GRMCE New PDF

Index
Sr. No. Chapter Name Pg. No.

1 Conceptual Framework of Corporate Governance 1.1 – 1.24
2 Legislative Framework of Corporate Governance in 2.1 – 2.13

India
3 Board effectiveness 3.1 – 3.8
4 Board Process through SS 4.1 – 4.10
5 Board Committee 5.1 – 5.10

6 Corporate Policies and Disclosures 6.1 – 6.7
7 Accounting and Audit Related Issues, RPT and Vigil 7.1 – 7.15
Mechanism
8 Corporate Governance and Shareholders Rights 8.1 – 8.12
9 Corporate Governance And Other Stakeholders 9.1 – 9.7
10 Governance and Compliance Risk 10.1 – 10.9
11 Corporate Governance forum 11.1 – 11.9
12 Risk Management 12.1 – 12.9
13 Compliance Management 13.1 – 13.14
14 Internal Control 14.1 – 14.7
15 Reporting 15.1 – 15.10
16 Ethics and Business 16.1 – 16.35

17 CSR and Sustainability 17.1 – 17.37
18 Anti corruption & Anti Bribery Laws in India 18.1 – 18.6

CS Praveen Choudhary Conceptual Framework of Governance
www.pcbaba.in (The EcoLawgy Expert)
Conceptual Framework of Corporate Governance

CORPORATE
Corporate or a Corporation is derived from Latin term “corpus” which means a “body”.

GOVERNANCE
The root of the word governance is from ‘gubernate’, which means to steer.
When combined Corporate Governance means a set of systems procedures, policies,
practices, standards put in place by a corporate to ensure that relationship with various
stakeholders is maintained in transparent and honest manner

VARIOUS DEFINITIONS OF CORPORATE GOVERNANCE

Corporate Governance is the application of best management practices, compliance of
law in true letter and spirit and adherence to ethical standards for effective management
and distribution of wealth and discharge of social responsibility for sustainable
development of all stakeholders.”(ICSI)

Corporate Governance is concerned with the way corporate entities are governed, as
distinct from the way business within those companies is managed. Corporate
governance addresses the issues facing Board of Directors, such as the interaction with
top management and relationships with the owners and others interested in the affairs
of the company” Robert Ian (Bob) Tricker (who introduced the words corporate
governance for the first time in his book in 1984)(James D. Wolfensohn (9th President
World Bank)

Corporate governance deals with laws, procedures, practices and implicit rules that
determine a company’s ability to take informed managerial decisions vis-a-vis its
claimants - in particular, its shareholders, creditors, customers, the State and employees.
(Confederation of Indian Industry (CII)

ICSI PRINCIPLE FOR GOVERNANCE
1) Sustainable development of all stakeholders
2) Effective management and distribution of wealth
3) Discharge of social responsibility
4) Application of best management practices

NEED FOR CORPORATE GOVERNANCE
Corporate Governance is needed to create a corporate culture of Transparency,
accountability and disclosure. It refers to compliance with all the moral & ethical values,
legal framework and voluntarily adopted practices.

BENEFITS OF CORPORATE GOVERNANCE
1. Reduced Risk of Corporate Crisis and Scandals
2. Corporate Performance
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3. Better Access to Global Market

4. Enhanced Investor Trust:
5. Combating Corruption
6. Easy Finance From Institutions

CORPORATE GOVERNANCE AND COMPANIES ACT, 2013
Some of the Provisions of Companies Act, 2013 related to Corporate Governance
are:
1. Mandatory provisions related to independent directors, woman director, Key
Managerial Personnel
2. Enhanced disclosures and assertions in Board Report, Annual Return and Directors’
Report with regard to Managerial Remuneration, risk management, internal control
for financial reporting, legal compliance, Related Party Transactions, Corporate Social
Responsibility, shareholding pattern, public money etc.
3. Stricter yet forward-looking procedural requirements for Secretarial compliances
and ICSI Secretarial Standards made mandatory.
4. Enhanced scope of Related Party Transactions and introduction of concept of arm’s
length pricing.
5. Introduction of mandatory provisions regarding Whistle Blower Policy, Audit
Committee, Nomination and Remuneration Committee, Stakeholders Relationship
Committee, and Corporate Social Responsibility Committee.

ELEMENTS OF GOOD CORPORATE GOVERNANCE
ROLE AND POWERS OF BOARD
Good governance is decisively the manifestation of personal beliefs and values which
configure the organizational values, beliefs and actions of its Board. The Board as a main
functionary is primary responsible to ensure value creation for its stakeholders.

LEGISLATION
Clear and unambiguous legislation and regulations are fundamental to effective
corporate governance. Legislation that requires continuing legal interpretation or is
difficult to interpret on a day-today basis can be subject to deliberate manipulation or
inadvertent misinterpretation.

MANAGEMENT ENVIRONMENT
Management environment includes setting-up of clear objectives and appropriate ethical
framework, establishing due processes, providing for transparency and clear enunciation
of responsibility and accountability, implementing sound business planning, encouraging
business risk assessment, having right people and right skill for the jobs, establishing
clear boundaries for acceptable behaviour, establishing performance evaluation
measures and evaluating performance and sufficiently recognizing individual and group
contribution.

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BOARD SKILLS
To be able to undertake its functions efficiently and effectively, the Board must possess
the necessary blend of qualities, skills, knowledge and experience. Each of the directors
should make quality contribution. A Board should have a mix of the following skills,
knowledge and experience:

BOARD INDUCTION AND TRAINING
Directors must have a broad understanding of the area of operation of the company’s
business, corporate strategy and challenges being faced by the Board.

CODE OF CONDUCT
It is essential that the organization’s explicitly prescribed norms of ethical practices and
code of conduct are communicated to all stakeholders and are clearly understood and
followed by each member of the organization.
BOARD MEETINGS
Directors must devote sufficient time and give due attention to meet their obligations.
Attending Board meetings regularly and preparing thoroughly before entering the
Boardroom increases the quality of interaction at Board meetings.

EVIDENCE OF CORPORATE GOVERNANCE FROM THE ARTHASHASTRA
Kautilya’s Arthashastra maintains that for good governance, all administrators, including
the king were considered servants of the people. Good governance and stability were
completely linked. There is stability if leaders are responsive, accountable and
removable.
KAUTILYA’S FOURFOLD DUTY OF A KING
RAKSHA VRIDDHI PALANA YOGAKSHEMA
literally means literally means literally means literally means
protection, in growth, in the maintenance/compliance, well being and in
the corporate present day in the present day context Kautilya’s
scenario it can context can be it can be equated to Arthashastra it is
be equated with equated to compliance to the law in used in context of
the risk stakeholder letter and spirit. a social security
management value system. In the
aspect. enhancement present day
context it can be
equated to
corporate social
responsibility.

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CORPORATE GOVERNANCE THEORIES
(a) Agency Theory
According to this theory, managers act as ‘Agents’ of the corporation. The owners set the
central objectives of the corporation. Managers are responsible for carrying out these
objectives in day-today work of the company.
Corporate Governance is control of management through designing the structures and
processes.
In agency theory, the owners are the principals. But principals may not have knowledge
or skill for getting the objectives executed. Thus, principal authorises the mangers to act
as ‘Agents’ and a contract between principal and agent is made. Under the contract of
agency, the agent should act in good faith. He should protect the interest of the principal
and should remain faithful to the goals.

(b) Shareholder Theory
According to this theory, it is the corporation which is considered as the property of
shareholders/ stockholders.
They can dispose off this property, as they like. They want to get maximum return from
this property.
The owners seek a return on their investment and that is why they invest in a corporation.
But this narrow role has been expanded into overseeing the operations of the
corporations and its mangers to ensure that the corporation is in compliance with ethical
and legal standards set by the government.

(c) Stake Holder Theory
According to this theory, the company is seen as an input-output model and all the
interest groups which include creditors, employees, customers, suppliers, local-
community and the government are to be considered.
From their point of view, a corporation exists for them and not the shareholders alone.

(d) Stewardship Theory
The word ‘steward’ means a person who manages another’s property or estate. Here, the
word is used in the sense of guardian in relation to a corporation, this theory is value
based. The managers and employees are to safeguard the resources of corporation and
its property and interest when the owner is absent. They are like a caretaker. They have
to take utmost care of the corporation. They should not use the property for their selfish
ends. This theory thus makes use of the social approach to human nature.

CORPORATE GOVERNANCE DEVELOPMENTS IN USA
YEAR PROVISIONS DEVELOPMETS
1977 The Foreign Provides for specific provisions regarding establishment,

Corrupt Practices maintenance and review of systems of internal control.
Act
1979 US Securities Prescribed mandatory reporting on internal financial
Exchange controls
Commission
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1985 Tread way Emphasized the need of putting in place a proper control
commission environment, desirability of constituting independent
boards and its committees and objective internal audit
function.
1992 (COSO) issued It is a framework to help businesses and other entities assess
Internal Control - and enhance their internal control systems”.
Integrated
Framework
2002 Sarbanes - Oxley The Act made fundamental changes in virtually every aspect
Act of corporate governance in general and auditor
independence, conflict of interests, corporate responsibility,
enhanced financial disclosures and severe penalties for
wilful default by managers and auditors, in particular.
2010 The Dodd-Frank This gives shareholders a powerful opportunity to hold
Wall Street Reform accountable executives of the companies they own, and a
and Consumer chance to disapprove where they see the kind of misguided
Protection Act, incentive schemes that threatened individual companies and
2010 in turn the broader economy.

CORPORATE GOVERNANCE DEVELOPMENTS IN UK
Historical developments in the UK for the improvement in corporate governance since
the setting of Cadbury Committee are as under:

THE CADBURY REPORT 1992
Due to several scandals and financial collapses in the UK in the late 1980s and early
1990s, London Stock Exchange setup the Cadbury Committee in May 1991 to raise the
standard of corporate governance.

This committee in its report known as Cadbury Report, recommended mainly:
ü Separating the role of CEO and Chairman of the Board
ü Balanced composition of Board of Directors with executive and non executive
directors
ü Selection process for non executive directors.

THE GREENBURY REPORT. 1995
The Confederation of British Industry set up a group under the Chairmanship of Sir
Richard Greenbury to examine the remuneration of the directors. It recommended the
formation of Remuneration committee composed of non executive directors. Its
recommendations were incorporated in the Listing Rules of The London Stock Exchange.

THE HAMPEL REPORT. 1998
The Hampel Committee was set up to review the implementation of Cadbury and
Greenbury Reports and to see that their purposes were being achieved. The
Recommendations of the committee coupled with further consultations by the London
Stock Exchange resulted in a combined code on Corporate Governance, the original
combined code 1998.
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THE TURNBULL REPORT

A working group under the Chairmanship of Niger Turnbull recommended the internal
Control Guidance for Directors which were included in the combined code.

HIGGS REPORT
The combined code was reviewed in July 2007 by Derek Higgs about the role and
effectiveness of non-executive directors.

SMITH REPORT
A group under The Chairmanship of Sir Robert Smith was set up to develop guidance for
Audit Committee in the combined code.

THE TYSON REPORT
The Tyson Report was recommended on the recruitment and development of non-
executive directors.

THE UK STEWARDSHIP CODE (REVISED), 2012
The Stewardship Code aims to enhance the quality of engagement between institutional
investors and companies to help improve long-term returns to shareholders and the
efficient exercise of governance responsibilities. Engagement includes pursuing
purposeful dialogue on strategy, performance and the management of risk, as well as on
issues that are the immediate subject of votes at general meetings. The Code is addressed
in the first instance to firms who manage assets on behalf of institutional shareholders
such as pension funds, insurance companies, investment trusts and other collective
investment vehicles.

2014 The UK Corporate Governance Code
The changes to the Code are designed to strengthen the focus of companies and investors
on the longer term and the sustainability of value creation. In this update of the Code, the
Financial Reporting Council (FRC) has focussed on the provision by companies of
information about the risks which affect longer term viability. In doing so the information
needs of investors has been balanced against setting appropriate reporting requirements.
Companies will now need to present information to give a clearer and broader view of
solvency, liquidity, risk management and viability. For their part, investors will need to
assess these statements thoroughly and engage accordingly. In addition, boards of listed
companies will need to ensure that executive remuneration is aligned to the long-term
success of the company and demonstrate this more clearly to shareholders

CORPORATE GOVERNANCE DEVELOPMENTS IN SOUTH AFRICA
In 1992, former South African Supreme Court judge, Mervyn king was asked to chair a
private - sector body to draft corporate governance guidelines. The body became known
as the king committee, and its first report, issued in 1994, was regarded by many as ahead
of its time in adopting an integrated and inclusive approach to the business life of
companies, embracing stakeholders other than shareholders. Three reports were issued
in 1994 (king I), 2002 (king II), and 2009 (king III). King principles of corporate
governance is based on apply or explain.
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KING I REPORT ON CORPORATE GOVERNANCE (1994)

In 1992, the king committee on corporate governance was formed in south Africa, and, in
line with international thinking, considered corporate governance from a south African
Perspective. The result was the king report 1994, which marked the institutionalization
of corporate Governance in South Africa. It aimed to promote Corporate governance in
south Africa and Established recommended standards of conduct for Boards and
directors of listed companies, banks, And certain state-owned enterprises, with an
Emphasis on the need for companies to become a Responsible part of the societies in
which they Operate.

