Professional Documents
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PROJECT REPORT Corporate Governance
PROJECT REPORT Corporate Governance
Companies pool capital from a large investor base both in the domestic and
in the international capital markets. In this context, investment is ultimately
an act of faith in the ability of a company’s management. In order to manage
the affairs of a company and to act in the best interests of all at all times,
there must be a system whereby the directors are entrusted with
responsibilities and duties in relation to the direction of the company affairs.
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Meaning & Definition of Corporate Governance
A means whereby society can be sure that large corporations are well-run
institutions to which investors and lenders can confidently commit their
funds.
Considering the ethical failures in the last several years and the resulting
crisis in confidence...A sincere commitment to creating and sustaining an
ethical business culture in public and private sectors (has never been so
important).
As per ICSI:
Corporate Governance is the best Management practices compliance of law
in true letter and adherence to ethical standards for effective management
and distribution of wealth and discharge of social responsibility for
sustainable development of all stakeholders.
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HISTORICAL BACKGROUND
Duties of a King
Corporate governance …
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Corporate governance are the policies, procedures and rules governing the
relationships between the shareholders, (stakeholders), directors and
managers in a company, as defined by the applicable laws, the corporate
charter, the company’s bylaws, and formal policies.
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Improving performance
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INDIAN SCENARIO
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INTERNATIONAL SCENARIO
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The important legislations for regulating the entire corporate structure and
for dealing with various aspects of governance in companies are Companies
Act, 1956 and Companies Bill, 2004. These laws have been introduced and
amended, from time to time, to bring more transparency and accountability
in the provisions of corporate governance. That is, corporate laws have been
simplified so that they are amenable to clear interpretation and provide a
framework that would facilitate faster economic growth.
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Companies Laws
The Ministry of Corporate Affairs (MCA) is the main authority for regulating
and promoting efficient, transparent and accountable form of corporate
governance in the Indian corporate sector. It is constantly working towards
improvement in the legislative framework and administrative set up, so as to
enable easy incorporation and exit of the companies, as well as convenient
compliance of regulations with transparency and accountability in corporate
governance. It is primarily concerned with administration of the Companies
Act, 1956 and related legislations.
The main objectives with which this Act has been introduced are to:- (i) help
in the development of companies on healthy lines; (ii) maintain a minimum
standard of good behaviour and business honesty in company promotion
and management; (iii) protect the interests of the shareholders as well as
the creditors; (iv) ensure fair and true disclosure of the affairs of companies
in their annual published balance sheet and profit and loss accounts; (v)
ensure proper standard of accounting and auditing; (vi) provide fair
remuneration to management and Board of Directors as well as to
company's employees; etc.
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Every company shall in each year, hold in addition to any other meetings, a
general meeting as its annual general meeting and shall specify the meeting
as such in the notices calling it; and not more than fifteen months shall
elapse between the date of one annual general meeting of a company and
that of the next. At each annual general meeting, every company shall
appoint an auditor or auditors to hold office from the conclusion of that
meeting until the conclusion of the next annual general meeting and shall,
within seven days of the appointment, give intimation thereof to every
auditor so appointed.
Every auditor of a company shall have a right of access at all times to the
books and accounts and vouchers of the company, whether kept at the head
office of the company or elsewhere, and shall be entitled to require from the
officers of the company such information and explanations as the auditor
may think necessary for the performance of his duties as auditor.
The auditor shall inquire: - (i) whether loans and advances made by the
company on the basis of security have been properly secured and whether
the terms on which they have been made are not prejudicial to the interests
of the company or its members; (ii) whether transactions of the company
which are represented merely by book entries are not prejudicial to the
interests of the company; etc.
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Every company shall keep one or more registers in which shall be entered
separately particulars of all contracts or arrangements, including the
following particulars to the extent they are applicable in each case, namely:-
(i) the date of the contract or arrangement; (ii) the names of the parties
thereto; (iii) the principal terms and conditions thereof; (iv) in the case of a
contract or arrangement to which this Act applies, the date on which it was
placed before the Board; (v) the names of the directors voting for and
against the contract or arrangement and the names of those remaining
neutral. Further, every company shall keep at its registered office a register
of its directors, managing director, managing agent, secretaries and
treasurers, manager and secretary.
