Introduction of New Concepts in Corporate...

Agenda

2

Section I:

Introduction

Section II New Concepts in Corporate

Governance and Consequent

Challenges

Section III Implications on Directors

Section I

Introduction

3

• Companies Act 2013 (“CA 2013”) enacted, new concepts introduced.

• Consequent amendment to Clause 49 of the Listing Agreement (“LA”) in line with CA

2013.

• Enhanced responsibilities of the Board and Independent Directors

• More involvement of Independent Directors (“IDs”) in the functioning and management

of companies. Companies seek to benefit from their experience, skills, knowledge and

expertise.

• In light of additional roles and responsibilities of IDs, Company implementing a program

to familiarize the IDs with the Company, their roles, rights, responsibilities in the

Company, nature of the industry and the business model of the Company.

• As a beginning to the familiarization process, this presentation gives an overview of the

new concepts introduced under CA 2013 and LA in corporate governance and the impact

on the Directors.

4

SECTION II

NEW CONCEPTS IN CORPORATE GOVERNANCE

AND

CONSEQUENT CHALLENGES

Section II

Key Highlights

5

CA 2013 enhances self regulation, encourages corporate democracy and reduces the number of approvals required from government

Increased disclosure requirements, greater operational transparency. Adopts internationally accepted practices

Several aspects of CA 2013 (340 out of 490 sections) are governed by the rules drafted by the MCA

Stringent provisions for violations, enhanced penalties

Practical issues are emerging in implementation

6

Section II

4. Related Party Transactions Policy

• Enhanced scope of RPTs; includes, inter alia,

sale/purchase of goods; selling/disposing/buying

property; leasing immovable property; availing &

rendering services, by company itself or through agents

and appointment of related party to office of profit.

• Approval process requires determination of three

factors: (a) whether transaction is in ordinary course of

business; (b) whether it is on arm’s length and (c)

whether it is a material RPT.

Section II

Related Party Transactions

Issues/Concerns

• Inconsistency between LA and CA 2013: CA 2013

requires only related party with reference to RPT

under consideration to abstain from voting on the

resolution. However, LA requires all related parties

to abstain from voting at resolutions for approving

proposed RPTs.

• Companies are required to formulate a RPT Policy;

follow prescribed approval process and comply with

documentation requirements.

Approval Requirements for RPTs

Non - Material

RPTs, which are in

ordinary course of

business and on

arm's length

Audit Committee

approval only

Non - Material

RPTs, which are

Not in ordinary

course of business

or Not arm's length

or both

Audit Committee

and Board approval

For Material RPTs;

OR

RPTs which are Not

in ordinary course

of business, or Not

on arm's length or

both And above the

prescribed

thresholds

Audit Committee,

Board and

Shareholder's

approval by special

resolution, where

related parties shall

not vote.

7

Section II

Deposits

Concept of Deemed Deposits

• All deposits accepted prior to commencement of CA 2013 to be repaid within 365 days from

commencement of CA 2013. Exemption available for deposits accepted or invited under Companies

Act, 1956 if company is regular in repaying deposits and interest thereon.

• Issues / concerns:

If goods cannot be manufactured or services cannot be rendered within 365 days?

Operational difficulties in identifying deposits as regulations may apply.

Advances from resident non-corporate entities in ordinary course

of business

Not appropriated against goods/services within 365 days from date of receipt

of advance

Tantamount to Deposits

Share application money/advance towards allotment of securities

Securities not allotted within 60 days and such money is not refunded

within 15 days of completion of 60 days


Amounts raised through debentures, other than bonds/debentures

secured by first charge on assets of equivalent market value or bonds/

debentures compulsorily convertible into shares within 5 years


8

Section II

Loans to Directors and Secretarial Audit

Loans to Directors

• Absolute restrictions on advancing of loan or giving of guarantee by a company to directors including

any partner, relative, firm or private company of director.

• No exemption prescribed for private companies.

• No provision for Central Government approval.