KING II REPORT ON CORPORATE GOVERNANCE (2002)
In 2002, the second king report on corporate governance was published. It contains a
code of corporate practices and conduct. It refers to seven characteristic for good
corporate governance
1. Discipline - A commitment to behaviour that is universally recognised and accepted
as correct and proper.
2. Transparency - The ease with which an outsider is able to analyse a company's
actions.
3. Independence - The mechanisms to avoid or manage conflict.
4. Accountability - The existence of mechanisms to ensure accountability.
5. Responsibility - Processes that allow for corrective action and acting responsibly
towards all stakeholders.
6. Fairness - Balancing competing interests.
7. Social Responsibility - Being aware of and responding to social issues.

KING III REPORT ON CORPORATE GOVERNANCE (2009)
King III became necessary because of the anticipated new Companies Act, 2008 and
changing trends in international governance. As with King I and King II, the King
Committee endeavoured to be at the forefront of governance internationally and focused
on the importance of reporting annually on how a company has both positively and
negatively affected the economic life of the community in which it operated during the
year under review. In addition, emphasis has been placed on the requirement to report
on how the company intends to enhance those positive aspects and eradicate or
ameliorate any possible negative impacts on the economic life of the community in which
it will operate in the year ahead.

CORPORATE GOVERNANCE DEVELOPMENTS IN INDIA
The initiatives taken by Government in 1991, aimed at economic liberalization and
globalisation of the domestic economy, led India to initiate reform process in order to
suitably respond to the developments taking place world over. On account of the interest
generated by Cadbury Committee Report, the Confederation of Indian Industry (CII), the
Associated Chambers of Commerce and Industry (ASSOCHAM) and, the Securities and
Exchange Board of India (SEBI) constituted Committees to recommend initiatives in
Corporate Governance.

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Confederation of Indian Industry (CII) - Desirable Corporate

Governance
CII took a special initiative on Corporate Governance, the first institution initiative in
Indian Industry. The objective was to develop and promote a code for Corporate
Governance to be adopted and followed by Indian companies, whether in the Private
Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate
entities. The final draft of the said Code was widely circulated in 1997. In April 1998, the
Code was released. It was called Desirable Corporate Governance.

Recommendation I
The full board should meet a minimum of 6 times a year, preferably at an interval of 2
months, and each meeting should have agenda items that require at least half a day’s
discussion.

Recommendation II
Any listed company with a turnover ≥ Rs.100 Cr. should have professionally competent,
independent, nonexecutive directors, who should constitute:
ü At least 30 % of the board if the Chairman of the company is a non-executive director,
or
ü At least 50 % of the board if the Chairman and MD is the same person.

Recommendation III
No single person should hold directorships in more than 10 listed companies. This ceiling
excludes directorships in subsidiaries (where the group has over 50% equity stake) or
associate companies (where the group has over 25 % but no more than 50 % equity
stake).

Recommendation IV
For non-executive directors to play a material role in corporate decision making and
maximising long term shareholder value, they need to:
ü become active participants in boards, not passive advisors;
ü have clearly defined responsibilities within the board such as the Audit Committee;
and
ü know how to read a balance sheet, profit and loss account, cash flow statements and
financial ratios and have some knowledge of various company laws. This, of course,
excludes those who are invited to join boards as experts in other fields such as science
and technology.

Recommendation V
To secure better effort from non-executive directors companies should Pay a commission
over and above the sitting fees for the use of the professional inputs. The present
commission of 1% of net profits (if the company has a MD), or 3% (if there is no MD) is
sufficient.

Recommendation VI
While re-appointing members of the board, companies should give the attendance record
of the concerned directors. If a director has not been present (absent with or without
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leave) for 50 % or more meetings, then this should be explicitly stated in the resolution
that is put to vote.

Recommendation VII
Kev information that must be reported to, and placed before, the board must contain:
1. Annual operating plans and budgets, together with up-dated long term plans.
2. Capital budgets, manpower and overhead budgets.
3. Quarterly results for the company as a whole and its operating divisions or business
segments.
4. Internal audit reports, including cases of theft and dishonesty of a material nature.
5. Show cause, demand and prosecution notices received from revenue authorities
which are considered to be materially important (Material nature if any exposure that
exceeds 1 % of the company’s net worth).
6. Default in payment of interest or non-payment of the principal on any public deposit
and/or to any secured creditor or financial institution.
7. Fatal or serious accidents, dangerous occurrences, and any effluent or pollution
problems.
8. Defaults such as non-payment of inter-corporate deposits by or to the company, or
materially substantial non-payment for goods sold by the company.
9. Any issue which involves possible public or product liability claims of a substantial
nature, including any judgment or order which may have either passed strictures on
the conduct of the company, or taken an adverse view regarding another enterprise
that can have negative implications for the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or
intellectual property.
12. Recruitment and remuneration of senior officers just below the board level, including
appointment or removal of the Chief Financial Officer and the Company Secretary.
13. Labour problems and their proposed solutions.
14. Quarterly details of foreign exchange exposure and the steps taken by management
to limit the risks of adverse exchange rate movement, if material.

Recommendation VIII
Listed companies with either a turnover of over Rs.100 Cr OR a paid-up capital of Rs.20
Cr should set up Audit Committees within 2 years.
Composition: at least 3 members, all drawn from a company’s non-executive directors,
who should have adequate knowledge of finance, accounts and basic elements of
company law.
Audit Committees should periodically interact with the statutory auditors and the
internal auditors to ascertain the quality and veracity of the company’s accounts as well
as the capability of the auditors themselves.

Recommendation IX
Under “Additional Shareholder’s Information”, listed companies should give data on:
High and low monthly averages of share prices in a major Stock Exchange where the
company is listed for the reporting year.
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Statement on value added, which is total income minus the cost of all inputs and
administrative expenses.

SEBI had set up a Committee under the Chairmanship of KUMAR
MANGALAM BIRLA to promote and raise standards of corporate
governance.

The Report of the committee was the 1st formal and comprehensive attempt to evolve a
Code of Corporate Governance, in the context of prevailing conditions of governance in
Indian companies, as well as the state of capital markets at that time.

The recommendations of the Report, led to inclusion of Clause 49 in the Listing
Agreement in the year 2000. These recommendations, aimed at improving the standards
of Corporate Governance, are divided into mandatory and non-mandatory
recommendations. The said recommendations have been made applicable to all listed
companies with the paid-up capital ≥ 3 Cr. OR net worth ≥ Rs. 25 Cr. at any time in the
history of the company.

A summary of the Report is reproduced hereunder:
1) The Board should have an optimum combination of Executive and Non- Executive
Directors with not less than 50 % of the Board consisting of non-executive directors.
In the case of Non-executive Chairman, at least 1/3rd of the Board should consist of
independent directors and in the case of an executive Chairman, at least half of the
Board should consist of independent directors.
2) Board meetings should be held at least 4 times in a year, with a maximum time gap of
4 months between any 2 meetings. A director should not be a member in more than
10 committees or act as Chairman of more than 5 committees across all companies in
which he is a director.
3) Financial Institutions should appoint nominee directors on a selective basis and
nominee director should have the same responsibility, be subject to the same
discipline and be accountable to the shareholders in the same manner as any other
director of the company
4) Non-executive Chairman should be entitled to maintain Chairman’s office at the
expense of the company and also allowed reimbursement of expenses incurred in
performance of his duties.
5) Audit Committee - a qualified and independent audit committee should be set up by
the board of a company.

Composition
1) The audit committee should have minimum 3 members, all being non-executive
directors, with the majority being independent, and with at least 1 director having
financial and accounting knowledge;
2) The chairman of the committee should be an independent director;
3) The chairman should be present at AGM to answer shareholder queries;
4) The audit committee should invite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of the
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committee but on occasions it may also meet without the presence of any executives
of the company. Finance director and head of internal audit and when required, a
representative of the external auditor should be present as invitees for the meetings
of the audit committee;
5) The Company Secretary should act as the secretary to the committee.

Frequency of Meeting
The audit committee should meet at least thrice a year. One meeting must be held before
finalisation of annual accounts and one necessarily every 6 months.

Quorum
The quorum should be either 2 members or 1/3rd of the members of the audit committee,
whichever is higher and there should be a minimum of 2 independent directors.

Powers of Audit Committee
ü To investigate any activity within its terms of reference.
ü To seek information from any employee.
ü To obtain outside legal or other professional advice.
ü To secure attendance of outsiders with relevant expertise, if it considers necessary.

Remuneration Committee
Remuneration Committee should comprise of at least 3 directors, all of whom should be
non-executive directors, the chairman of committee being an independent director. All
the members of the remuneration committee should be present at the meeting. These
recommendations are non- mandatory.

Shareholders/Investors’ Grievance Committee of Directors
The Board should set up a Committee to specifically look into share holder issues
including share transfers and redressal of shareholders’ complaint

N.R. NARAYANA MURTHY COMMITTEE REPORT ON CORPORATE
GOVERNECE
In the year 2002, SEBI analyzed the statistics of compliance with the clause 49 by listed
companies and felt that there was a need to look beyond the mere systems and
procedures if corporate governance was to be made effective in protecting the interest of
investors. SEBI therefore constituted a Committee under the Chairmanship of Shri N.R.
Narayana Murthy, for reviewing implementation of the corporate governance code by
listed companies and for issue of revised clause 49 based on its recommendations.

Following are the highlights of recommendations.

1) Audit committees of publicly listed companies should be required to review the
following information mandatorily:
ü Financial statements and draft audit report, including quarterly/half yearly
financial information;
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ü Management discussion and analysis of financial condition and results of

operations;
ü Reports relating to compliance with laws and to risk management;
ü Management letters/letters of internal control weaknesses issued by
statutory/internal auditors; and
ü Records of related party transactions
2) All audit committee members should be “financially literate” and at least one
member should have accounting or related financial management expertise.

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.
3) In case a company has followed a treatment different from that prescribed in an
accounting standard, management should justify why they believe such alternative
treatment is more representative of the underlying business transaction.
4) Companies should be encouraged to move towards a regime of unqualified financial
statements.
5) A statement of all transactions with related parties including their bases should be
placed before the independent audit committee for formal approval/ratification.
6) To inform Board members about the risk assessment and minimization
procedures.
7) Management should place a report before the entire Board of Directors every quarter
documenting the business risks faced by the company, measures to address and
minimize such risks, and any limitations to the risk taking capacity of the corporation.
8) Companies raising money through an Initial Public Offering (“IPO”) should disclose to
the Audit Committee, the uses/applications of funds by major category (capital
expenditure, sales and marketing, working capital, etc.), on a quarterly basis.
9) It should be obligatory for the Board of a company to lay down the code of conduct
for all Board members and senior management of a company.
10) There shall be no nominee directors.
11) All compensation paid to non-executive directors may be fixed by the Board of
Directors and should be approved by shareholders in general meeting.
12) Personnel who observe an unethical or improper practice (not necessarily a
violation of law) should be able to approach the audit committee without necessarily
informing their supervisors.

NARESH CHANDRA COMMITTEE REPORT 2002
In the year 2002, Naresh Chandra Committee was appointed to examine and
recommend inter alia amendments to the law involving the auditor-client relationships
and the role of independent directors.

Recommendations of Naresh Chandra committee report
1) In line with international best practices, the Committee recommends an
abbreviated list of disqualifications for auditing assignments, which includes:
ü Prohibition of any direct financial interest in the audit client
ü Prohibition of receiving any loans and/or guarantees from or on behalf of the audit
client
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ü Prohibition of any business relationship with the audit client

ü Prohibition of undue dependence on an audit client.
2) The following services should not be provided by an audit firm to any audit
client
ü Accounting and bookkeeping services, related to the accounting records or financial
statements of the audit client.
ü Internal audit services.
ü Actuarial services.
ü Broker, dealer, investment adviser or investment banking services.
ü Outsourced financial services. Management functions, including the provision of
temporary staff to audit clients
ü Any form of staff recruitment, and particularly hiring of senior management staff for
the audit client.
ü Valuation services and fairness opinion.
3) Compulsory Audit Partner Rotation
ü There is no need to legislate in favour of compulsory rotation of audit firms.
ü However, the partners and at least 50 % of the engagement team (excluding article
clerks and trainees) responsible for the audit of either a listed company, or
companies whose paid up capital and free reserves exceeds Rs.10 crore, or
companies whose turnover exceeds Rs. 50 crore, should be rotated every 5 years.
ü Persons who are compulsorily rotated could, if need be, allowed to return after a
break of 3 years.
4) Auditor’s disclosure of contingent liabilities
It is important for investors and shareholders to get a clear idea of a company’s
contingent liabilities because these may be significant risk factors that could adversely
affect the corporation’s future health.
5) Auditor’s disclosure of qualifications and consequent action
Qualifications to accounts, if any, must form a distinct, and adequately highlighted,
section of the auditor’s report to the shareholders.
6) Auditor’s annual certification of independence
Before agreeing to be appointed (along with 224(1 )(b)), the audit firm must submit a
certificate of independence to the Audit Committee or to the board of directors of the
client company certifying that the firm, together with its consulting and specialised
services affiliates, subsidiaries and associated companies:
7) Appointment of auditors
The Audit Committee of the board of directors shall be the first point of reference
regarding the appointment of auditors.
8) Percentage of independent directors
Not less than 50 % of the board of directors of any listed company, as well as unlisted
public limited companies with a paid-up share capital and free reserves of Rs.10 crore
and above, or turnover of Rs.50 crore and above, should consist of independent directors

DR. J J IRANI EXPERT COMMITTEE ON COMPANY LAW (2005)
In 2004, the Government constituted a committee under the Chairmanship of Dr. J.J. Irani,
Director, Tata Sons, with the task of advising the Government on the proposed revisions
to the Companies Act, 1956 with the objective to have a simplified compact law that
would be able to address the changes taking place in the national and international
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scenario, enable adoption of internationally accepted best practices as well as provide

adequate flexibility for timely evolution of new arrangements in response to the
requirements of ever-changing business models.

