Presentation on ‘Legal Compliance...

Presentation on ‘Legal Compliance Management’

(Ooty, August 11, 2007)

- By Mahavir Lunawat

Outline•Why Legal Compliance •Why Legal Compliance

•Legal Compliance – Role of Corporate Directors•Legal Compliance – Role of Corporate Directors

•Specific Practices & Role of Company Secretary•Specific Practices & Role of Company Secretary

•Understanding Legal Compliance Management•Understanding Legal Compliance Management

•Legal Compliance & Knowledge Management•Legal Compliance & Knowledge Management

•Developing LCM System•Developing LCM System

Why Legal Compliance• “BOD shall review Compliance Report of

all applicable laws as well as steps taken to rectify the instance of non-compliance” -Listing Agreement [Clause 49 (1) (C) (iii)] – Identification of all applicable laws !– Extent of actual compliance– Identification of instances of non-compliance– Identification of left-out areas– Preparation of report– Review of the report by the Board

Why Legal Compliance• CEO & CFO Certification on financial reporting

and internal controls [Cl. 49]–– That they have reviewed financial statements and the

cash flow statement for the year and that to the best of their knowledge and belief …………..

• these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

• these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

– ………………

Why Legal Compliance• Code of Conduct [49.I.(D)]

– Board to lay down a Code of Conduct for Directors and Senior Management. Such personnel to affirm compliance annually. Annual Report to contain Declaration signed by CEO.

– Section 406 of the SOX Act read with the Rules issued thereunder by SEC, US provides that the Code of Ethics should be reasonably designed to deter wrongdoing and to promote :

• ……………..• Compliance with applicable governmental laws, rules and

regulations;

Why Legal Compliance• Information to be placed before the Board [Schedule 1A

of Clause 49]– ……………– Show cause, demand, prosecution notices and penalty notices

which are materially important – Any issue, which involves possible public or product liability

claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company.

– Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc.

– ………......

Why Legal Compliance

• Section 5 of the Companies Act– For the purpose of any provision in this Act

which enacts that an officer of the company who is in default shall be liable to punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression “officer who is in default” means all the following officers of the company, namely……….

Why Legal Compliance

• Section 210 of the Companies Act– ………….provided that in any proceedings

against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty……

Why Legal Compliance• Schedule XIII to the Companies Act provides that no person shall be

eligible for appointment as a MD / WTD / manager of a company if he had been sentenced to imprisonment for any period, or to a fine exceeding Rs. 1,000/- under any of the following 15 Acts-

– The Indian Stamp Act, 1899– The Central Excise Act, 1944– The Industries (Development and Regulation) Act, 1951– The Prevention of Food Adulteration Act, 1954– The Essential Commodities Act, 1955– The Companies Act, 1956– The Securities Contracts (Regulation) Act, 1956– The Wealth-tax Act, 1957– The Income-tax Act, 1961– The Customs Act, 1962– The Monopolies and Restrictive Trade Practices Act, 1969– The Foreign Exchange Regulation Act, 1973 (replaced by FEMA)– The Sick Industrial Companies (Special Provisions) Act, 1985– The Securities and Exchange Board of India Act, 1992 – The Foreign Trade (Development and Regulation) Act, 1992

• Detention for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 shall also be a ground for the above disqualification.

Why Legal Compliance• Section 633 of Companies Act, 1956 –

– If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against any officer of a company, it appears to the court hearing the case that he is or may be liable in respect of negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the court my relieve him, either wholly or partly, from his liability on such terms as it may think fit.

Why Legal Compliance• Director ONLY can be an Occupier

– J. K. Industries Ltd. v. Chief Inspector of Factories (1996) : In case of a factory owned by a company, the company is its owner and the ultimate power of controlling the affairs of the factory vests with the company but, since it cannot act on its own, any of the directors, being its agents, shall be the occupier of the factory. Any other employee cannot be nominated as the occupier of the factory as he does not have ultimate control and his decision is likely to be influenced by the directors.

