CORPORATE GOVERNANCE AND THE COMPANIES ACT, 2013

Reflections on Companies Act, 2013- Conference O.P. Jindal University 24th October, 2013

Arjya B. Majumdar
Assistant Professor, Assistant Director, Centre for Global Corporate and Financial Law and Policy, Jindal Global Law School

OUR STORY BEGINS~ WHAT IS CORPORATE GOVERNANCE?

A set of rules which govern the relationships between the company, its shareholders, directors and other stakeholders
Shareholders as true owners of corporations

Shareholders

Directors

Company

Directors play a role as trustees on behalf of shareholders

Consumers

Vendors

ORIGINS
Revived interest in Corporate Governance in 2000-01 Accounting frauds involving Enron and WorldCom Sarbanes Oxeley Act, 2002
Disclosure Controls Conduct of Audits and Auditor Independence Corporate Responsibility Conflicts of Interest for securities analysts Accountability for corporate fraud

CORP GOVERNANCE IN INDIA- PRE 2013

Naresh Chandra Report on Corporate Audit and Governance Narayan Murthy Committee on Corporate Governance Clause 49 of the Listing Agreement
Independent Directors Annual and Quarterly Disclosures Committees of the Board of Directors
Audit Remuneration Shareholders Grievances

UNDER THE COMPANIES ACT 2013

Companies Act Serious Fraud Investigation Class Action Directors Independent Directors Code of Conduct Liabilities Board Committees Audit Committee Nomination and Remuneration Committee Shareholders Relationship Committee Internal Audit

DIRECTORS
Atleast one director who is resident in India Atleast one woman director for a prescribed class of companies Certain public companies to have one director elected by small shareholders Fiduciary capacity of Directors Act in accordance with the Articles Act in good faith to promote the objects of the company Exercise due and reasonable care, skill and diligence Not get involved in situations of conflict of interest Not to achieve any undue gain or influence

INDEPENDENT DIRECTORS
Similar concept to that in the Listing Agreement One third of the board should comprise of Independent Directors if the Chairman is a non-executive director Half of the board should comprise of Independent Directors if the Chairman is an executive director Person of integrity, should possess relevant skill and experience No material pecuniary relationship or transactions with the company or related parties

INDEPENDENT DIRECTORS (CONTD.)

Schedule IV of the Companies Act, 2013 provides for a code for independent directors
Act objectively and constructively Exercise responsibilities in a bonafide manner Not allow extraneous considerations to vitiate objectivity and independent judgment Bring an objective view in the evaluation of board and management Safeguard the interests of all stakeholders, particularly the minority shareholders Ensure that related party transactions are deliberated upon Report concerns about unethical behavior, actual or suspected fraud or violation of the companys code of conduct or ethics policy.

INDEPENDENT DIRECTORS (CONTD.)

SEBI consultation paper to review corporate governance norms in India
Listing agreement would have to be brought in line with the Companies Act, 2013 Certain listed companies my have to revisit the appointment of their independent directors Code of conduct is qualitative in nature- demonstrating compliance may be difficult

Independent director immunity

BOARD COMMITTEES - AUDIT

Audit Committee to comprise of atleast three directors of whom only onethird should be managing or whole time directors
Majority of members should be financially literate Duties of the Audit Committee not defined- Board to determine the terms of reference Establishment of vigilance mechanism- provide direct access to the Audit Committee chairperson in exceptional and appropriate cases of victimization (not mandatory under the Listing Agreement)

BOARD COMMITTEESNOMINATION AND REMUNERATION

Comprised of three or more non-executive directors, of which atleast half must be independent directors Duties include identification and recommendation of appropriate senior management and directors to the board Must formulate a policy to provide for appointment and remuneration of directors, key managerial personnel and other employees In the event that a company does not have profits, or where profits are inadequate, managerial remuneration requires approval of the Nomination and Remuneration Committee

BOARD COMMITTEESSTAKEHOLDERS RELATIONSHIPS

A company having more than 1000 shareholders, debenture holders, deposit holders and other security holders must constitute a Stakeholders Relationships Committee
Minimum strength not provided for- however, the chairman must be a nonexecutive director Similar duties to that of the existing shareholders grievances committee Expansion of scope from shareholders grievances under the Listing Agreement to Stakeholders Relationships under the Companies Act, 2013

INTERNAL AUDIT
Certain companies (as may be prescribed) must appoint an internal auditor to evaluate the functions and activities of the company
Separate from statutory auditors

Such internal auditor may be a chartered or a cost accountant or other professional appointed by the board- may also engage an external agency Rules for the conduct and report of internal audits yet to be prescribed

THANK YOU