The recommendations of the committee are:

S.NO. PARTICULARS PROVISIONS
1 Board Law should provide for only the minimum number of
Composition: directors necessary for various classes of companies. There
need not be any limit to maximum number of directors. Other
than procedures for appointments, no age limit for directors
need be specified in the Act.
2 Appointment Every company to have at least one director resident in India.
and resignation Requirement of obtaining approval of Central Govt, under
of director: Companies Act for appointment of non- resident managerial
persons should be done away with. Duty to inform the
Registrar of particulars regarding
appointment/resignation/death etc. of directors should be
that of the company.
3 Independent Presence of independent director on the boards of companies
Directors: will lead to greater transparency in company’s dealings. Law
should recognize the principle of independent directors and
spell out their attributes, role, qualifications and liabilities
4 Remuneration Decision on remuneration of directors should not be based on
of Directors: a “Government approval based system” but should be left to
the company. However, this should be transparent, based on
principles that ensure fairness, reasonableness and
accountability and should be properly disclosed. No limits
need be prescribed.
5 Disqualification Failure to attend board meetings for a continuous period of
of director one year to be made a ground for vacation of office regardless
of whether or not leave of absence was granted to such
director. Specific provisions to be made in the Law to regulate
the process of resignation by a director.
6 Board meetings: Board Meetings by electronic means to be allowed. In the case
of companies where Independent Directors are prescribed,
notice period of 7 days has been recommended for Board
Meetings with provisions for holding emergency meetings at
a shorter notice. Consent of shareholders by way of special
resolution should be mandatory for certain important
matters.
7 Annual General Use of postal ballot during meetings of members should be
Meetings: allowed to be more widely used by companies. Law should
provide for voting through electronic mode.
8 Appointment of MD,WTD/Executive Director (ED) should be in the whole-
MD/WTD: time employment of only 1 company at a time
1. 14

9 Key managerial Every company should be required to appoint, a Chief

Personnel Executive Officer, Chief Finance Office and Company
Secretary as its KMP whose appointment and removal shall
be by the BOD.

Corporate Governance Voluntary Guidelines 2009
ü Good corporate governance practices enhance companies’ value and stakeholders’
trust resulting into robust development of capital market, the economy and also help
in the evolution of a vibrant and constructive shareholders’ activism.
ü Considering the above, the MCA issued Corporate Governance Voluntary Guidelines,
2009 after duly examining committee reports and suggestions received from various
stakeholders on issues related to corporate governance.
ü These guidelines provide a set of good practices which may be voluntary adopted by
the public companies and private companies, particularly the bigger ones. These
guidelines are not substitute for or addition to the existing laws but is
recommendatory in nature.

‘Comply or Explain’ Basis
While the guidelines are expected to be adopted by more and more corporates, there may
be genuine reasons for some companies for not being able to adopt them. In such a case
it is expected that such companies should inform their shareholders about the reasons
for not adopting these guidelines either fully or partially

1. 15

CS Praveen Choudhary International Perspective of CG
Legislative Framework of Corporate Governance

– An International Perspective
INTRODUCTION
International bodies, governments, financial institutions, public and private sector bodies
are encouraging debate and spearheading initiatives towards good corporate
governance. Better regulatory and self-regulatory corporate governance frameworks and
enforcement mechanisms are being implemented through tougher legislations and
Corporate Governance Codes.

AUSTRALIA
Australia’s corporate governance framework contains a range of measures that promote
accountability of management and transparency of financial and other information.

The Australian Securities Exchange
The Australian Securities Exchange through its listing rules, regulates the behaviour of
ASX listed companies.
In addition to the listing rules, which are mandatory, the ASX has a set of guidance notes
to assist listed companies to comply with both the spirit and letter of the rules. In
Australia it is called “if not, why not approach”.
If a company considers that a recommendation is inappropriate to a particular
circumstance, it has the flexibility not to adopt it and explain why it has not adopted.

THE RECOMMENDATIONS OF THE COUNCIL ARE AS UNDER:
Board Structure
Companies should have a board of an effective composition, size and commitment to
adequately discharge its responsibilities and duties. Majority of the board should be
independent directors.

Independent Director
The Board of directors to determine the independent status of a director. While
determining the independent status of a director, the board should consider whether the
director
1) Is a substantial shareholder of the company or an officer of, or otherwise associated
directly with, a substantial shareholder of the company.
2) Is employed, or has previously been employed in an executive capacity by the
company or another group member, and there has not been a period of at least three
years between ceasing such employment and serving on the board.
3) Has within the last three years been a principal of a material professional adviser or
a material consultant to the company or another group member, or an employee
materially associated with the service provided.
1. 16

4) Is a material supplier or customer of the company or other group member, or an

officer of or otherwise associated directly or indirectly with a material supplier or
customer.
5) Has a material contractual relationship with the company or another group member
other than as a director.

The chairman of the Board
The chairman of the Board should be an independent director. The chairman is
responsible for leadership of the board and for the efficient organisation and conduct of
the board‘s functioning. Where the chairman is not an independent director, companies
should consider the appointment of a lead independent director.
The role of chairman and chief executive officer (Managing Director) should not be
exercised by the same individual.

Audit Committee
The board is required to constitute an audit committee. The audit committee should be
of sufficient size, independence and technical expertise to discharge its mandate
effectively.

Composition
The Audit Committee should:
ü Consist only of non-executive directors.
ü Consist of a majority of independent directors.
ü Be chaired by an independent chairman. The chairman of the board should not be the
chairman of the Audit Committee.
ü Have at least three members.

Remuneration Committee
The board should establish a remuneration committee. The remuneration committee
should have a charter that clearly sets out its role and responsibilities, composition,
structure and membership requirements and the procedures for non-committee
members to attend meetings.

Composition of remuneration committee
ü consists of a majority of independent directors
ü is chaired by an independent director
ü has at least three members.

Nomination Committee
The board is required to constitute a nomination committee.
The nomination committee should:
ü consist of a majority of independent directors
1. 17

ü be chaired by an independent director

ü have at least three members.

SINGAPORE
Corporate Governance in Singapore
Singapore requires listed companies to describe in company’s Annual Reports their
corporate governance practices with specific reference to the principles of the Code of
Corporate Governance (the Code), as well as disclose and explain any deviation from any
guideline of the Code. The Code of Corporate Governance was first issued by the
Corporate Governance Committee (“CGC”) on 21 March 2001. Compliance with the Code
is not mandatory but listed companies are required under the Singapore Exchange Listing
Rules to disclose their corporate governance practices and give explanations for
deviations from the Code in their annual reports. A revised Code was issued on 14 July,
2005.

FOLLOWING PRINCIPLES ARE PRESCRIBED UNDER THE CODE:
Board of Directors
Every company should be headed by an effective Board to lead and control the company.
The Board is collectively responsible for the long-term success of the company. The Board
works with Management to achieve this objective and Management remains accountable
to the Board.

Board Composition and Guidance
There should be a strong and independent element on the Board, which is able to exercise
objective judgement on corporate affairs independently, in particular, from Management
and 10% shareholders. No individual or small group of individuals should be allowed to
dominate the Board’s decision making.
Normally, at least one-third of the Board should consist of Independent Directors.
However, the independent directors should make up at least half of the Board, where:
1. The Chairman and Chief Executive Officer (or equivalent) is the same person
2. The Chairman and the CEO are immediate family members
3. The Chairman is part of the management team
4. The Chairman is not an independent director.

Division of Responsibilities between Chairman and CEO
There should be a clear division of responsibilities between the leadership of the Board
and the executives responsible for managing the company’s business to ensure an
appropriate balance of power, increased accountability and greater capacity of the Board
for independent decision making. No one individual should represent a considerable
concentration of power.
1. The Chairman and the CEO is the same person
2. The Chairman and the CEO are immediate family members;
3. The Chairman is part of the management team
1. 18

4. The Chairman is not an independent director.

Board Membership
There should be a formal and transparent process for the appointment and re-
appointment of directors to the Board. The Board should establish a Nomination
Committee (NC) to make recommendations to the Board on all board appointments, with
written terms of reference which clearly set out its authority and duties.

The Nomination Committee should make recommendations to the
Board on relevant matters relating to:
1. The review of board succession plans for directors, in particular, the Chairman and
for the CEO
2. The development of a process for evaluation of the performance of the Board, its
board committees and directors
3. The review of training and professional development programs for the Board.
4. The appointment and re-appointment of directors (including alternate directors, if
applicable).

Remuneration matter
There should be a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors. No
director should be involved in deciding his own remuneration. The Board should
establish a Remuneration Committee (RC) with written terms of reference which clearly
set out its authority and duties. The RC should comprise at least three directors, the
majority of whom, including the Chairman, should be independent. All the committee
members should be non-executive directors.

UNITED KINGDOM
UK combined Code 2008, has set standards of good practice in relation to issues such as
board composition and development, remuneration, accountability and audit and
relations with shareholders. Significant decline in economic conditions led to revision of
the Combined Code by Financial Reporting Council during 2009 by Sir David Walker. It
was announced that the Code would be known as the UK Corporate Governance Code
2010, in order to make the Code‘s status as the UK‘s recognised corporate governance
standard known to foreign investors, and to foreign companies listed in the UK.

UK Corporate Governance Code, 2014:
Whilst primarily aimed at companies with a Premium Listing of shares in the UK, who are
required under the Listing Rules to “comply or explain” in their annual report and
accounts, the broad principles of the Code may be of interest to other companies who may
consider that it would be beneficial to adopt certain of the provisions.
1. 19

The FRC has emphasised the importance of the board in establishing the correct “tone
from the top” and that the board should lead by example to prevent misconduct, unethical
practices and support the delivery of long-term success.
The FRC was also keen to establish the appropriate relationship between the board’s risk
assessment and management responsibilities.

The FRC has proposed that companies make two separate statements
in its annual report:
ü one stating whether they consider it appropriate to adopt the going concern basis of
accounting in preparing the annual and half-yearly financial statements and
ü Another statement relating to a broad assessment of the company’s viability over a
specified period, which is expected to be significantly longer than twelve months.

Board Composition
The board should include an appropriate combination of executive and nonexecutive
directors (and, in particular, independent non-executive directors) such that no
individual or small group of individuals can dominate the board s decision taking.

The board should state its reasons if it determines that a director is independent
notwithstanding the existence of relationships or circumstances which may appear
relevant to its determination, including if the director:
1) Has been an employee of the company or group within the last five years
2) Has, or has had within the last three years, a material business relationship with the
company either directly, or as a partner, shareholder, director or senior employee of
a body that has such a relationship with the company;
3) Has received or receives additional remuneration from the company apart from a
directors fee, participates in the company's share option or a performance-related pay
scheme, or is a member of the company's pension scheme;
4) Has close family ties with any of the company's advisers, directors or senior
employees;
5) Holds cross-directorships or has significant links with other directors through
involvement in other companies or bodies;
6) represents a significant shareholder; or
7) Has served on the board for more than nine years from the date of their first election.

Role of the Board
UK Corporate Governance Code clearly provides that every company shall be headed by
an effective Board which shall collectively be responsible for the long term success of the
company. The board’s role is to provide entrepreneurial leadership of the company
within a framework of prudent and effective controls which enables risk to be assessed
and managed. The board should set the company’s strategic aims, ensure that the
necessary financial and human resources are in place for the company to meet its
objectives and review management performance.

1. 20

Chairman
In addition to separation of roles between the chairman and chief executive officer the
chairman is also held responsible for leadership of the board and ensuring its
effectiveness on all aspects of its role.

Senior Independent Directors
The board should appoint one of the independent non-executive directors to be the
senior independent director to provide a representing board for the chairman and to
serve as an intermediary for the other directors when necessary. The senior independent
director should be available to shareholders if they have concerns which contact through
the normal channels of chairman, chief executive or other executive directors has failed
to resolve or for which such contact is inappropriate. The senior independent director is
also expected to attend sufficient meetings with a range of major shareholders to listen
to their views in order to help develop a balanced understanding of the issues and
concerns of major shareholders.

Performance Evaluation of Directors
The board should undertake a formal and rigorous annual evaluation of its own
performance and that of its committees and individual directors. The chairman should
act on the results of the performance evaluation by recognising the strengths and
addressing the weaknesses of the board. The board should state in the annual report how
performance evaluation of the board, its committees and its individual directors has been
conducted.