Why Legal Compliance• SPP

Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

Directors’ Position – Uneasy lies the head that wears the crown

• Supremacy in corporate management embodied under Section 291 of Companies Act

• Under Section 253 only individuals can be appointed as directors of a company. The idea behind section 253 is that as the office of a director is to some extent an office of trust, there should be somebody readily available who can be held responsible for the failure to carry out the trust and it might be difficult to fix that responsibility if the directorwas a corporation or an association of persons. (Oriental Metal Pressing Pvt. Ltd. vs. Bhaskar Kashinath Thakoor).

• Officer in Default • Non-compliance may attract disqualification• Personal Liability (in case of breach of fiduciary duty,

abuse of powers, etc.)• Delegation is NOT the solution

How can I be sure that all my

subordinates / team members are doing their jobs perfectly?

After spending all this time in doing work, am I really going to be sure that I have not missed

out on any compliance ?

How I wish someone tracks all

developments and discusses & prepares a

follow-up action report?

How can I be sure I’m complying with all

the regulations?

How can I be sure that all statutory compliances have been identified ?

Many of Us Ask…

Oh God! I am under so much of pressure, how do I

ensure a completely controlled process?

Understanding LCM

• Questions– Objective– To What Extent ?– At What Levels ?– What Activities ?– How Should Information Flow ?– How To Capture Knowledge Contents and

Keep Updated Throughout ?

Understanding LCM

• Objectives– To protect the interests of various stakeholders– To avoid legal action by law-enforcing agencies– To lay down effective internal control systems

& practices– To practice strengthened corporate governance– To ensure continuity of business smoothly

Understanding LCM

• Scope– Applicable Laws– Standards issued by professional bodies (Eg. Secretarial

Standards issued by ICSI)– Directions of the Court, Quasi-Judiciary Bodies– Agreements – Governance Norms – Internal Policies and Codes– SOPs and Practices– International Laws

Understanding LCM• Levels

Board

Chief Compliance Officer

Business / Functional Heads

Operating Level

Understanding LCM• Effective LCM Components

– Management Commitment : Setting the tone at the Top –developing the compliance culture.

– Strong Compliance Culture : “Compliance is every employees’ job”

– Effective Compliance Organization• Reporting line independent of the business organization• Mix of knowledgeable business and functional compliance

officers• Coordination across the board

– Pro-active Focus

Understanding LCM

• Legal Compliance & Governance – Legal compliance is a pre-requisite for good

governance – Governance is an overall strategy while legal

compliance is an operational plan of action– Governance norms endeavour to ensure legal

compliance– Overall governance practices are guided by

legal compliance practices

Highly complex, rapidly changing environment

– Number of applicable rules/laws are becoming more complex and technical.

– new laws are continually increasing and thus, the number of rules/laws we need to test continuously expand.

– Increased scrutiny of financial services industry by regulators and law enforcement agencies.

– Substantial fines, enforcement actions, negative publicity, business restrictions and/or suspensions (i.e., written agreements, non-prosecution agreements, etc.) are commonplace

– Legal requirements vs. ethical responsibility - following the law just isn’t good enough.

– Global developments – Business and regulatory conditions require increased Compliance

activity and focus on reputational risk issues.

KNOWLEDGE

MANAGEMENT

IS

THE SOLUTION

LCM & KM

KM = The systematic process & integrated approach of identifying, capturing, organising, retrieving, sharing & evaluating information to broaden the Organisation’s Knowledge Base.

LCM & KM

• Why Knowledge Management ? – KM helps focus the Organisation on acquiring, storing

& utilising knowledge for activities like problem solving, dynamic learning, strategic planning & decision making and legal compliance.

– Specific KM activities helps an Organisation to gain insight & understanding from its own experience.

– Eases out information flow – desired info. at any time any place

LCM & KM

• Knowledge & the Organisation– An Organisation learns when an individual is equipped

to capture the understanding & share the same.– If the individual’s learning/insights are explicitly

captured in a way they can be shared with the rest of the Organisation, then it becomes part of the ‘Organisation Knowledge Base’ – Linking up.

– Through KM, Organisation Knowledge & Individual Knowledge complement each other making the other stronger & broader.

LCM & KM• No Structured KM ?-Identify!