• Exemption is available in case of loan advanced and guarantee given by a holding company to its

WOS/Subsidiaries only if loan is used by WOS/Subsidiary for its principal business activities.

• Penalty - Punishable with imprisonment of up to 6 months or fine or both.

Secretarial Audit

• Mandatory for listed companies and report is to be annexed to the Board’s report.

• Company secretary to audit compliance with laws applicable to company including

2013 Act, foreign exchange laws, SEBI guidelines and regulations.

• Secretarial audit report to comment on whether systems and processes in a

company for monitoring and ensuring compliance with applicable

laws/rules/regulations/guidelines commensurate with the company’s size and

operations.

Section II

Auditors and Accountability

CA 2013 has introduced detailed provisions about appointment of statutory auditors, their responsibility

and liability

Appointment

and Rotation

• No listed company can appoint:

individual auditor for more than 1 term of five years;

audit firm for more than 2 consecutive terms of five years each.

• Eligible for reappointment only after 5 years of cooling off period.

• No audit firm:

having a partner common with the retiring firm, or

being in the “same network” as the outgoing firm can be appointed. Same

network includes firms under same brand name, network or trademark.

• Companies get 3 years to comply with this provision .

Restrictions on

non-audit work

• Auditors not to provide, directly or indirectly, any specified non-audit services.

• Comply within one year of commencement of CA 2013.

Reporting of

frauds

• If auditor has reason to believe that an offence involving fraud has been committed

by officers/ employees of the company against the company - duty to report to the

Central Government.

• If auditor does not act in good faith in reporting fraud then he is punishable with

imprisonment for up to 1 year and fine. Auditor to also refund remuneration and

pay damages in such cases.

9

Section II

Corporate Social Responsibility

• Provisions applicable to every company

having minimum: (i) net worth of INR 500

crore; or (ii) turnover of INR 1000 crore; or

(iii) net profit of INR 5 crore, in any 3

preceding FYs.

• Mandatory constitution of CSR Committee to

formulate policy and recommend expenditure.

• Spend min. 2% of the average net profits of

the co. during the 3 preceding FYs. Mention

reasons for failure to spend in Board’s report.

Activities in India will be included as CSR.

• CSR projects and programs to be carried out

itself or along with its associate companies.

Mere donations not sufficient. If carried out

through qualified Trust or Society, then

exercise control and monitor of utilization of

funds.

• CSR activities to be carried on in program/project

mode and not as one-off activity.

• CSR projects that only benefit employees or their

families are not eligible CSR expenditures.

• Activities which are identified as CSR -

eradicating poverty; promoting education, gender

equality, empowering women; reducing child

mortality; combating fatal diseases; ensuring

environmental sustainability, etc. List of activities

to be interpreted liberally, intention to cover wide

range of activities.

• Contribution to political parties, expenditure

incurred on fulfilment of any statute/regulation not

considered CSR expenditure.

10

Section II

Class Action Suits

Class Action Suit

Who can file? Members: 100 or more members or specified

% of members or members holding specified

% of capital, whichever is lower

Depositors: 100 or more depositors or

specified % of depositors, whichever is lower,

or depositors to whom company owes

specified % of total deposits

Against

Whom?

Company, its directors, auditors or any

experts, advisors and consultants for wrongful

acts

Why file? That the management and conduct of the company are being conducted in a manner prejudicial to the

interests of the company, its members or depositors

Implications? • Restrain company from acting ultra vires, declaring a resolution passed by suppressing material facts

as void or doing an act which is against their interest

• Grant damages or compensation from the company, its directors, auditors including audit firm, expert

or advisor or consultant.

11

12

Section II

Policies of the Board

Risk Management Policy Board Diversity Policy Policy on Material Subsidiaries

Relevant

Provision

• Board to formulate risk

management policy and

specify steps towards

implementation of the

said policy in the Board

report.