Election of Directors
The code provides that all directors should be submitted for re-election at regular
intervals, subject to continued satisfactory performance. It provides that the directors of
FTSE 350 companies should be subject to annual election by shareholders. All other
directors should be subject to election by shareholders at the first annual general meeting
after their appointment, and to re-election thereafter at intervals of no more than three
years. Non-executive directors who have served longer than nine years should be subject
to annual re- election. The names of directors submitted for election or re-election should
be accompanied by sufficient biographical details and any other relevant information to
enable shareholders to take an informed decision on their election.

UNITED STATES OF AMERICA
U.S. Securities and Exchange Commission (SEC) is one of the most powerful machineries
for exerting pressure on behalf of Federal Government on the companies. It regulates
many processes affecting companies, stakeholders and the market. There are elaborate
and important rules on disclosures and procedure for complying with the same. SEC
regulations are the vital part of US corporate governance as it largely controls
information.

1. 21

The Sarbanes Oxley Act (SOX), 2002

The SOX Act was signed into law by the US President on 30th July, 2002.
The Sarbanes Oxley Act is also known as the 'Public Company Accounting Reform and
Investor Protection Act of 2002 \ This legislation brought with it fundamental changes in
virtually every area of corporate governance and particularly in auditor independence,
conflicts of interest, corporate responsibility, enhanced financial disclosures, and severe
penalties, both fines and imprisonment for willful default by managers and auditors.

THE MAIN PROVISIONS OF THE ACT ARE:
1. The Act called for establishment of the Public Company Accounting Oversight Board,
whose duties are to:
ü Register and regulate all public accounting firms that prepare audit reports;
ü Establish or adopt, or both, by rule, auditing, quality control, ethics, independence,
and other standards relating to the preparation of audit reports;
ü Conduct inspections of registered public accounting firms; conduct investigations
and disciplinary proceedings concerning, and impose appropriate sanctions
where justified upon, registered public accounting firms and associated persons
of such firms;

2. It prohibits any public accounting firm from providing non-audit services while
auditing firm. These services include:
ü Bookkeeping or other services related to the accounting records or financial
statements of the audit client;
ü Actuarial services;
ü Internal audit outsourcing services;
ü Legal services and expert services unrelated to the audit; and
ü Any other service that the Board determines, by regulation, is impermissible.

3. The lead audit and reviewing partner must rotate off the audit every 5 years. It shall
be unlawful for a registered public accounting firm to provide audit services to an
issuer if the lead (or coordinating) audit partner (having primary responsibility for
the audit), or the audit partner responsible for reviewing the audit, has performed
audit services for that issuer in each of the 5 previous fiscal years.
4. The Act calls for the formation of an independent and competent audit committee,
which is directly responsible for the appointment, compensation, and oversight of the
work of any registered public accounting firm and of auditor's activities. It requires
that each member of a firm's audit committee be a member of the board of directors
and be 'independent'. In order to be considered independent, a member of an audit
committee may not accept any consulting, advisory, or other compensatory fee from
the issuer; or be an affiliated person of the issuer or any subsidiary thereof.

MALASIYA
The Malaysian Code on Corporate Governance 2012 effective from December 31, 2012
is the first deliverable of the CG Blueprint and supersedes the Malaysian Code on
Corporate Governance. It sets out broad principles and specific recommendations on
1. 22

structures and processes which companies should adopt in making good corporate
governance an integral part of their business dealings and culture.
The Principles and Recommendation as enumerated under the Malaysian Code on
Corporate Governance 2012 are as under:

Principle 1: Establish clear roles and responsibilities
The responsibilities of the board, which should be set out in a board charter, include
management oversight, setting strategic direction premised on sustainability and
promoting ethical conduct in business dealings.
Recommendation 1.1: The board should establish clear functions reserved for the board
and those delegated to management.
Recommendation 1.2: The board should establish clear roles and responsibilities in
discharging its fiduciary and leadership functions.
Recommendation 1.3: The board should formalise ethical standards through a code of
conduct and ensure its compliance.

Principle 2: Strengthen Composition
The board should have transparent policies and procedures that will assist in the
selection of board members. The board should comprise members who bring value to
board deliberations.
Recommendation 2.1: The board should establish a Nominating Committee which
should comprise exclusively of non-executive directors, a majority of whom must be
independent.
Recommendation 2.2: The Nominating Committee should develop, maintain and review
the criteria to be used in the recruitment process and annual assessment of directors.

Principle 3: Reinforce Independence
The board should have policies and procedures to ensure effectiveness of independent
directors.
Recommendation 3.1: The board should undertake an assessment of its independent
directors annually.
Recommendation 3.2: The tenure of an independent director should not exceed a
cumulative term of nine years. Upon completion of the nine years, an independent
director may continue to serve on the board subject to the director’s re-designation as a
non- independent director.
Recommendation 3.3: The board must justify and seek shareholders’ approval in the
event it retains as an independent director, a person who has served in that capacity for
more than nine years.

Principle 4: Foster Commitment
Directors should devote sufficient time to carry out their responsibilities, regularly
update their knowledge and enhance their skills.
1. 23

Recommendation 4.1: The board should set out expectations on time commitment for
its members and protocols for accepting new directorships.
Recommendation 4.2: The board should ensure its members have access to appropriate
continuing education programmes.

Principle 5: uphold integrity in financial reporting
Recommendation 5.1: The Audit Committee should ensure financial statements comply
with applicable financial reporting standards.
Recommendation 5.2: The Audit Committee should have policies and procedures to
assess the suitability and independence of external auditors.

Principle 6: Recognise and Manage risks
The board should establish a sound risk management framework £ internal controls
system.
Recommendation 6.1: The board should establish a sound framework to manage risks.
Recommendation 6.2: The board should establish an internal audit function which
reports directly to the Audit Committee.

Principle 7: ensure timely and high quality disclosure
Companies should establish corporate disclosure policies and procedures to ensure
comprehensive, accurate and timely disclosures.
Recommendation 7.1: The board should ensure the company has appropriate corporate
disclosure policies and procedures. Recommendation 7.2: The board should encourage
the company to leverage on information technology for effective dissemination of
information.

Principle 8: Strengthen Relationship between company and
shareholders
The board should facilitate the exercise of ownership rights by shareholders.
Recommendation 8.1: The board should take reasonable steps to encourage
shareholder participation at general meetings.
Recommendation 8.2: The board should encourage poll voting.
Recommendation 8.3: The board should promote effective communication and
proactive engagements with shareholder.

1. 24

CS Praveen Choudhary Governance in Banks/Insurance/PSU
Corporate Governance in Banks, Insurance and

Public Sector Companies

CORPORATE GOVERNANCE IN BANKS
The economic development of a country in the modem age can be judged from the
efficiency of its banking system. They are central to market development and socio-
economic growth, regulatory and economic reforms.
ü By the very nature of their business, banks are highly leveraged.
ü They accept large amounts of public funds as deposits in a fiduciary capacity and
further leverage those funds through credit creation.

In the Indian context banks can be classified as Scheduled Bank and
Unscheduled Bank.
BANKS

Central bank Commercial Bank

RESERVE BANK OF Non —Schedule

Schedule Commercial Banks
INDIA Commercial Banks
(RBI)

RBI ACT, 1934 Public Sector Private Sector
Foreign Banks
(NIOG - 1 - 04-1935) Banks Banks

Nationalized of the RBI, 1949

SBI and Subsidiaries Other Nationalised banks
RBI

2. 1

Regulation of Banks
The Reserve Bank of India, the central bank of the country, is the primary regulator of
banks. The Banking Regulation Act, 1949 applies to all banks. The provisions of this Act
shall be in addition to, and not, unless expressly provided, in derogation of the Companies
Act, 2013 and any other law for the time being in force.
ü Companies Act, 2013 is applicable to all private sector banks registered under the
Companies Act, 2013.
ü Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980
is applicable to all nationalized banks except State Bank of India, which is governed
by the State Bank of India Act.

CLASSIFICATION OF BANKS
Schedule bank means a bank mentioned in 2nd schedule of RBI Act
1934
Conditions for inclusion of name of a bank in 2nd schedule:
Section 42(6)(a) of the RBI act, 1934 narrates the following conditions for inclusion of
the name of a bank in the 2nd schedule:
ü Has a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs, and
ü Satisfies the RBI that its affairs are not being conducted in a manner detrimental to the
interests of its depositors, and
ü Is a state co-operative bank or a company, or an institution notified by the central
government in this behalf or a corporation or a company incorporated by or under any
law in force in any place outside India.

Non-scheduled bank:
It means those banks, whose names have not been included in the 2nd schedule of the RBI
act, 1934. The non-scheduled banks are required to maintain by way of cash reserve with
itself or with RBI in terms of section 18 of the banking regulation act, 1949.

The banks may also be classified in the following way:
State bank of India: The state bank of India act, 1955 came into force w.e.f 1st July,
1955.

SBI associate banks: To provide for the formation of certain government or
government Associated banks as subsidiaries of the state bank of India, an act called as
the state bank of India (subsidiary banks) act, 1959 was enacted and it came into force
2. 2

10th September, 1959. These SBI and associate banks are called the govt of India
undertakings.

Nationalised banks: In 1969, the government of India issued an ordinance, banking
companies (acquisition and transfer of undertakings) ordinance, 1969, and 14 scheduled
commercial banks were nationalised in order to expand the branch network, followed by
six more in 1980. The ordinance was thereafter enacted as act namely the banking
companies (acquisition and transfer of undertakings) act, 1970 and the banking
companies (acquisition and transfer of undertakings) act, 1980. These nationalised banks
are called the Govt. of India undertakings.
Old/New private sector banks: The Ownership of these banks are scattered
among the individuals, institutions, mutual funds and companies and are not the
government banks, but they are governed and controlled by the RBI guidelines and
directives. Among old private sector banks, it includes J & K bank, federal bank etc. and
ICICI bank, HDFC bank, axis bank etc. Are the new generation banks.

State/district co-operative banks: a cooperative bank is a cooperative society
registered or deemed to have been registered under any state or central act. If a
cooperative bank is operating in more than one state, the central cooperative societies
act is applicable. In other cases the state laws are applicable. Apart from various other
laws like the banking laws (application to co-operative societies) act, 1965 and banking
regulation (amendment) and miscellaneous provisions act, 2004, the provisions of the
RBI act, 1934 and the BR Act, 1949 would also be applicable for governing the banking
activities.

Regional rural banks (RRB): These banks were established under the regional
rural banks act, 1976. These banks are sponsored by nationalized banks and the capital
contribution is in the ratio of 50% by CG, 15% by SG and 35% by the concerned sponsored
bank. These banks established with the focused attention of the local villagers financial
needs.

Local area banks (LAB): Local area banks with operations in two or three
contiguous districts were conceived in the 1996 union budget to mobilise rural savings
and make them available for investments in local areas. They are expected to bridge the
gaps in credit availability and enhance the institutional credit framework in rural and
semi-urban areas. Although the geographical area of operation of such banks is limited,
they are allowed to perform all functions of a scheduled commercial bank.

2. 3

Foreign banks: The other important segment of the commercial banking is that of
foreign banks. Foreign banks have their registered offices outside India, and through their
branches they operate in India. Foreign banks are allowed on reciprocal basis. They are
allowed to operate through branches or wholly owned subsidiaries.

NATIONALISED BANKS (MANAGEMENT AND MISCELLANEOUS
PROVISIONS) SCHEME, 1970
In exercise of the powers conferred by Section 9 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970, the Central Government, after consultation with
the Reserve Bank, makes this Scheme called as the Nationalised Banks (Management and
Miscellaneous Provisions) Scheme, 1970.

The scheme deals with the manner of nomination of directors, retirement of nominee
directors/excess elected directors, terms of office of Managing and other directors etc.


1 Terms of Officer The scheme provides that a WTD, including the MD, shall
for Whole Time devote his whole time to the affairs of the Nationalised Bank
Directors and shall hold office for such term not exceeding 5 years and
shall be eligible for re-appointment.
The CG shall have the right to terminate the term of office of
a WTD, including the MD, at any time before the expiry of the
term specified under that sub clause by giving to him notice
of not less than 3 months in writing or 3 month’s salary and
allowances in lieu of notice; and the WTD, including the MD,
shall also have the right to relinquish his office by giving to
the CG notice of not less than 3 months in writing.
2 Disqualification The Scheme provides that a person shall be disqualified for
of directors being appointed as, and for being, a Director:
ü If he has at any time been adjudicated an insolvent or has
suspended payment or has compounded with his
creditors; or
ü If he has been found to be of unsound mind and stands so
declared by a competent court; or
ü If he has been convicted by a criminal court of an offence
which involves moral turpitude.
2. 4

3 Chairman The CG shall, after consultation with the RBI, appoint one of
the Directors to be the Chairman of the Board and
The CG may also appoint the same person to hold, at the same
time, both the Offices of the Chairman and the MD.
4 Meeting of the Board Meeting shall ordinarily be held at least 6 times in a
board year and at least once in each quarter.
A board meeting shall be held at the head office of the
Nationalised Bank or such other place as the board may
decide.
Ordinarily, not less than 15 days notice shall be given of any
board meeting and such notice shall be sent to every Director
at the address specified by him in this behalf.
5 Constitution of Some of the stipulated committees of the Board are as under:
committees ü Management Committee of the Board
ü Audit Committee:
ü Risk Management Committee
ü Nomination Committee
ü Committee of High Value Frauds
ü IT Strategy Committee
ü Remuneration Committee
ü Credit Approvals Committee
ü Customer Service Committee
ü Committee of Directors
ü Human Resources Committee

GANGULY COMMITTEE RECOMMENDATIONS ON CORPORATE
GOVERNANCE IN BANKS
The RBI vide its circular dated 20th June 2002, circulated to all scheduled commercial
banks, a report of the consultative group of directors of banks/financial institutions (Dr.
Ganguly group) - implementation of recommendations. The RBI through this circular
urged the banks to place the report as well as the list of recommendations enclosed in
circular before the board of directors of respective banks. Based on the decision taken by
the board, these recommendations be adopted and implemented in banks.