– Knowledge - people driven & not system driven.– Vital Knowledge resting with individual(s) – Organisation does not ‘know what it knows’

• No Structured KM? -What may happen – Valuable inputs / the ‘other view’ is not taken into account.– Results into duplication of effort throughout the organisation, thus

undue high response time and increased time & effort. – Knowledge of the Organisation is often lost through employee

attrition etc.

LCM & KM

Analysis Co-relation

Sharing & Evaluation

Effective Retrieval

Updation

Retention

Acquisition

KM Process Flow

LCM & KM

• KM aids to effective practice of legal compliance management

• Modification in compliance checklists according to developments

• Emerging laws can be included in legal compliance program on a real time basis

• Back-up support

Developing LCM System

• LCM Module– Compliance Team– Responsibility & Accountability– Information Flow between various locations– Identification – Awareness– Development of Checklists– Consolidation of Checklists– Development of Manual / SOPs– Incorporation of changes on real time basis


• LCM Module– Development of Certifications, Reports

etc.– Periodic Review at different levels– Follow-up Action Report– Internal Concurrent Audit– Independent Periodic Audit– Participation in Ratings, Surveys etc.


• Flow– The designated officer(s) at all Units to prepare

a list of applicable laws and discuss with the Unit Head

– Unit Heads to forward the list to Secretarial / Legal Compliance Dept.

– Sec / LC Department to finalise the lists, develop a standard format of checklist

– Sec / LC Dept. to revert to the Unit Head

Indicative Lists of Laws

Emblems and Names (Prevention of Improper Use) Act, 1950

Sick Industrial Companies (Special Provisions) Act, 1985

Stamp Law

NBFC Regulations

Foreign Exchange Management Act, 1999

Depositories Act, 1996

Securities Contracts (Regulation) Act, 1956

SEBI Act, 1992

Companies Act, 1956

Secretarial

The Personal Injuries ( Compensation ) Insurance Act, 1963

Maternity Benefit Act, 1961

Contract Labour (Regulation & Abolition) Act, 1970

Apprentices Act, 1961

Workmen’s Compensation Act, 1923

Employees’ State Insurance Act, 1948

Employees’ Provident Funds & Miscellaneous Provisions Act, 1952

Equal Remuneration Act, 1976

Payment of Gratuity Act, 1972

Payment of Bonus Act, 1965

Payment of Wages Act, 1936

Minimum Wages Act, 1948

Industrial Disputes Act, 1947

Employment Exchanges (Compulsory Notification of Vacancies) Act,1959

Industrial Employment (Standing Orders) Act, 1946

Factories Act, 1948

HR

The Foreign Exchange Management Act, 1999

Negotiable Instrument Act, 1881

Service Tax, 1994

Customs Act, 1962

The Central Excise Act, 1944

State Tax on Professions

State Sales Tax / VAT Act

The Central Sales Tax Act, 1956

Wealth Tax Act, 1957

Income Tax Act, 1961

Finance

The Foreign Trade (Development & Regulation) Act, 1992

Sale of Goods Act

MRTP Act / Competition Act

Trade Marks Act, 1999

Patents Act, 1970

Copyright Act, 1957

Consumer Protection Act, 1986

Bureau of Indian Standards Act, 1986

The Standards Of Weights & Measures Rules, 1977

The Standards Of Weights & Measures(Enforcement) Act, 1985

The Standards Of Weights & Measures Act, 1976

Essential Commodities Act, 1955

Sales / Marketing

The Indian Wireless Telegraphy Act, 1933

The Telegraph Wires (Unlawful Possession) Act, 1950 & The Telegraph Wires (Unlawful Possession) Rules, 1951 & The Telegraph Wires (Permission for Sale and Purchase) Rules, 1954

The Indian Telegraph Act, 1885 & The Indian Telegraph Rules, 1951

The Gas Cylinder Rules, 2004

The Static And Mobile Pressure Vessels (Unfired) Rules, 1981

The Explosives Act, 1884

The Petroleum Rules, 2002

The Petroleum Act, 1934

The Manufacture, Storage And Import Of Hazardous Chemicals Rules, 1989

The Hazardous Waste (Management & Handling) Rules, 1989

Water (Prevention & Control of Pollution) Cess Act, 1977

Water (Prevention & Control of Pollution) Act, 1974

Air (Prevention & Control of Pollution) Act, 1981

The Environment Protection Act, 1986

The Mines And Minerals (Regulation & Development) Act, 1957

The Mines Act, 1952

Boilers Act, 1923

Project

PQR Department:Primary Responsibility

:Ultimate Responsibility

ABC Limited – XYZ Unit

5.