• Listed companies to

constitute risk

management committee

comprising majority of

Board members and

senior executives

Nomination and Remuneration Committee to

formulate policy on Board diversity.

LA requires listed company to formulate

policy for determining ‘material subsidiaries’.

Policy to be disclosed on company’s web site.

Main

Purpose

Identifying and assessing

risks; formulating plan to

mitigate risks

• Candidates to be selected having due regard

to benefits of diversity of the Board.

• Selection of candidates to be considered

across number of aspects: gender, age,

cultural and educational background,

professional experience etc.

Identify material subsidiaries:

• for appointment of ID of holding company

on board of material subsidiary;

• Special resolution required for: disposal of

shares of material subsidiary reducing stake

of holding company to less than 50% or

resulting in holding company ceasing to

have control; selling, disposing, leasing

assets of material subsidiary amounting to

more than 20% of assets of material

subsidiary;

• minutes of all significant transactions of

material subsidiary to be placed at Board

meeting

12

Section II

Whistle Blow Mechanism

13

• Director or employees of the company having genuine

concerns or grievances, such as actual or suspected

fraud, unethical behavior or violation of company’s

ethics policy, can report concerns.

• Every listed company to establish vigil mechanism.

• Code of conduct of IDs to ascertain that company has adequate and functional vigil

mechanism. Vigil mechanism to support Board’s functions of laying internal controls to

prevent and detect frauds.

• Audit Committee or person nominated by the Board shall oversee the vigil mechanism.

• Vigil policy to provide adequate safeguards against victimization of employees and direct

access to overseer of vigil mechanism. Policy should ensure that whistle blower has

complete anonymity.

• Protection built for companies – company may take appropriate action if repeated frivolous

complaints.

• Issues/Concerns: What action is to be taken? If director/employee not satisfied with the

action that has been taken, can he appeal to any higher authority?

SECTION III

IMPLICATIONS ON DIRECTORS

14

Section III

Qualifications for Directors

Not have been convicted of offence in

relation to RPTs under section 188 of CA

2013 during 5 years, immediately

preceding his appointment and in case

convicted, such order must not be in

effect

Must not be a director (including

alternate director) in more than 20

companies or in more 10 public

companies

Not be an undischarged insolvent nor

preferred an application for being

adjudicated as insolvent, which application

is pending

Paid calls on shares held by him in

the company and in case not paid, 6

months shall not have lapsed from the

date such payment is due

No order disqualifying him from being

appointed as a director of any company

should have been passed by a court or

tribunal or if passed, such order shall not

be in force

Must be of a sound mind

In the immediately preceding 5 years, must not

have been a director of a company which has:

(i) not filed financial statements or annual

returns for continuous period of 3 FYs, or

(ii) failed to repay deposits or interest thereon

or to redeem debentures on the due date

and such failure to pay or redeem

continues for 1 year or more

Must not have been convicted of any

offence making him incapable of being

appointed as a director under CA 2013

Qualifications

for a Director

15

Section III

Role of Nomination and Remuneration Committee

Board to constitute a Nomination and Remuneration Committee (“NRC”) comprising of 3 or more non-executive

directors, with at least ½ IDs and the chairman being an ID.

Role of

NRC

To identify and recommend to the Board

persons qualified to become directors and

hold in senior management position;

Formulating criteria for evaluation of IDs

and the Board;

Formulating criteria for determining

qualifications, positive attributes and

independence of directors;

Formulating policy on remuneration for the

directors, KMPs and other employees based

on principles such as (i) need to attract,

retain and motivate talent in running the

company, and (ii) relationship between

remuneration and performance.

Devising policy on Board diversity.

Appointment of IDs

• Explanatory statement for appointment of ID to specify that

in the opinion of the Board the ID fulfils the prescribed

conditions.

• Company to issue formal letters of appointment to IDs.

• Every ID is required to give a declaration that he meets the

criteria for independence, at (i) the first meeting of the Board

that he attends; (ii) first meeting of the Board in every FY;

and (iii) whenever there is any change in the circumstances

which may affect his independence.