Recommendations which may be implemented by all banks:
Responsibilities of the BOD:
A strong corporate board should fulfil the following 4 major roles viz.
2. 5

ü Overseeing the risk profile of the bank,

ü monitoring the integrity of its business and control mechanisms,
ü ensuring the expert management, and
ü maximising the interests of its stakeholders.
The BOD should ensure that responsibilities of directors are well defined and every
director should be familiarised on the functioning of the bank before his induction

Role and responsibility of independent and non-executive directors:
The independent/non-executive directors have a prominent role in inducting and
sustaining a proactive governance framework in banks.
In order to familiarise the independent /non-executive directors with the environment
of the bank, banks may circulate among the new directors a brief note on the profile of
the bank, the sub committees of the board, their role, details on delegation of powers, the
profiles of the top executives etc.

Training facilities for directors:
Need-based training programmes/seminars/ workshops may be designed by banks to
acquaint their directors with emerging developments/challenges facing the banking
sector and participation in such programmes could make the directors more sensitive to
their role.
The board should ensure that the directors are exposed to the latest managerial
techniques, technological developments in banks, and financial markets, risk
management systems etc. So as to discharge their duties to the best of their abilities.
Submission of routine information to the board: Reviews dealing with
various performance areas may be put up to the management committee of the board and
only a summary on each of the reviews may be put up to the board of directors at periodic
intervals. This will provide the board more time to concentrate on more strategic issues
such as risk profile, internal control systems, overall performance of the bank. Etc.
RECOMMENDATIONS APPLICABLE ONLY TO PUBLIC SECTOR BANK
1. INFORMATION FLOW:
In order to improve manner in which the proceedings are recorded and followed up in
public sector banks, they may initiate measures to provide the following information to
the board:
• A summary of key observations made by the directors which should be submitted in the
next board meeting.
2. 6

• A more detailed recording of the proceedings which will clearly bring out the
observations, dissents, etc. By the individual directors which could be forwarded to them
for their confirmation.
2. COMPANY SECRETARY
The company secretary has important fiduciary and company law responsibilities. The
company secretary is the nodal point for the board to get feedback on the status of
compliance by the organisation in regard to provisions of the company law, listing
agreements, SEBI regulations, shareholder grievances, etc. In view of the important role
performed by the company secretary vis-a- vis the functioning of the boards of the banks,
as also in the context of some of the public sector banks having made public issue it may
be necessary to have company secretary for these banks also. Banks should therefore
consider appointing qualified company secretary as the secretary to the board and have
a compliance officer (reporting to the secretary) for ensuring compliance with various
regulatory/accounting requirements.

RECOMMENDATIONS APPLICABLE ONLY TO PRIVATE SECTOR BANK
Eligibility criteria and ‘fit and proper’ norms for nomination of
directors:
The board of directors of the banks while nominating/ co-opting directors should be
guided by certain broad 'fit and proper’ norms for directors, viz. formal qualification,
experience, track record, integrity etc. For assessing integrity and suitability features like
criminal records, financial position, civil actions initiated to pursue personal debts,
refusal of admission to or expulsion from professional bodies, sanctions applied by
regulators or similar bodies, previous questionable business practices etc. should be
considered. The board of directors may, therefore, evolve appropriate systems for
ensuring ‘fit and proper’ norms for directors, which may include calling for information
by way of self-declaration, verification reports from market, etc.

The following criteria, which is in vogue in respect of nomination to the boards of public
sector banks, may also be followed for nominating independent/ non-executive directors
on private sector banks:
ü The candidate should normally be a graduate (which can be relaxed while selecting
directors for the categories of farmers, depositors, artisans, etc.)
ü He/she should be between 35 and 65 years of age.
ü He/she should not be a member of parliament/member of legislative assembly/
member of legislative council.

2. 7

Composition of the board:

in the context of banking becoming more complex and competitive, the composition of
the board should be commensurate with the business needs of the banks. There is an
urgent need for making the boards of banks more contemporarily professional by
inducting technical and specially qualified personnel. Efforts should be aimed at bringing
about a blend of 'historical skills' set, i.e. regulation based representation of sectors like
agriculture, SSI, cooperation etc. And the 'new skills' set, i.e. need based representation
of skills such as, marketing, technology and systems, risk management, strategic
planning, treasury operations, credit recovery etc. The above suggestions may be kept in
view while electing/co-opting directors to their boards.

BASEL COMMITTEE ON CORPORATE GOVERNANCE
Banks are the custodians of the public money. The objective of the corporate governance
in banks is first the protections of the depositor’s interest and then to optimise the share
holders/ stake holders interest.
A consultative document of guidelines on corporate governance for banks was released
by the BASEL committee on banking supervision in October 2014 and comments were
invited by the central banks of the countries. Once the comments received from all the
central banking authority is debated and deliberated, the BASEL committee will circulate
to the member banks for its implementation.

The principles of corporate governance of this consultative document
are as under:
Principle 1: Board’s overall responsibilities: The board has overall responsibility for
the bank, including approving and overseeing the implementation of the bank’s strategic
objectives, governance framework and corporate culture. The board is also responsible
for providing oversight of senior management.

Principle 2: Board qualifications and composition: Board members should be and
remain qualified, individually and collectively, for their positions. They should
understand their oversight and corporate governance role and be able to exercise sound,
objective judgment about the affairs of the bank.

Principle 3: Board’s own structure and practices: The board should define appropriate
governance structures and practices for its own work, and put in place the means for such
practices to be followed and periodically reviewed for ongoing effectiveness.

2. 8

Principle 4: Senior management: Under the direction and oversight of the board,
senior management should carry out and manage the bank’s activities in a manner
consistent with the business strategy, risk appetite, incentive compensation and other
policies approved by the board.

Principle 5: Governance of group structures: In a group structure, the board of the
parent company has the overall responsibility for the group and for ensuring that there
is a clear governance framework appropriate to the structure, business and risks of the
group and its entities. 17 the board and senior management should know and understand
the bank’s operational structure and the risks that it poses.

Principle 6: Risk Management: Banks should have an effective independent risk
management function, under the direction of a Chief Risk Officer (CRO), with sufficient
stature, independence, resources and access to the board

Principle 7: Risk identification, monitoring and controlling: Risks should be
identified, monitored and controlled on an ongoing bank-wide and individual entity basis.
The sophistication of the bank’s risk management and internal control infrastructure
should keep pace with changes to the bank’s risk profile, to the external risk landscape
and in industry practice.

Principle 8: Risk communication: An effective risk governance framework requires
robust communication within the bank about risk, both across the organisation and
through reporting to the board and senior management.

Principle 9: Compliance: The bank’s board of directors is responsible for overseeing
the management of the bank’s compliance risk. The board should approve the bank’s
compliance approach and policies, including the establishment of a permanent
compliance function.

Principle 10: Internal Audit: The internal audit function provides independent
assurance to the board and supports board and senior management in promoting an
effective governance process and the long-term soundness of the bank. The internal audit
function should have a clear mandate, be accountable to the board, be independent of the
audited activities and have sufficient standing, skills, resources and authority within the
bank.
2. 9

CORPORATE GOVERNANCE IN INSURANCE COMPANIES

The Insurance Regulatory and Development Authority (IRDA) has outlined in general
terms, governance responsibilities of the Board in the management of the insurance
functions under various Regulations notified by it covering different operational areas.
These guidelines are in addition to provisions of the Companies Act, 2013, Insurance Act,
1938 and requirement of any other laws or regulations framed thereunder. Where any
provisions of these guidelines appear to be in conflict with the provisions contained in
any law or regulations, the legal provisions will prevail.

The objective of the guidelines is to ensure that the structure, responsibilities and
functions of Board of Directors and the senior management of the company fully
recognize the expectations of all stakeholders as well as those of the regulator.

1) Composition of Insurance companies in India would be public companies &

the Board will require properly constituted Board.
The size of the Board in addition to being compliant with legal
requirements (where applicable), should be consistent with
scale, nature and complexity of business.
No. of Independent Directors
For Listed companies
ü If company has a non-executive Chairman, then at least
1/3rd of the directors and in other cases at least 50% of
the directors.
For Unlisted companies
ü 2 Independent Directors
As a matter of prudence, not more than one family member or
a close relative as defined in the Companies Act or an
associate (partner, director etc.) should be on the Board of an
Insurer as ‘Independent Director’.
2. 10

2) Conduct of The Board should also lay down systems that would make the
Meetings CS responsible for proper conduct of the Board meetings and
with adequate time to deliberate on the major issues in detail.
ü There should be a system of familiarizing new Directors with
the background of the company’s governance philosophy,
duties and responsibilities of the Directors, etc.
ü
ü Well-structured arrangements should be in place for ongoing
briefing of Directors on dynamic changes in the insurance in
particular and in the financial sector in general and for
updating the Directors through formal and informal
programmes covering regulatory systems, market growth
trends, future strategic plans/operations, etc.
3) Control Given the risks that an insurer takes in carrying out its
Functions operations, and the potential impact it has on its business, it
is important that the Board lays down the policy framework
to put in place:
ü Robust and efficient mechanisms for the identification,
assessment, quantification, control, mitigation and
monitoring of the risks;
ü Appropriate processes for ensuring compliance with the
Board approved policy, and applicable laws and regulations;
ü Appropriate internal controls to ensure that the risk
management and compliance policies are observed;
ü An internal audit function capable of reviewing and assessing
the adequacy and effectiveness of, and the insurer’s
adherence to its internal controls as well as reporting on its
strategies, policies and procedures; and
ü Independence of the control functions, including the risk
management function, from business operations
demonstrated by a credible reporting arrangement.
4) Committees IRDA has advised insurers that it is mandatory to establish

• Audit;
• Investment;
• Risk Management;
• Policyholder Protection; and
• Asset Liability Management (in case of life insurers)
Committees
2. 11

that have a critical role in strengthening the control

environment in the company. Establishment of the other
Committees is left to the option of the insurer.

CORPORATE GOVERNANCE IN PUBLIC SECTOR ENTERPRISES
Department of Public Enterprises (DPE) is the nodal department for issuing the corporate
governance guidelines for the Public Sector Enterprises for both at centre and state level.
To bring in more transparency and accountability in the functioning of CPSEs, the
Government in June, 2007 introduced, for an experimental period of one year, the
Guidelines on Corporate Governance for CPSEs.
These Guidelines were of voluntary nature. Since the issue of these guidelines, the CPSEs
have had the opportunity to implement them for the whole of the financial year 2008-09.
These Guidelines have been modified and improved upon based on the experience gained
during the experimental period of one year.
The Government have felt the need for continuing the adoption of good Corporate
Governance Guidelines by CPSEs for ensuring higher level of transparency and decided
to make these Guidelines mandatory and applicable to all CPSEs. Accordingly, revised
Guidelines on Corporate Governance for Central Public Sector Enterprises was issued by
DPE in 2010.

For the purpose of DPE Guidelines on Corporate Governance, CPSEs
have been categorised into 2 groups, namely
1. Those listed on the Stock Exchanges
2. Those not listed on the Stock Exchanges
CPSEs listed on Stock Exchanges Unlisted CPSEs

In so far as listed CPSEs are concerned, Each CPSE should strive to institutionalize
they have to follow the SEBI Guidelines on good Corporate Governance practices
Corporate Governance. In addition, they broadly in conformity with the SEBI
shall follow those provisions in these Guidelines. The listing of the non-listed
Guidelines which do not exist in the SEBI CPSEs on the stock exchanges may also be
Guidelines and also do not contradict any considered within a reasonable time
of the provisions of the SEBI Guidelines frame to be set by the Administrative
Ministry concerned in consultation with
the CPSEs concerned. The non-listed
CPSEs shall follow the Guidelines on
Corporate Governance on a mandatory
basis.
2. 12


DPE Guidelines on Corporate Social Responsibility (CSR) and
Sustainability for Central Public Sector Enterprises
Department of Public Enterprises (DPE) has issued New Guidelines on CSR and
Sustainability for CPSEs w.e.f. April 1, 2013.
The guidelines issued are in consonance with the National Voluntary Guidelines for
Social, Environmental & Economic Responsibilities of Business issued by the Ministry of
Corporate Affairs in July 2011.
In the revised guidelines the thrust of CSR and Sustainability is clearly on capacity
building, empowerment of communities, inclusive socio-economic growth, environment
protection, promotion of green and energy efficient technologies, development of
backward regions, and upliftment of the marginalized and under-privileged sections of
the society.
Making it mandatory in the revised guidelines for CPSEs to take up at least one major
project for development of a backward district has the potential of contributing
significantly in the long run to socio-economic growth in all the backward regions of the
country.
2. 13

CS Praveen Choudhary Board Effectiveness
Board Effectiveness – Issues and challenges

Role of Director
ü To establish the Vision & Mission Statement
ü Strategic Direction and advice
ü Overseeing Strategy Implementation and performance
ü Appointing and evaluation of CEO and Senior management
ü Ensuring Stakeholder Relations
ü Risk Mitigation
ü Procuring resources

Board of Directors (Sec 2(10))
ü The collective body of directors of the company.
ü A board of directors is a body of elected or appointed members who jointly oversee the activities of
a company. They are also referred as board of governors, board of managers, board of regents, board
of trustees, or simply referred to as "THE BOARD".