4.

3.

2.

1.

Law – 25.

4.

3.

2.

1.

Law – 1

Reasons & Action Plan for Non Compliance

Person(s) responsible

Actual Date of Compliance

Due Date of Compliance

Requirement in brief

Section/Rule

Sl.No.

Sd/-

Compliance Officer


• Flow contd…..– The designated officer(s) at all Units to prepare

exhaustive checklist and discuss with the Unit Head– The Unit Head to forward the checklist to Sec / LC

Department– Sec / LC Department to consolidate the checklists,

analyse the level of compliance & instances of non-compliance, and prepare suggested course of action

– Chief Compliance Officer to prepare a report and submit to the Board


– The Board to review the Compliance Report periodically

• Periodicity – May be quarterly• Views/comments on Instances of non-compliance• Discussions on reasons of non-compliance & way forward

– Minuting, preparation of action taken report– Circulating the action taken report – Updating the action taken report and ensuring

compliance

Legal Compliance Management System – Flow

Identification Preparation of List

Identification of

Compliance AreasPreparation of

Compliance Reports

Review Follow-up Action Amendments

Yes

No

END

LCM–Specific Activities & Role of CS

• Compliance & Ethical Policy / Code• Statutory Compliance Manual• Time-bound Compliance Calendar• Compliance Report – ‘Comply or Explain’• Periodic Review – MIS Reports• Audits

– Internal– External

• Web-based Compliance Module– Integration of all units with Chief Compliance

Officer’s Office– Compliance Calendar– Reminders by way of Pop-Ups– Status update– Generation of reports

• Regular reports• Exception report


• Circulation of event-based Knowledge Memos containing changes with impact analysis and suggested course of action

• Circulation of periodic Bulletin covering important developments & landmark judicial pronouncements of relevance

• Help Desk


• Legal Notices – Timely & effective action– Priority – Identified Responsibility– Note on Analysis, Impact and Response – Quick Answer– Follow-up Action– Preparedness for the future action– Lessons of Learning


• Legal documents, agreements– General Laws (eg. Contract Act, Sale of Goods Act

etc.)– Covenants / Obligations– Tenure– Signing Authority– Affixation of Common Seal– Time-bound compliances / Renewal – Tracking System



• Role of Company Secretary– Overcome the challenges– Identifying the regulators– ABC analysis of applicable laws– Finalising SOPs / Manuals / Certificates– Follow-up exercise– Collation of reports / certificates

Challenges• Businesses’ Perceptions of Compliance

– Too much control and bureaucracy – Too conservative – easy to say no – Impediment to business – too slow – Uncoordinated and disjointed – too “sequential”– Not enough product knowledge or business sense

• Operational Hazards– Mapping and connecting all team members spread across – Training – Continuous upgradation

• Cost of Compliance– Cost of control is too high

• Role of Company Secretary– Analysis of risk areas / instances of non-

compliance and suggesting the forward path– Briefing the Board members and taking their

insight– Conveying the Board’s views / decisions

appropriately and following-up– Apprising the team members of any change



• Role of Company Secretary– Nodal Point of contact for regulators– Interface between the company & its stakeholders– Interaction with other departments in the organisation

eg. Legal, tax, risk management etc.– Custodian of document, records etc.– A knowledge in ensuring compliance & promoting

good governance norms– Authorised professional (S.383A, Cl.47, 49)– Instrumental in ensuring compliance & promoting good

governance

Legal Complian

ce

Management

Corporate Governance

Knowledge Management

COMPANY SECRETARIES

AND….. ALL THIS HAS TO BE DONE BY US –

Thank You

Your Feedback is invited at [email protected]

Presentation on ‘Legal Compliance...

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