiary company shall be placed for review by the board of holding company.

directors report of the holding company shall confirm that the affairs of the subsidiary companies have been reviewed

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5. DISCLOSURES: ACCOUNTING TREATMENT

management shall disclose justifying the different accounting treatment than the accounting standards as a foot note of financial statement.

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DISCLOSURES:CONTIGENT LIABILITY

the management shall provide clear description of each material contingent liability and its risk alongwith auditors comments on managements views. this should be highlighted in significant accounting policy/ notes and accounts / auditor’s report.

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DISCLOSURES:RELATED PARTY TRANSACTIONS

Summary of related party transactions, their basis bifurcating transactions in normal course of business and individual transactions not in normal course of business and

Details and management’s justification for any material transaction not on arms length basis

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DISCLOSURES:BY MANAGEMENT

By senior management of all material financial and commercial transactions, where they have personal interest

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DISCLOSURES:RISK ASSESSMENT

Risk management procedure to be laid down for the management and to be reviewed periodically

A quarterly report certified by Compliance Officer on business risk and measures to minimise risks an limitations to the risk taking capacity of the company

This document shall be formally approved by the Board.

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6. CERTIFICATION BY CEO/CFO TO THE BOARD

That they have reviewed the financial statements and cash low statement for the year and:

These do not contain any materially untrue statement or omit any material fact

There were no fraudulent, illegal transactions violative of the co’s Code of Conduct

They accept responsibility for establishing and maintaining internal controls and have evaluated their effectiveness.

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7. REPORT ON CORPORATE GOVERNANCE TO THE STOCK EXCHANGES

a compliance report within 15 days from the close of the quarter in the revised format.

the report contains the entire provisions of the new corporate governance clause.

a separate cell is being set up by the stock exchanges to monitor the compliance of the provisions.

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Thank you.