Remuneration to directors

• To be determined based on the policy framed by NRC.

• Total managerial remuneration payable to all directors (and

manager, if any) for a FY not to exceed 11% of the net profits

of the company, except with the consent of the Central

Government.

• Non-Executive directors may be paid (i) sitting fee, (ii)

reimbursement of expenses for participation in Board

meetings; and (iii) profit related commission as approved by

the shareholders, subject to the maximum thresholds

prescribed.

• No stock options to ID. 16

Section III

Tenure, Evaluation and Vacation of Office

Tenure of an ID

• Maximum tenure: 2 consecutive terms of 5 years

each.

• Re-appointment for second term requires special

resolution of the shareholders.

• After completion of the 2 consecutive terms, the

individual shall be eligible for appointment, only

after a cooling off period of 3 years, provided he

has not been associated with the company in any

other capacity, either directly or indirectly during

the said period of 3 years.

Vacation of office of director

• The office of a director stands vacated if the director

inter alia:

absents himself from all the meetings of the Board

held during 12 months with or without seeking

leave of absence;

fails to disclose his interest in a contract or

arrangement in which he is interested in

contravention of section 184 of CA 2013; or

is convicted by a court of any offence and

sentenced to imprisonment for six months or more,

irrespective of whether the order is under appeal.

• Person who knows that his office as director has

become vacant on account of above disqualifications,

and continues to function as a director, may be

punished with imprisonment for up to 1 year or with

fine between INR 1 lakh to INR 5 lakh or with both.

Performance Evaluation

• NRC to formulate criteria and evaluate

performance of directors.

• Performance evaluation of IDs to be done by the

entire Board, except the director being evaluated.

• Based on the performance evaluation report, to

determine whether the ID will continue to hold

office or his tenure be extended.

Resignation

Director to forward a copy of the resignation along with

detailed reasons to the Registrar of Companies within 30

days of resignation.

17

Section III

General Duties of Directors

• Unlike Companies Act, 1956, duties of directors codified in CA 2013 to include the following:

• Additionally, Clause 49 of LA also specifies certain key functions to be undertaken by the Board such as

monitoring effectiveness of company’s governance practices; ensuring transparent board nomination

process and ensuring appropriateness of systems for risk management, financial and operational control,

and compliance with the law and relevant standards.

• Directors’ responsibility statement to inter alia include a statement that the directors “devised proper

systems to ensure compliance with provisions of applicable laws and such systems were adequate and

operating effectively”.

• Enhanced penalties for defaults by directors - for example, imprisonment prescribed for failure to

disclose interest, non-compliance with provisions regarding RPTs, availing loan from the company in

contravention with section 185 of CA 2013 and engaging in insider trading.

Do’s Don'ts

Act in good faith in order to promote objects of

the Company for benefit of members, employees,

shareholders, community and environment.

Perform duties with due care, skill and diligence

and exercise independent judgment.

Not act in a manner so as to achieve or attempt to

achieve any undue gain/advantage, either for

himself or for his relatives, partners, or associates.

Not be involved in situations where he may have

a direct or indirect interest that conflicts or may

conflict, with the interest of the company.

18

Section III

Duties of Directors: Disclosure of Interest

• Explanatory statement for a shareholders meeting: Additional disclosures in the explanatory statement

annexed to a notice of a general meeting

Where the agenda for a meeting includes any special business, extent of shareholding interest of every

(i) promoter, (ii) director, (iii) manager and (iv) every KMP of the company, in the counter party shall

be disclosed, if the interest is 2% or more in the paid up capital of such counterparty.

If due to insufficient disclosure any benefit accrues to a promoter, director or KMP, such person shall

hold the benefit in trust for the company and be liable to compensate the company for the benefit.