Types of Board
1. Unitary Board
The unitary board, remains in full control of every aspect of the company’s activities. It initiates
action and it is responsible for ensuring that the action which it has initiated is carried out. All the
directors, whether executive or outside, share the same aims and responsibilities and are on the
same platform.

2. Two-tier Boards
The alternative board model to unitary board is the two-tier board, which was developed in its
present form in Germany. A two-tier board fulfils the same basic functions as a unitary board, but it
does so through a clear separation between the tasks of monitoring and that of management. The
supervisory board oversees the direction of the business and the management board is responsible
for the running of the company. The supervisory board controls the management board through
appointing its members and through its statutory right to have the final say in major decisions
3. 1

affecting the company. The structure rigorously separates the control function from the
management function and members of the one board cannot be members of the other. This
separation is enshrined in law and the legal responsibilities of the two sets of board members are
different. The supervisory board system was introduced to strengthen the control of shareholders,
particularly the banks, over the companies in which they had invested. Shareholdings are more
concentrated in Germany and most quoted companies have at least one major shareholder, often a
family or another company. Banks play an important part in governance as investors, lenders and
through the votes of individual shareholders for which they hold proxies. They are, therefore, well
represented on supervisory boards.
Directors
Definition
Sec 2(34) of companies Act 2013 defines the term director as “A director appointed to the Board of the
Company.”

Governance Functionary
1. Executive Director
2. Non Executive Director
3. Shadow Director
4. Woman Director
5. Resident Director
6. Independent Director

Kumar Mangalam Birla Committee agreed on the following definition of “Independence”:
Independent directors are directors who apart from receiving director’s remuneration do not have any
other material pecuniary relationship or transactions with the company, its promoters, its management
or its subsidiaries, which in the judgment of the Board may affect their independence of judgment.

The Naresh Chandra Committee defined an independent director as follows:
An independent director of a company is a non-executive director who -
3. 2

a) Apart from receiving director’s remuneration, does not have any material pecuniary relationships
or transactions with the company, its promoters, its senior management or its holding company, its
subsidiaries and associated companies;
b) Is not related to promoters or management at the Board level, or one level below the Board (spouse
and dependent, parents, children or siblings);
c) Has not been an executive of the company in the last 3 years;
d) Is not a partner or an executive of the statutory auditing firm, the internal audit firm that is
associated with the company, and has not been a partner or an executive of any such firm for the
last 3 years.
e) Is not a significant supplier, vendor or customer of the company;
f) Is not a substantial shareholder of the company, i.e. owing 2 % or more of the block of voting shares;

g) Has not been a director, independent or otherwise, of the company for more than 3 terms of 3 years
each (not exceeding 9 years in any case):
h) An employee, executive director or nominee of any bank, financial institution, corporations or
trustees of debenture and bond holders, who is normally called a “nominee director” will be
excluded from the pool of directors in the determination of the number of independent directors. In
other words, such a director will not feature either in the numerator or the denominator.
7. Nominee Director
8. Lead Independent Director
9. Chairman
10. Chief Executive Officer (CEO)
11. Company Secretary

Board Composition [Sec 149]
(1) Every company shall have a Board of Directors consisting of individuals as directors and shall
(a) Minimum 3 directors in the case of a public company, 2 directors in the case of a private
company, and 1 director in the case of a OPC; and
(b) Maximum of 15 directors:
Provided that a company may appoint more than 15 directors after passing a special resolution:
3. 3

Provided further that such class or classes of companies as may be prescribed, shall have at least
1-woman director.
(2) Every company shall have at least one director who has stayed in India for a total period of not less
than 182 in the previous calendar year.
(3) Every listed public company shall have at least 1/3rd of the total number of directors as independent
directors and the Central Government may prescribe the minimum number of independent
directors in case of any class or classes of public companies.

Regulation 17 of the SEBI (LODR) Regulations, mandates as under:
(i) The Board of Directors of the company shall have an optimum combination of executive and non-
executive directors with at least one-woman director and not less than 50 % of the BOD comprising
non-executive directors.
(ii) Where the Chairperson of the Board is a non-executive director, at least 1/3rd of the Board should
comprise independent directors and in case the listed entity does not have a regular non- executive
Chairman, at least half of the Board should comprise independent directors.
Provided that where the regular non-executive Chairperson is a promoter of the listed entity or is
related to any promoter or person occupying management positions at the Board level or at one
level below the Board, at least one-half of the Board of the company shall consist of independent
directors.

BOARD CHARTER
As a good practice companies may have a Board Charter which is intended as a tool to assist directors
in fulfilling their responsibilities as Board members. It sets out the respective roles, responsibilities and
authorities of the Board and of Management in the governance, management and control of the
organization. This charter should be read in conjunction with the Company’s MOA and AOA.

A Model Charter may include the following:
The Role of the Board
The principal functions and responsibilities of the Board relating to
ü Strategies
ü Corporate Governance
3. 4

ü Financial Management
ü Relationship with Senior Management
ü Directors Code of Conduct
ü Conflicts of Interests
ü Related Party transactions
ü Board Members
ü Qualifications,
ü skills
ü Board Meetings
ü Delegation of Authority by the Board
ü Board Evaluation
ü Protocol for media contact and comment

RESPONSIBILITIES OF BOARD
The purpose of having a board in a company is:
ü To contribute to the business of the company through their knowledge and skills.
ü To advise on such matters as need their attention and influence.
ü To critically analyze the performance and operations of the company.
ü To be able to act as a professional aide.
ü To be able to offer their professional expertise in the relevant field.
ü To establish sound business principles and ethics.
ü To act as a mentor to the management.

The responsibilities of the directors can be summarized as below:
Responsibilities towards the company
The board should ensure that:
a) It acts in the best interest of the company.
b) The decisions it takes do not serve the personal interests of its members.
c) It helps the company in increasing its profits and turnover by following principles of equity, ethics
and values.
3. 5

d) It helps the company in building its goodwill.

e) It shares with the management the decision taken by them and the reasons thereof.
f) That the company has systems and means to best utilize the resources of the company and especially
its intangible resources.

Responsibilities towards management
The board must ensure that:
a) It gives its guidance, support and direction to the management in every decision.
b) It acts as leader to inspire and motivate the management to perform their duties.
c) It encourages compliance and disclosures.
d) It trusts the management and gives it the freedom to act.
e) It does not dictate terms but take objective decisions.
f) It follows the company’s code of conduct and the other rules and the regulations of the company.

Responsibilities towards stakeholders
a) Its every decision helps in the increasing the stakeholders value.
b) It does not act in a manner by which any stakeholder is prejudiced.
c) One stakeholder should not be benefited at the cost of the other.
d) It must discourage restrictive or monopolistic activities for the undue benefit of the company.
e) That proper system is established and followed which helps in resolving the grievances of the
stakeholders.
f) The company has policies for different class of stakeholders which are equally applicable. Such
policies should be based on the principles of equity and justice.
g) The company discloses its policies to all the stakeholders.
h) The stakeholders are able to establish long term relationships based on trust and confidence.

Corporate Social Responsibility
The board must ensure that
a) The company has policies which encourage social activities on purely non profitable basis.
3. 6

b) Such policies are followed ethically and resources are provided to give effect to these policies.
c) The actual benefit is actually passed on to the society by doing such activities.
d) That these policies cover activities such as upliftment of society, providing education to the needy,
promoting employment, preservation of environment, etc.
e) That the company’s products are eco-friendly and comply with all the related norms.
f) That the company does not take any decision which affects the society adversely.

Responsibility towards government
a) The company complies with all the laws applicable to it whether they are the central laws or state
laws.
b) There are systems and checks to ensure that the above is complied.
c) That all the dues towards the government in the form of taxes, rates, etc. are paid on time.
d) It supports the initiatives taken by the government for the promotion of welfare and security of the
nation.

Inter-se responsibilities
a) True and full disclosure of all the transactions, where there is an interest, is made to the other
members of the board.
b) It follows board decorum and code for conduct of meetings.
c) All relevant information is shared among themselves for a proper decision making.
d) It is able to take independent, unbiased and objective decisions.
e) The executive directors respect and give due regard to the presence and opinions of the non-
executive independent directors.

Barriers to Visionary Leadership
(i) Lack of Time Management
(ii) Resistance to risk taking
(iii) Lack of Strategic Planning
3. 7

(iv) Complexity
(v) Micro Management
(vi) Clinging to Tradition
(vii) Confused Roles
(viii) Past Habit
3. 8

CS Praveen Choudhary Secretarial Standard
Board Process through

SECRETARIAL STANDARD
Secretarial Standards – Meaning
1. Secretarial Standards are the policy documents relating to various aspects of secretarial practices in
the corporate sector.
2. These standards lay down a set of principles which companies are expected to adopt and adhere to,
in discharging their responsibilities.
Formulator of the Secretarial Standards

ICSI constituted the Secretarial Standards Board (SSB) in the year 2000 for formulating Secretarial
Standards. SSB formulates Secretarial Standards taking into consideration the applicable laws, business
environment and the best secretarial practices prevalent.
Composition of Secretarial Standards Board (SSB)

SSB having members from following authorities.
1. ICSI members working in Companies as well as in practice
2. Representatives of MCA,
3. Representatives of SEBI
4. Representatives of ICAI
5. Representatives of ICWAI
Scope and Functions of the Secretarial Standards Board

The scope of SSB is to identify the areas in which Secretarial Standards need to be issued by the Council
of ICSI and to formulate such Standards, taking into consideration the applicable laws, business
environment and best secretarial practices. SSB will also clarify issues arising out of such Standards and
issue guidance notes for the benefit of members of ICSI, Corporates and other users.
The main functions of SSB are

1. Formulating Secretarial Standards
2. Clarifying issues arising out of the Secretarial Standards
3. Issuing Guidance Notes
4. Reviewing and updating the Secretarial Standards
Scope of Secretarial Standards

1. The Secretarial Standards do not seek to substitute or supplant any existing laws or the rules and
regulations framed there under but, in fact, seek to supplement such laws, rules and regulations.
2. Secretarial Standards that are issued will be in conformity with the provisions of the applicable laws.
4. 1

3. However, if, due to subsequent changes in the law, a particular Standard or any part thereof becomes
inconsistent with such law, the provisions of the said law shall prevail.
Procedure for issuing Secretarial Standards
SSB, in consultation with the ICSI council, shall determine the areas in which Secretarial Standards
need to be formulated.
↓
SSB may constitute Working Groups to formulate preliminary drafts of the proposed Standards
↓
The preliminary draft of the Secretarial Standard prepared by the Working Group shall be circulated
amongst the members of SSB for discussion and shall be modified appropriately.
↓
The preliminary draft will then be circulated to the members of the Central Council as well as to
Chairmen of Regional Councils/ Chapters of ICSI, various professional bodies, Chambers of
Commerce, regulatory authorities for ascertaining their views.
↓
On the basis of the preliminary draft and the discussion with the bodies/organizations, an Exposure
Draft will be prepared and published in the “Chartered Secretary”, the journal of ICSI, and also put
on the Website of ICSI to elicit comments from members and the public at large.
↓
After taking into consideration the comments received, the draft of the proposed Secretarial Standard
will be finalized by SSB and submitted to the Council of ICSI.
↓
The Council will consider the final draft of the proposed Secretarial Standard and finalize the same
in consultation with SSB. The Secretarial Standard on the relevant subject will then be issued under
the authority of the Council.
SECRETARIAL STANDARDS UNDER THE COMPANIES ACT, 2013
Introduction and Need

The term ‘Secretarial Standard’ is defined as an explanation to section 205 of the Companies Act, 2013
to mean secretarial standards issued by ICSI constituted u/s 3 of the Company Secretaries Act, 1980 and
approved by the Central Government. Thus, for the 1st time, Secretarial Standards have been accorded
statutory recognition under the Companies Act, 2013.
The formulation of Secretarial Standards by the SSB and its statutory recognition is a unique and
pioneering step towards standardization of diverse Secretarial practices prevalent in the corporate sector.
No similar Standards are in existence elsewhere in the world.
4. 2