A director may receive remuneration by way of a fee for each meeting of the
Board, or a committee thereof, attended by him. A director who is neither in
the whole-time employment of the company nor a managing director may
be paid remuneration, either by way of a monthly, quarterly or annual
payment with the approval of the Central Government; or by way of
commission if the company by special resolution authorises such payment.
However, the remuneration paid to such director, or where there is more
than one such director, to all of them together, shall not exceed:- (i) one per
cent of the net profits of the company, if the company has a managing or
whole-time director, a managing agent or secretaries and treasurers or a
manager; (ii) three per cent of the net profits of the company, in any other
case.
Every public company having paid-up capital of not less than five crores of
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The Audit Committee should have discussions with the auditors periodically
about internal control systems, the scope of audit including the observations
of the auditors and review the half-yearly and annual financial statements
before submission to the Board and also ensure compliance of internal
control systems. It shall have authority to investigate into any matter in
relation to the items specified by the Board and for this purpose, shall have
full access to information contained in the records of the company and
external professional advice, if necessary. The recommendations of the
Audit Committee on any matter relating to financial management, including
the audit report, shall be binding on the Board. If the Board does not accept
the recommendations of the Audit Committee, it shall record the reasons
thereof and communicate such reasons to the shareholders.
Besides, a listed public company may, and in the case of resolutions relating
to such business as the Central Government may, by notification, declare to
be conducted only by postal ballot, shall, get any resolution passed by
means of a postal ballot, instead of transacting the business in general
meeting of the company. Where a company decides to pass any resolution
by resorting to postal ballot, it shall send a notice to all the shareholders,
along with a draft resolution explaining the reasons thereof, and requesting
them to send their assent or dissent in writing on a postal ballot within a
period of thirty days from the date of posting of the letter. If a resolution is
assented to by a requisite majority of the shareholders by means of postal
ballot, it shall be deemed to have been duly passed at a general meeting
convened in that behalf. However, if a shareholder sends his assent or
dissent in writing on a postal ballot and thereafter any person fraudulently
defaces or destroys the ballot paper or declaration of identify of the
shareholder, such person shall be punishable with imprisonment for a term
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which may extend to six months or with fine or with both.
The important step in this direction has been the Companies Bill, 2004,
which has been introduced to provide the comprehensive review of the
company law. It contained important provisions relating to corporate
governance, like, independence of auditors, relationship of auditors with the
management of company, independent directors with a view to improve the
corporate governance practices in the corporate sector. It is subjected to
greater flexibility and self-regulation by companies, better financial and non-
financial disclosures, more efficient enforcement of law, etc.
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SEBI Laws
Every recognised stock exchange shall furnish the Central Government with
a copy of the annual report, and such annual report shall contain such
particulars as may be prescribed. It may make rules or amend any rules
made by it to provide for all or any of the following matters, namely:- (i) the
restriction of voting rights to members only in respect of any matter placed
before the stock exchange at any meeting; (ii) the regulation of voting rights
in respect of any matter placed before the stock exchange at any meeting so
that each member may be entitled to have one vote only,
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irrespective of his share of the paid-up equity capital of the stock exchange;
(iii) the restriction on the right of a member to appoint another person as
his proxy to attend and vote at a meeting of the stock exchange; etc.
If, in the opinion of the Central Government, an emergency has arisen and
for the purpose of meeting the emergency, the Central Government
considers it expedient so to do, it may, by notification in the Official Gazette,
for reasons to be set out therein, direct a recognised stock exchange to
suspend such of its business for such period not exceeding seven days and
subject to such conditions as may be specified in the notification, and, if, in
the opinion of the Central Government, the interest of the trade or the
public interest requires that the period should be extended, it may, by like
notification extend the said period from time to time.
This Act was enacted to protect the interests of investors in securities and to
promote the development of, and to regulate, the securities market and for
matters connected therewith or incidental thereto. For this purpose, the
SEBI (the Board), by regulation, specify:- (i) the matters relating to issue of
capital, transfer of securities and other matters incidental thereto; and (b)
the manner in which such matters shall be disclosed by the companies.
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may be associated with securities market shall buy, sell or deal in securities
except under, and in accordance with, the conditions of a certificate of
registration obtained from the Board in accordance with the regulations
made under this Act.
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I. Board of Directors
iii. For the purpose of the sub-clause (ii), the expression ‘independent
director’ shall mean a non-executive director of the company who:
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ii. the legal firm(s) and consulting firm(s) that have a material
association with the company.