Body corporate in which

the director (along with

other directors), holds more

than 2% shareholding;

Body corporate in which

the director is a Promoter,

Manager or CEO

Firm in which the

director is a partner,

owner or member

Disclosure by Interested Director

• Directors to disclose their concern/interest in the

following persons; and

• Not participate in meetings where transactions with

such persons are discussed

19

Section III

Additional Duties of Independent Directors

Duties of IDs

Not disclose confidential

information of the company

Undertake induction, refresh skills,

knowledge and familiarity with

company

Be well informed about company and external

environment relating to operations of company

Report concerns about unethical behaviour,

actual/suspected fraud and ensure existence adequate functional

vigil mechanism

Notify concerns about running of the company to

the Board; ensure unresolved concerns are

recorded in minutes

Attend meetings; seek

clarifications/information / professional

advice where necessary

In addition to the above, IDs are required to

comply with the Code for Independent

Directors (Schedule IV of CA 2013) which

lays down the duties, role and functions for

IDs.

20

Section III

Additional Duties of Independent Directors

Separate meetings

• IDs required to convene at least 1 meeting in a year, without the

presence of the non-independent directors and members of the

management.

• Such meeting of IDs shall:

review performance of non-independent directors and the

Board as a whole;

review performance of chairperson of the company and

take into account views of executive directors and non-

executive directors;

asses quality, quantity and timelines of flow of information

between management and the Board required by the board

of directors to perform its functions.

21

Section III

Officer in Default

Wide definition for “Officer in

Default” introduced to include the

following:

Officer in Default

Whole-time director

KMP

Director - as specified by Board in this

regard and who has consented to it or all directors,

if no director specified

Person - under immediate

authority of Board or KMP, who is charged with any responsibility and who fails to take steps to prevent

default

Person - in accordance with whose advice/ directions the

Board is accustomed to

act

Every director who is aware of contravention*

• Limitation on liability of non-

executive directors: Despite the wide

definition, IDs and non executive

directors (not being promoter or

KMP) only liable for acts which

occurred with their knowledge,

attributable through Board processes

and with his consent or connivance or

where he did not act diligently.

• The broader definition of officer in

default and the enhanced penalty

provisions are a double edged sword -

on one hand these warrant active

participation of the non-executive

directors in the Board proceedings

leading to better management, while

on the other hand, may lead to an over

cautious approach, thereby delaying

the decision making process.

* A director may be considered to be aware of a contravention by virtue of receipt by

him of any proceedings of the Board or participation in such proceedings without

objecting to the same, or where such contravention had taken place with his consent

or connivance. 22

• Prohibition on Insider Trading - No person shall deal in securities while having access to any non-public price sensitive

information.

• Price sensitive information means any information which relates directly or indirectly to the company and which if

published is likely to materially affect the price of securities of a company; includes major expansion plans or new

projects; amalgamation, mergers, take overs; disposal of whole or substantial part of undertaking; significant changes in

policies, plans, operations of company.

• Disclosures by directors and officers of listed companies:

• Directors and officers to deal in securities of company only during valid ‘trading windows’ specified by the company.

23

Section III

Insider Trading

One time disclosure Continual Disclosure

To the company To the company and stock exchange

Within 2 working days of appointment as director

or officer of the company

Within 2 working days of receiving intimation of allotment of

shares or acquisition or sale of shares or voting rights

Shareholding or voting rights held in the company

and positions taken in derivatives by him and his

dependents

Total shareholding/ voting rights held and changes thereto

(including holdings of dependents) since last disclosure; change

exceeding INR 5 lakh in value or 25,000 shares or 1% of total

shareholding or voting rights, whichever is lower

• All proposed transactions in securities of company to be undertaken by directors and

officers require pre-clearance by the company as per its pre-clearance procedure.

• All transactions in company’s securities to be completed within 1 week from receipt of

pre-clearance by company; fresh pre-clearance required if order for securities not

executed within 1 week.

23

Thank you

[email protected]

+91 99586 91440



Introduction of New Concepts in Corporate...

Documents

Transcript of Introduction of New Concepts in Corporate...