Generally, in addition to the Secretarial Standards, the requirements laid down under any other
applicable laws and rules and regulations, need to be complied with. However, in case of variations in
any provision of the applicable laws and the Secretarial Standards, the stricter provisions need to be
complied with.
If, due to subsequent changes in the law, a particular Standard or any part thereof becomes inconsistent
with such law, the provisions of the said law shall prevail.
Section 118 (10) of the Companies Act, 2013 requires every company to observe Secretarial standards
with respect to Board meetings (SS-1) and General meetings (SS-2).
Also, as per section 205(1) (b), it is the duty of the company secretary to ensure that the company
complies with the applicable secretarial standards.
Note: Earlier SS were approved by CG on 10th April 2015 and were published in Gazette on 23rd
April 2015. They were supposed to be effective from 1st July 2015 but it was withdrawn on 30th
Sept 2017 without effecting the enforceability of SS 1 and SS 2 during the period before such
withdrawal.
Now Revised SS-1 and SS-2 are approved by CG on 14th June 2017 which shall be effective from
1st October 2017.
Even Section 121 of the Companies Act, 2013 requires confirmation with respect to compliance of
Secretarial Standards in the Report on the AGM.
Section 205 (1) of the Companies Act, 2013 lays down the functions of the Company Secretary which
inter-alia include ensuring that the company complies with the applicable Secretarial Standards.
SECRETARIAL STANDARD -1 BOARD MEETING
SECRETARIAL
STANDARD-1
NON-APPLICABLTY
APPLICABLTY
OPC in which there is only 1
Meeting of board and
director and section 8
committee meeting
company.
4. 3

Ø Calendar Year is 1st January and ends on 31st December
Ø National Holiday” means Republic Day i.e. 26th January, Independence Day i.e. 15th August, Gandhi
Jayanti i.e. 2nd October and such other day as may be declared as National Holiday by the Central
Government
CONVENING A MEETING
Any Director of a company may, at any time, summon a Board Meeting and the CS or any
authorized person, shall convene Board Meeting, in consultation with the Chairman or in his absence,
the MD or in his absence, the WTD, where there is any, unless otherwise provided in the AOA.
DAY, TIME, PLACE, MODE AND SERIAL NUMBER OF MEETING:

Ø Every Meeting shall have a serial number.
Ø A Meeting may be convened at any time and any place, on any day.
NOTICE OF BOARD MEETING

Notice, Agenda and Notes of Agenda in writing of every Meeting shall be given to EVERY DIRECTOR
by following ways
Ø By hand or by Speed Post or by Registered Post or
Ø By fax or by Email or by any other electronic mode.
Ø In case the company sends the Agenda and Notes on Agenda by speed post or by registered
post an additional 2 days shall be added for the service of Agenda and Notes on Agenda.
Ø Where a Director specifies a particular means of delivery of Notice, the Notice shall be given
to him by such means. However, in case of a Meeting conducted at a shorter notice, the
Company may choose an expedient mode of sending notice.
Ø Proof of sending Notice and its delivery shall be maintained by the company for such period
as decided by the Board, which shall be at least 3 years from the date of the Meeting.
Ø Notice shall be issued by CS/Director/any other authorized officer.
Ø Notice shall be sent even if meeting is held on pre determined dates or at pre determined
intervals.
Ø Notice on items of business which are in the nature of unpublished price sensitive information
may be given at a shorter period of time but only with consent of a majority of the directors,
which shall include at least 1 Independent Director.
Ø Any item not included in the Agenda may be taken up for consideration with the permission
of the Chairman and with the consent of a majority of the Directors present in the Meeting.
Ø The decision taken in respect of any other item shall be final only on its ratification by a majority of
the Directors of the company, unless such item was approved at the Meeting itself by a majority of
Directors of the company.
4. 4

TIME PERIOD FOR ISSUE OF NOTICE

↓ ↓
NORMAL NOTICE SHORTER NOTICE
Notice, Agenda and Notes of Agenda convening To transact urgent business, the Notice, Agenda
a Meeting shall be given at least 7 days before and Notes on Agenda may be given at shorter
the date of the Meeting, unless the Articles period of time than stated above,
prescribed a longer period.
If at least one Independent Director, if any, shall
In case the company sends the Notice, Agenda be present at such Meeting.
and Notes of Agenda by Speed Post or by
registered post, An Additional 2 Days shall be If no Independent Director is present, decisions
Added for the service of Notice. taken at such a Meeting shall be circulated to all
the Directors and shall be final only on
The Notice, Agenda and Notes on Agenda shall ratification thereof by at least one Independent
be sent to the Original Director also at the address Director, if any.
registered with the company, even if these have
been sent to the Alternate Director. In case the company does not have an
Independent Director, the decisions shall be final
only on Ratification Thereof By A Majority Of
The Directors of the company, unless such
decisions were approved at the Meeting itself by
a majority of Directors of the company
Matter which can’t be dealt at a meeting held though Video conferencing unless expressly
permitted by the Chairman:
Ø Approval of the annual financial statements;
Ø Approval of the Board’s report;
Ø Approval of the prospectus;
Ø Audit Committee Meetings for consideration of accounts; and
Ø Approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.
CHAIRMAN OF BOARD MEETING
4. 5

1. The Chairman of the Board shall conduct the Board Meeting. If no such Chairman is elected or if
the Chairman is unable to attend the Meeting, the Directors present at the Meeting shall elect one of
themselves to chair and conduct the Meeting, unless otherwise provided in the AOA
2. If the Chairman is interested in an item of business, he shall, with the consent of the members
present, entrust the conduct of the proceedings in respect of such item to any Non-Interested
Director with the consent of the majority of Directors present and resume the chair after that
item of business has been transacted. However, in case of a private company, the Chairman
may continue to chair and participate in the Meeting after disclosure of his interest.
3. If the item of business is a related party transaction, the Chairman shall also not be present at
the Meeting, whether physically or through Electronic Mode, during discussions and voting
on such items.
4. In case some of the Directors participate through Electronic Mode, the Chairman and the Company
Secretary shall take due and reasonable care to safeguard the integrity of the Meeting by ensuring
sufficient security and identification procedures to record proceedings and safe keeping of the
recordings. No person other than the Director concerned shall be allowed access to the proceedings
of the Meeting where Director (s) participate through Electronic Mode, except a Director who is
differently abled, provided such Director requests the Board to allow a person to accompany him
and ensures that such person maintains confidentiality of the matters discussed at the Meeting.
5. The Chairman shall ensure that the required Quorum is present throughout the Meeting and at the
end of discussion on each agenda item the Chairman shall announce the summary of the decision
taken thereon
6. The Chairman of the Board or in his absence, the Managing Director or in their absence, the
Managing Director or in their absence, the WTD and where there is none, any Director other than
an Interested Director, shall decide, before the draft Resolution is circulated to all the Directors,
whether the approval of the Board for a particular business shall be obtained by means of a
Resolution by circulation.
FREQUECNY OF MEETING
↓ ↓
First board Meeting” should be held within 30 Meetings of the Board of Directors; (Except
days of Incorporation of Company. Small Company, OPC and Dormant co.);
Ø The company shall hold.
Ø At least 4 Board Meetings in a calendar year.
Ø Maximum interval between 2 board meetings
120 days
An adjourned Meeting being a continuation of the original Meeting, the interval period in such a
case, shall be counted from the date of the original Meeting.
MEETINGS OF THE INDEPENDENT DIRECTORS:

4. 6

Where a company is required to appoint Independent Directors under the Act, such Independent
Directors shall meet at least once in a Calendar year.
QUORUM
Ø The Quorum for a Meeting of the Board shall be 1/3rd or total no. of directors OR 2 Directors
whichever is HIGHER. Any fraction contained in the above 1/3rd shall be rounded off to the next
one.
Ø Where the Quorum requirement provided in the AOA is higher than 1/3rd of the total strength; the
company shall conform to such higher requirement.
Ø If the number of Interested Directors exceeds or is equal to 2/3rd of the total strength, the remaining
Directors present at the Meeting, being not less than 2, shall be the Quorum during such item.
Ø If there is no Quorum at the adjourned Meeting also, the Meeting shall stand cancelled.
Ø Quorum shall be present not only at the time of commencement of the Meeting but also
throughout the Meeting.
Ø Directors participating through Electronic Mode in a Meeting shall be counted for the purpose
of Quorum, unless they are to be excluded for any items of business under the provisions of
the Act or any other law.
Ø If a Director is interested in any resolution, he shall either be reckoned for Quorum nor shall be
entitled to participate in respect of an item of business in which he is interested. However, in case
of a private company, a Director shall be entitled to participate in respect of such item after
disclosure of his interest.
Ø If the item of business is a related party transaction, then he shall not be present at the meeting,
whether physically or through Electronic Mode, during discussions and voting on such item.
ATTENDANCE REGISTERS:
ATTENDANCE REGISTERS
Every Company shall maintain separate attendance registers for the Meetings of the Board & for
the Meetings of the Committee. The pages of the respective attendance registers shall be serially
numbered. If an attendance register is maintained in loose-leaf form, it shall be bound periodically
at-least once in every 3 years.
↓ ↓
PARTICULARS OF ATTENDANCE SIGNING OF ATTENDANCE REGISTER;
REGISTER OF BOARD MEETING Ø Every Director, Company Secretary who is in
Ø Serial number and date of the Meeting; attendance and
Ø Place of the Meeting; Ø Every Invitee who attends a Meeting of the
Ø Time of the Meeting; Board or Committee thereof shall sign the
attendance register at that Meeting.
4. 7

Ø Names of the Directors and signature of each Ø The attendance register shall be deemed to
Director and their mode of presence, if have been signed by the Directors
participating through Electronic Mode. participating through Electronic Mode, if
Ø Name and Signature of the Company their attendance is recorded in the attendance
Secretary and Also of persons attending the register and authenticated by the Company
Meeting by invitation. Secretary or where there is no Company
Ø In case of Committee Meeting “name of the Secretary, by the Chairman or by any other
Committee” also be mentioned. Director present at the Meeting, if so
Ø The attendance register is open for authorized by the Chairman and the fact of
inspection by the Directors, even after a such participation is also recorded in the
person ceases to be a Director, he shall be Minutes.
entitled to inspect the attendance register The attendance register shall be kept in the
of the Meetings held during the period of custody of the Company Secretary.
his Directorship
Ø The attendance register shall be preserved Ø Where there is no Company Secretary, the
for a period of at-least 8 financial years attendance register shall be kept in the
from the date of last entry made therein and custody of any other person Director
may be destroyed thereafter with the approval authorized by the Board for this purpose.
of the Board
PASSING OF RESOLUTIO BY CIRCULATION

The Act requires certain business to be approved only at Meetings of the Board. However, other
business that requires urgent decisions can be approved by means of Resolutions passed by
circulation. Resolutions passed by circulation are deemed to be passed at a duly convened Board
Meeting and have equal authority.
Check whether
1. A Resolution proposed to be passed by circulation is sent in draft along with necessary
documents, individually to all the Directors including Interested Directors on the same day.
2. The Resolution, if passed, shall be deemed to have been passed on the earlier of:
a) The last date specified for signifying assent or dissent by the Directors or
b) The date on which assent has been received from the required majority, provided that on that
date the number of directors, who have not yet responded on the resolution under circulation,
along with the Directors who have expressed their desire that the resolution under circulation
be decided at a Meeting of the Board, shall not be one third or more of the total number of
directors whichever is earlier and shall be effective from that date, if no other effective date
is specified in such Resolution.
3. Resolutions passed by circulation shall be noted at a subsequent Meeting of the Board and the text
thereof with dissent or abstention, if any, shall be recorded in the Minutes of such Meeting.
4. 8

MINUTES
1. Minutes shall be recorded in books maintained for that purpose.
2. A distinct Minutes Book shall be maintained for Meetings of the Board and each of its
Committees.
3. The pages of the Minutes Books shall be consecutively numbered.
4. Minutes shall not be pasted or attached to the Minutes Books, or tampered with in any
manner.
5. Minutes shall state, at the Beginning the serial number and type of the Meeting, name of the
company, day, date, venue and time of commencement and conclusion of the Meeting.
6. Minutes shall be written in third person and past tense. Resolutions shall however be written
in present tense. Minutes need not be an exact transcript of the proceedings at the Meeting.
7. Within 15 days from the date of the conclusion of the Board Meeting or Committee Meeting, the
draft Minutes shall be circulated to all the Directors for their comments.
8. Proof of sending draft Minutes and its delivery shall be maintained by the company for at least 3
years from the date of the Meeting.
9. The Directors, (whether present at the Meeting or not), shall communicate their comments, if any,
in writing on the draft Minutes within 7 days from the date of circulation. If no comment from
director, the draft minutes shall be deemed to be approved.
10. If any Director communicates his comments after the expiry of 7 days, if so authorized by the
Board, the Chairman shall have the discretion to consider such comments.
11. A Director, who ceases to be a Director after a Meeting of the Board is entitled to receive the
draft Minutes of that particular Meeting and to offer comments thereon, irrespective of
whether he attended such Meeting or not.
12. Minutes shall be entered in the Minutes Book within 30 days from the date of conclusion of the
Meeting.
13. A Member of the company is not entitled to inspect the Minutes of the Meetings of the Board.
14. The Board Report shall include a statement on compliances of applicable Secretarial Standards.
15. In case a Meeting is adjourned, the Minutes shall be entered in respect of the original Meeting as
well as the adjourned Meeting. In respect of a Meeting convened but adjourned for want of Quorum,
a statement to that effect by the Chairman or in his absence, by any other Director present at the
Meeting shall be recorded in the Minutes.
CONTENTS OF MINUTES:
a) The names of Directors present and their mode of attendance (Physical or Video conference).
b) If a Director participate through E Mode à his particulars, the location from where and the
agenda item in which he participated and wherever required, his consent to sign the statutory
registers to be placed in at the Meeting as per the Act.
c) The name of CS who is in attendance and Invitees, if any, for specific items and mode of their
attendance if through E - Mode.
d) Record of election, if any, of the Chairman of the Meeting.
4. 9

e) Record of presence of Quorum.
f) The names of Directors who sought and were granted leave of absence.
g) The fact that an Interested Director was not participate in the discussions and did not vote on
item of business in which he was interested and in case of a Related Party Transaction such
director was not present in the meeting during discussions and voting on such item.
4. 10

CS Praveen Choudhary Board Committees
Board Committees

Introduction
A board committee is a small working group identified by the board, consisting of board
members, for the purpose of supporting the board’s work. Committees are generally formed
to perform some expertise work. Members of the committee are expected to have expertise
in the specified field.