Explanation
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i. The board shall meet at least four times a year, with a maximum
time gap of four months between any two meetings. The minimum
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Explanation:
1. For the purpose of considering the limit of the committees on
which a director can serve, all public limited companies, whether
listed or not, shall be included and all other companies including
private limited companies, foreign companies and companies
under Section 25 of the Companies Act shall be excluded.
iii. The Board shall periodically review compliance reports of all laws
applicable to the company, prepared by the company as well as
steps taken by the company to rectify instances of non-compliances.
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(D) Code of Conduct
i. The Board shall lay down a code of conduct for all Board members and
senior management of the company. The code of conduct shall be posted
on the website of the company.
ii. All Board members and senior management personnel shall affirm
compliance with the code on an annual basis. The Annual Report of the
company shall contain a declaration to this effect signed by the CEO.
Explanation:
For this purpose, the term “senior management” shall mean personnel of
the company who are members of its core management team excluding
Board of Directors. Normally, this would comprise all members of
management one level below the executive directors, including all
functional heads.
A qualified and independent audit committee shall be set up, giving the
terms of reference subject to the following:
Explanation 1: The term “financially literate” means the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss
account, and statement of cash flows.
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The audit committee should meet at least four times in a year and not more
than four months shall elapse between two meetings. The quorum shall be
either two members or one third of the members of the audit committee
whichever is greater, but there should be a minimum of two independent
members present.
The audit committee shall have powers, which should include the following:
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11.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.
12.To review the functioning of the Whistle Blower mechanism, in case the
same is existing.
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discharging that function) after assessing the qualifications, experience
& background, etc. of the candidate.
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IV. Disclosures
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The company shall lay down procedures to inform Board members about
the risk assessment and minimization procedures. These procedures shall
be periodically reviewed to ensure that executive management controls
risk through means of a properly defined framework.
(D) Proceeds from public issues, rights issues, preferential issues etc.
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(E) Remuneration of Directors
(F) Management
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(G) Shareholders
i. In case of the appointment of a new director or re-appointment of a
director the shareholders must be provided with the following
information:
a. A brief resume of the director;
b. Nature of his expertise in specific functional areas;
c. Names of companies in which the person also holds the
directorship and the membership of Committees of the Board;
and
d. Shareholding of non-executive directors as stated in Clause 49
(IV) (E) (v) above
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ia. Disclosure of relationships between directors inter-se shall be made
in the Annual Report, notice of appointment of a director,
prospectus and letter of offer for issuances and any related filings
made to the stock exchanges where the company is listed.
ii. Quarterly results and presentations made by the company to
analysts shall be put on company’s web-site, or shall be sent in such
a form so as to enable the stock exchange on which the company is
listed to put it on its own web-site.
iii. A board committee under the chairmanship of a non-executive
director shall be formed to specifically look into the redressal of
shareholder and investors complaints like transfer of shares, non-
receipt of balance sheet, non-receipt of declared dividends etc. This
Committee shall be designated as ‘Shareholders/Investors Grievance
Committee’.
iv. To expedite the process of share transfers, the Board of the company
shall delegate the power of share transfer to an officer or a
committee or to the registrar and share transfer agents. The
delegated authority shall attend to share transfer formalities at least
once in a fortnight.
V. CEO/CFO certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the
Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or
any other person heading the finance function discharging that function
shall certify to the Board that:
a. They have reviewed financial statements and the cash flow statement for
the year and that to the best of their knowledge and belief :
ii. 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.
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ii. significant changes in accounting policies during the year and that the
same have been disclosed in the notes to the financial statements;
and
iii. instances of significant fraud of which they have become aware and
the involvement therein, if any, of the management or an employee
having a significant role in the company’s internal control system over
financial reporting.
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VII. Compliance
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action lawsuits against Satyam, but given the company's precarious finances,
it is unclear how much money investors will be able to recover.
According to experts from Wharton and elsewhere, the Satyam debacle will
have an enormous impact on India's business scene over the coming
months. The possible disappearance of a top IT services and outsourcing
giant will reshape India's IT landscape. Satyam could possibly be sold -- in
fact, it had engaged Merrill Lynch to explore "strategic options," but the
investment bank has withdrawn following the disclosure about the fraud. It
is widely believed that rivals such as HCL, Wipro and TCS could cherry pick
the best clients and employees, effectively hollowing out Satyam. Another
possible impact could be on the trend of outsourcing to India, since India's IT
firms handle sensitive financial information for some of the world's largest
enterprises. The most significant questions, however, will be asked about
corporate governance in India, and whether other companies could follow
Satyam's Raju in revealing skeletons in their own closets.
