NARESH CHANDRA COMMITEE

7/31/2019 NARESH CHANDRA COMMITEE

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PRESENTED BY

SRINIVASH NAIK


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ABBRIVIATIONSTERMINOLOGIESCORPORATE GOVERNANCECOMMITTEE REPORTOTHER SUGGETIONS & COMMITTEERESPONSE

CONCLUSION


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DCA-Department of company affairs.

SEBI-Security exchange board of India.

MoF- Ministry of finance.


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CONTIGENT LIABILITY: contingent liability is apotential liability it depends on a future event occurring or not occurring.

COMPLIANCE COST: A compliance cost isexpenditure of time or money in conforming withgovernment requirements suchas legislation or regulation.

Clause 49: of the Listing Agreement to the Indianstock exchange comes into effect from 31 December2005. It has been formulated for the improvement of corporate governance in all listed companies.


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Corporate is adjective meaning of or relating to acorporation derived from the noun corporation. A corporationis an organization created (incorporated) by a group of shareholders who have ownership of the corporation.

Oxford English Dictionary defines Governance as the act,manner, fact or function of governing, sway, control.

Corporate governance

It is generally understood as the framework of rules,relationships, systems and processes within and by whichauthority is exercised and controlled in corporations.


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On 21 August 2002, the department of companyaffairs(DCA) under the ministry of finance andcompany affairs appointed this High level

committee to examine various corporategovernance issues. Among others, this committeehas been entrusted to analyze and recommendedchanges if necessary,


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Disclosure of Contingent Liabilities.

CEO / CFO Certification.

Definition of Independent Director.

Independence of Audit Committee.

Independent Director Exemptions.


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Disclosure of Contingent LiabilitiesManagement should provide a clear description in plainEnglish of each material contingent liability and its risks,which should be accompanied by the auditors clearlyworded comments on the managements view. Thissection should be highlighted in the significant accounting policies and notes on accounts, as well as, inthe auditors report, where necessary.

This is important because investors and shareholdersshould obtain a clear view of a companys contingent liabilities as these may be significant risk factors that could adversely affect the companys future financialcondition and results of operations.


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CEO / CFO CertificationFor all listed companies, there should be a certification bythe CEO (either the Executive Chairman or the ManagingDirector) and the CFO (whole-time Finance Director orother person discharging this function) which shouldstate that, to the best of their knowledge and belief:

They have reviewed the balance sheet and profit andloss account and all its schedules and notes on accounts,as well as the cash flow statements and the Directors Report;

These statements do not contain any material untruestatement or omit any material fact nor do they containstatements that might be misleading;


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These statements together present a true and fairview of the company, and are in compliance with theexisting accounting standards and / or applicablelaws / regulations;

They are responsible for establishing andmaintaining internal controls and have evaluated theeffectiveness of internal control systems of thecompany; and they have also disclosed to theauditors and the Audit Committee, deficiencies in thedesign or operation of internal controls, if any, andwhat they have done or propose to do to rectifythese;


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They have also disclosed to the auditors as wellas the Audit Committee, instances of significant fraud, if any, that involves management oremployees having a significant role in thecompanys internal control systems; and

They have indicated to the auditors, the Audit

Committee and in the notes on accounts, whetheror not there were significant changes in internalcontrol and / or of accounting policies during theyear.


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Definition of Independent DirectorThe term independent director is defined as a non-executive director of the company who:apart from receiving director remuneration, does not have any material pecuniary relationships ortransactions with the company, its promoters, itssenior management or its holding company, itssubsidiaries and associated companies;is not related to promoters or management at theboard level or at one level below the board;has not been an executive of the company in theimmediately preceding three financial years;


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is not a partner or an executive of the statutory audit firm or theinternal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years.This will also apply to legal firm(s) and consulting firm(s) that have amaterial association with the entity.

is not a supplier, service provider or customer of the company. Thisshould include lessor-lessee type relationships also; and

is not a substantial shareholder of the company, i.e. owning two

percent or more of the block of voting shares.

The considerations as regards remuneration paid to an independent director shall be the same as those applied to a non-executive director.


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Independence of Audit Committee.

All audit committee members shall be non-executive directors


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Independent Director ExemptionsLegal provisions must specifically exempt non-executive and independent directors from

criminal and civil liabilities under certaincircumstances. SEBI should recommend that such exemptions need to be specifically spelt out for the relevant laws by the relevant departmentsof the Government and independent regulators,as the case may be.


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However, independent directors shouldperiodically review legal compliance reportsprepared by the company as well as steps taken

by the company to cure any taint. In the event of any proceedings against an independent directorin connection with the affairs of the company,defense should not be permitted on the ground

that the independent director was unaware of this responsibility.


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Removal of Independent DirectorsIt was suggested that companies should inform SEBI / stock

exchanges within five business days of the removal /resignation of an independent director, along with astatement certified by the managing director / director /company secretary about the circumstances of such removal/ resignation (specifically whether there was any

disagreement with the independent director that causedsuch removal / resignation). Any independent directorsought to be removed or who has resigned because of adisagreement with management should have theopportunity to be heard in general meeting.The Committee noted that under the existing provisions,companies are required to inform the stock exchanges of anychanges in directors. The existing safeguards are adequateand hence no further action is required.


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Disgorgement of ProfitsIt was suggested that CEOs / COOs / CFOs shoulddisgorge equity or incentive based compensation,

or profits arising from trading in company stock,if a restatement of financial statements isrequired or if there is any corporate misconduct leading to a financial liability.

The Committee noted that this was one of therecommendations of the Naresh ChandraCommittee. Therefore, the Committee resolvedthat no further action is required at this stage.


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Term of Office of Non-Executive DirectorsIt was suggested that there must be a cap on the term of office of a non-executive director. The Committee noted

that persons should be eligible for the office of non-executive director so long as the term of office did not exceed nine years (in three terms of three years each,running continuously).

The Committee also noted that it would be a goodpractice for directors to retire after a particular age.Companies may fix the retirement age at either 65 or 70years.

The Committee recommends that the age limit fordirectors to retire should be decided by companiesthemselves. Corporate Boards should have an adequatemechanism of self-renewal, as part of corporategovernance best practices.


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Corporate Governance RatingsIt was suggested that corporate governancepractices followed by companies should be rated

using rating models. It was also suggested that companies should be rated based on parametersof wealth generation, maintenance and sharing,as well as on corporate governance.

Media Scrutiny The Committee noted that SEBI should considerdiscussing this issue with representatives of themedia, especially the financial press.


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There are several corporate governance structuresavailable in the developed world, but there is no onestructure, which can be singled out as being betterthan the others. There is no one size fits all structure for corporate governance. The Committees recommendations are not, therefore, based on anyone model, but, are designed for the Indianenvironment. Corporate governance extendsbeyond corporate law. Its fundamental objective isnot mere fulfillment of the requirements of law, but,in ensuring commitment of the Board in managingthe company in a transparent manner formaximizing long-term shareholder value.


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NARESH CHANDRA COMMITEE

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