'Riding a Tiger'
The matter didn't die there, as Raju may have hoped. In the next 48 hours,
resignations streamed in from Satyam's non-executive director and Harvard
professor of business administration Krishna Palepu and three independent
directors -- Mangalam Srinivasan, a management consultant and advisor to
Harvard's Kennedy School of Government; Vinod Dham, called the "father of
the Pentium chip" and now executive managing director of NEA Indo-US
Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the
Indian School of Business in Hyderabad (ISB). Rao had chaired both
December 16 board meetings. On January 8, he resigned his position as the
ISB dean. In a letter to the ISB community, he explained: "Unfortunately,
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"If there were one or two more such accounting scandals in the next six
months, it would make international investors more wary," says Wharton
management professor Michael Useem. "One example would put people on
guard; several examples would be enough to tell big investment money
managers that they have to be especially careful working in that
environment."
Useem also warns against overreacting. "Don't assume other firms are
guilty," he says. But he considers the situation to be an "alerting call" for
investors to check where their money is, and for auditors and independent
directors in all major firms to take a look at the books.
"When you have companies that are ostensibly growing their top lines at
30%, 40% or 50%, it is possible to paper over things," Singh says. "Satyam
was doing it by boosting sales and profits; Bernie Madoff was doing it by
boosting rates of return. When growth rates slow down, you are unable to
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hide the financial reality of how much cash you actually have. It is possible
that during this slowdown period, more scandals will come to light." (U.S.
financier Madoff last month admitted to running a $50 billion Ponzi scheme
to keep his hedge fund afloat.)
Singh adds that companies with "the bluest of blue-chip reputations [such
as] Infosys and TCS" could actually gain in the current environment, because
of a potential "flight to quality" among client companies. "The third-tier and
weaker companies will probably undergo a lot more scrutiny," he says.
According to Ravi Aron, senior fellow at the Mack Center for Technological
Innovation at Wharton, the Satyam fallout could affect India's IT offshoring
and outsourcing firms in several ways. An immediate impact could be
skepticism on the part of clients about whether Indian IT firms can be
entrusted with sensitive financial information. "Clients could begin to ask,
'How much do I know about this IT company and its governance?'" says
Aron. "Is the IT service provider doing anything that could jeopardize the
client's compliance with FASB, Sarbanes Oxley, Basel II or other financial
regulations?"
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has an advantage in arguing that the problem is limited to Satyam and is not
systemic. "India is not perceived like Russia -- it is neither everyone's darling
nor the plague," he says. "This works to the country's advantage because it
deflects the blame of such occurrences to the way governance works in
emerging economies rather than to India. What regulators in India need to
do in response to Satyam is to find out quickly if other companies have been
doing similar things. The proper response is to deal with and defuse the
problem as soon as possible."
Guillen notes that what makes Satyam's case unusual is that it had listed its
ADRs on the NYSE. "Companies in emerging economies have trouble raising
capital at low costs. The literature shows that is the reason they want to list
in the U.S., where they accept a higher level of governance in order to raise
capital at a lower cost. The fact that Satyam listed its ADRs in the U.S. but
still had such serious governance problems makes this case particularly
disturbing."
Guillen adds, though, that India has several well-regarded IT companies. "If
one or two of them don't make the grade, it should not shake investor
confidence. It shows that investing in emerging markets is risky. Investors
always balance risks and rewards. If the IT sector in India continues to
remain competitive, the Satyam episode will just be a footnote in India's
business story. If the sector becomes uncompetitive, then that would create
a serious problem."
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Useem says that if one were to take an inference from recent high-profile
scandals outside of India, "there would be a redoubled effort [in India] on
the part of investors and independent directors at other companies to
ensure that nothing like what happened at Satyam happens under their
noses."
Useem draws a parallel between what occurred at Satyam with the scandals
at WorldCom and Tyco, rather than at Enron. "At WorldCom, the CFO and
the CEO were knowingly misstating the accounting and financials of the firm;
at Tyco, the CEO and the CFO were knowingly taking money from the
company for personal purposes," he says. "Satyam's disaster has a parallel to
these acts of malfeasance."
Useem recalls the CEO and promoter of a Chinese solar panel company who
"wanted his company to be extremely well governed" and therefore listed it
on the New York Stock Exchange. "He wanted a great board of directors and
thus listed the company fully on the NYSE -- not as an ADR -- for the sole
purpose ... of forcing himself to be disciplined in the governance policies his
company pursues."
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Singh adds that the Satyam scandal doesn't necessarily warrant more
regulation. "There is no need to strengthen corporate governance
regulations [in India]," he says. "The issue is really more one of leadership at
the board level. The tone gets set by the chairman of the board; it's much
more a matter of culture within the board room, of the group dynamics
within the board."
Truth in Numbers
Singh says he drew "a level of confidence" from the accounting rigor and
governance mechanisms at Infosys, where he was an independent director
from 2000 to 2003. He recalls how T.V. Mohandas Pai, the company's then-
chief financial officer (now a director overseeing human resources) "would
take so much time going into accounting details."
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been puzzled that the company was proposing to invest $1.6 billion in real
estate at a time when a competitor as formidable as HCL was gunning for
one of its most lucrative markets. "IT is a highly capital-intensive business,
especially in India," says Aron. "What on earth would compel Satyam to
invest $1.6 billion in real estate at a time when competition with HCL was
about to grow more intense? That is what the directors should have been
asking." Instead, he adds, like the dog that didn't bark in the Sherlock
Holmes story, the matter was allowed to slide.
Independent Defectors
Useem wonders if the Satyam directors who resigned actually did the right
thing. "The leadership dictum is that you need to stay the course, stay in the
game, face the problem and solve the problem," he says. "Did the four
directors who resigned have an option of banding together, staying on the
board and changing governance?" Useem adds that "it is often very hard to
stay the course. I am empathetic with people who have difficulty [making
that decision]."
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Singh says it is important to remember who the ultimate victims are in cases
like Satyam. "This is a real tragedy; the people who will be left holding the
bag will be the shareholders."
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Several studies in India and abroad have indicated that markets and
investors take notice of well managed companies and respond
positively to them. Such companies have a system of good corporate
governance in place, which allows sufficient freedom to the board and
management to take decisions towards the progress of their
companies and to innovate, while remaining within the framework of
effective accountability.
In today's globalised world, corporations need to access global pools
of capital as well as attract and retain the best human capital from
various parts of the world. Under such a scenario, unless a
corporation embraces and demonstrates ethical conduct, it will not be
able to succeed.
The credibility offered by good corporate governance procedures also
helps maintain the confidence of investors – both foreign and
domestic – to attract more long-term capital. This will ultimately
induce more stable sources of financing.
A corporation is a congregation of various stakeholders, like
customers, employees, investors, vendor partners, government and
society. Its growth requires the cooperation of all the stakeholders.
Hence it imperative for a corporation to be fair and transparent to all
its stakeholders in all its transactions by adhering to the best
corporate governance practices.
Good Corporate Governance standards add considerable value to the
operational performance of a company by:
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CORPORATE GOVERNANCE PROVISIONS AS PER COMPANIS ACT, 2013.
Contracts with related parties will require prior approval by the board and,
in some cases, by shareholders. By a unique provision, shareholders
interested in the matter cannot vote on these general meeting resolutions.
Small shareholders are ensured board participation by one director
representing them. Related-party contracts must be justified and fully
disclosed in the Director's Report. These approvals will, however, not be
required if the transactions are on arm's-length basis. The directors,
promoters, key management personnel and top 10 shareholders in listed
companies must report any share purchase or sale within 15 days to the
registrar.
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CORPORATE GOVERNANCE Rahul Kumar Agarwal
Reg. No. – 120552032/08/2011
Working directors and senior management staff have been prohibited from
entering into any call or put option on securities of the company, subsidiary
or associates. Insider trading in any company will fetch penalties. The
Remuneration Committee, headed by an ID, shall decide a remuneration
policy, having fixed and variable pay, and pay relationship between directors
and senior management, and to be disclosed to shareholders.
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CORPORATE GOVERNANCE Rahul Kumar Agarwal
Reg. No. – 120552032/08/2011
statutory board.
For private companies, many exemptions have been withdrawn. All loans to
working directors and other parties, related-party transactions, a business
diversification or capital raising, etc, will need board or general body
approval. Disclosure requirements to shareholders have been enhanced.
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