Committees are usually formed as a means of improving board effectiveness and efficiency,
in areas where more focused, specialized and technical discussions are required. These
committees prepare the groundwork for decision-making and report at the subsequent
board meeting. Committees enable better management of full board’s time and allow in-
depth scrutiny and focused attention.

Committee may be formed for the following purposes:
ü To select Board members, to select a CEO, to select KMP and senior management
personnel.
ü To look after/ administer/support Board members and committee members and other
executive positions.
ü For advising to the board for investments.
ü To report to the board about potential risks factor and to suggest action point for risk
mitigation.
ü Safety, Health & Environment Committee.
ü To inquire into particular questions (disciplinary, technical, etc.).
ü To be responsible for financial reporting, organising audits, etc.
ü To identify new markets; build relationship with media and public, etc.
Committees thus have an important role

5. 1

a) To strengthen the governance arrangements of the company and support the Board in
the achievement of the strategic objectives of the company.
b) To strengthen the role of the Board in strategic decision making and supports the role
of non-executive directors in challenging executive management actions;
c) To maximise the value of the input from non-executive directors, given their limited time
commitment;
d) To support the Board in fulfilling its role, given the nature and magnitude of the agenda.

RATIONAL BEHIND BOARD COMMITTEES:

1. To improve Board effectiveness and efficiency
2. Minor details need to be evaluated/ analysed to arrive at a logical conclusion- This
requires body having expertise in subject matter, a Board Committee shall in such cases
assist the Board and give well considered recommendations to the Board. e.g. Audit
Committee go through minor details of internal audit reports which is not possible and
give suitable recommendations, this is not possible for entire Board to consider.
3. Insulate Board from potential undue influence of controlling shareholders and managers
4. Committees prepare groundwork for decision making & submit their recommendations
to the Board for decision making.
5. Enables better management of Board’s time and allows in-depth scrutiny of proposals
6. Establishing committees is one way of managing the work of the Board and strengthening
the Board’s governance role.

Mandatory committees of Board
1. Under Companies Act 2013

a) Audit
b) NRC
c) SRC
d) CSR committee
5. 2

2. Under SEBI (LODR) Regulation 2015
a. audit
b. NRC
c. SRC
d. Risk Management committee
Audit Committee
Sec 177 read with Rule 6 of companies (meeting of board & its power) Rules 2014
The Board of directors of following companies are required to constitute a Audit Committee
of the Board-
1. All listed companies
2. All public companies with a paid up capital ≥ Rs. 10 Cr.;
3. All public companies having turnover ≥ Rs. 100 Cr.
4. All public companies, having in aggregate, outstanding loans or borrowings or debentures
or deposits exceeding Rs .50 Cr. or more.

Composition

As per companies Act 2013 As per SEBI (LODR)
Minimum of 3 directors Minimum of 3 directors
Majority should be independent directors 2/3rd members shall be independent
directors
Majority of members of Audit Committee All members shall be financially literate and
including its Chairperson shall be persons at least 1 member shall have accounting or
with ability to read and understand the financial management related expertise.
financial statement. The chairperson shall be independent
director.
The CS shall act as the secretary to the audit
5. 3

committee.

Function/Role of Audit Committee

As per companies Act 2013 As per SEBI (LODR)
1. the recommendation for appointment, 1. oversight of the listed entity’s financial
remuneration and terms of appointment reporting process and the disclosure of
of auditors of the company. its financial information to ensure that
2. review and monitor the auditor’s the financial statement is correct,
independence and performance, and sufficient and credible;
effectiveness of audit process; 2. recommendation for appointment,
3. examination of the financial statement remuneration and terms of appointment
and the auditors’ report thereon; of auditors of the listed entity;

3. approval of payment to statutory
4. approval or any subsequent
auditors for any other services rendered
modification of transactions of the
by the statutory auditors;
company with related parties;
4. reviewing, with the management, the
5. scrutiny of inter-corporate loans and
annual financial statements and
investments;
auditor's report thereon before
6. valuation of undertakings or assets of
submission to the board for approval,
the company, wherever it is necessary;
with particular reference to:
7. evaluation of internal financial controls
and risk management systems; a) matters required to be included in
monitoring the end use of funds raised the director’s responsibility
through public offers and related statement to be included in the
matters board’s report in terms of Section

134(3)(c) of the Companies Act,
2013;
b) changes, if any, in accounting
5. 4

policies and practices and reasons
for the same;
c) Major accounting entries involving
estimates based on the exercise of
judgment by management;
d) Significant adjustments made in the
financial statements arising out of
audit findings;
e) Compliance with listing and other
legal requirements relating to
financial statements;
f) Disclosure of any related party
transactions;
g) Modified opinion(s) in the draft
audit report;
5. Reviewing, with the management, the

quarterly financial statements before
submission to the board.

Number of Meetings and Quorum:
SEBI Listing Regulations, 2015 provides for the minimum number of meetings and quorum
of the audit committee.
1. The Audit Committee of a listed entity shall meet at least four (4) times in a year and not
more than 120 shall elapse between two meetings.
2. The quorum for audit committee meeting shall either be
ü 2 members or
ü 1/3rd of the members of the audit committee, whichever is greater;
5. 5

ü with at least 2 independent directors.
The requirement of minimum 2 independent directors in the meeting of Audit Committee is

new provision which must be complied by all the listed entities.

Disclosure in Board’s Report
Section 177(8) of the Act provides that the board’s report shall disclose following –
ü Composition of an Audit Committee

ü Where the Board had not accepted any recommendation of the Audit Committee, the
same shall be disclosed in the report along with the reasons therefor.
Nomination and Remuneration committee

Constitution of the Committee
a. All listed companies
b. All public companies with a paid up capital ≥ Rs. 10 Cr.
c. All public companies having turnover ≥ Rs. 100 Cr.
d. All public companies, having in aggregate, outstanding loans or borrowings or debentures
or deposits exceeding 50 crore rupees or more.
Composition
Under companies Act 2013 Under LODR 2015
Comprise of three or more directors; comprise of at least 3 directors
all directors shall be non-executive all directors of the committee shall be non-
directors; executive directors;
not less than one-half shall be independent at least 50% of the directors shall be
directors; independent directors.
The chairperson of the company (whether The chairperson of the listed entity, may be
executive or non-executive) may be appointed as a member of the Committee
5. 6

appointed as a member of the Committee but shall not chair such Committee.
but he shall not chair such Committee. The Chairperson of the committee shall be
an independent director.
The Chairperson of the committee may be
present at the annual general meeting, to
answer the shareholders' queries.

Functions of the Committee
Under Companies Act 2013
1. Identify persons who are qualified to become directors and who may be appointed in
senior management in accordance with the criteria laid down, recommend to the Board
their appointment and removal. Further it has been attached with a wider responsibility
of carrying out evaluation of every director’s performance.
2. Formulate the criteria for determining qualifications, positive attributes and
independence of a director and recommend to the Board a policy, relating to the
remuneration for the directors, key managerial personnel and other employees.
3. While formulating the policy, the Committee shall consider the following:
(a) the level and composition of remuneration is reasonable and sufficient to attract,
retain and motivate directors of the quality required to run the company
successfully;
(b) relationship of remuneration to performance is clear and meets appropriate
performance benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management
involves a balance between fixed and incentive pay reflecting short and long-term
performance objectives appropriate to the working of the company and its goals.
The remuneration policy formulated by the Committee is required under the Act to be
disclosed in the Board’s report.

5. 7

Under SEBI (LODR) Regulation 2015

(1) formulation of the criteria for determining qualifications, positive attributes and
independence of a director and recommend to the board of directors a policy relating to,
the remuneration of the directors, key managerial personnel and other employees;
(2) formulation of criteria for evaluation of performance of independent directors and the
board of directors;
(3) devising a policy on diversity of board of directors;
(4) identifying persons who are qualified to become directors and who may be appointed in
senior management in accordance with the criteria laid down, and recommend to the board
of directors their appointment and removal.
(5) whether to extend or continue the term of appointment of the independent director, on the
basis of the report of performance evaluation of independent directors.
Stakeholders Relationship committee

Constitution of the Committee
Sec 178(5) of companies act 2013 Regulation 20 of LODR 2015
Any company which have more than 1000 Every Listed entity
security holder

Composition
ü A chairperson who shall be non executive director
ü Other members to be decided by board
Functions
To consider and resolve the grievances of security holders of the company.

CSR committee
Section 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy) Rules,
2014, mandates that every company which fulfils any of the following criteria during any of
5. 8

the three preceding financial years shall constitute a CSR Committee -
Companies having
Ø Net worth ≥ Rs. 500 Cr. or
Ø Turnover ≥ Rs. 1000 Cr. or
Ø Net profit ≥ Rs. 5 Cr.
Composition of the Committee

ü The CSR Committee shall consist of three or more directors.
ü At-least one director shall be an independent director.
Functions
In accordance with section 135 the functions of the CSR committee include:
a) Formulating and recommending to the Board, a CSR Policy which shall indicate the
activities to be undertaken by the company as specified in Schedule VII;
b) Recommending the amount of expenditure to be incurred on the CSR activities.
c) Monitoring the Corporate Social Responsibility Policy of the company from time to time.
d) Further the rules provide that the CSR Committee shall institute a transparent
monitoring mechanism for implementation of the CSR projects or programs or activities
undertaken by the company.
Risk Management Committee

A company needs to have a proactive approach to convert a risk into an opportunity. It is
important for the company to have a structured framework to satisfy that it has sound
policies, procedures and practices in place to manage the key risks under risk framework of
the company. A risk management Committee’s role is to assist the Board in establishing risk
management policy, overseeing and monitoring its implementation.
Regulation 21 of the SEBI (LODR) Regulations, 2015 provides that the BOD of top 100 listed
entities, determined on the basis of market capitalisation, as at the end of the immediate
previous financial year shall constitute a Risk Management Committee.
5. 9


The majority of members of Risk Management Committee shall consist of members of the
board of directors.

The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.

The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit.

The committee shall be constituted with at least three directors, majority being independent
directors.

Major functions include:
1. Assisting the Board in fulfilling its risk management oversight responsibilities with
regard to identification, evaluation and mitigation of operational, strategic and external
environment risks.
2. To ensure that management has instituted adequate process to evaluate major risks
faced by the company
3. Establishing the role and responsibilities of officers/team who shall be responsible for:
i. Facilitating the execution of risk management practices in the enterprise
ii. Reviewing enterprise risks from time to time, initiating mitigation actions, identifying
owners and reviewing progress
iii. Reporting risk events and incidents in a timely manner.
4. Monitoring and reviewing risk management practices of the Company
5. Reviewing and approving risk-related disclosures.
5. 10

CS Praveen Choudhary Legislative Framework
Corporate Policies and Disclosures

Disclosure under Various laws

DISCLOSURES UNDER ICDR REGULATIONS
FILING OF OFFER DOCUMENT (REGULATION 6)
No Issuer shall make
ü A public issue; or
ü A right issue, where the aggregate value of the specified securities offered is ≥ Rs. 50
Lakh,
Unless a draft offer document, along with fees as specified in Schedule IV, has been
filed with the SEBI through the lead merchant banker, at least 30 days prior to
registering the prospectus, red herring prospectus or shelf prospectus with the ROC
or filing the letter of offer with the designated stock exchange, as the case may be.

COPIES OF OFFER DOCUMENTS TO BE AVAILABLE TO PUBLIC
(REGULATION 6)
1. The issuer and lead merchant bankers shall ensure that the contents of offer
documents hosted on the websites as required in these regulations are the same as
that of their printed versions as filed with the ROC, SEBI and the stock exchanges.
2. The lead merchant bankers and the recognised stock exchange shall provide copies of
the draft offer document and final offer document to the public as and when
requested.
3. However, the lead merchant bankers or the recognised stock exchange may charge a
reasonable sum for providing the copy of the offer document.

MANNER OF DISCLOSURES IN THE OFFER DOCUMENT (REGULATION
57)
The offer document shall contain all material disclosures which are true and adequate so
as to enable the applicants to take an informed investment decision.
Without prejudice to the generality of sub-regulation (1):
(a) The red-herring prospectus, shelf prospectus and prospectus shall contain:
ü The disclosures specified in section 26 of the Companies Act, 2013
ü The disclosures specified in the Schedule attached to the Regulations.
(b) The letter of offer shall contain disclosures as specified in the Schedule attached to
the regulations.

PRE-ISSUE ADVERTISEMENT FOR PUBLIC ISSUE (REGULATION 47)
1. Subject to the provisions of section 30 of the Companies Act, 2013, the issuer shall,
after registering the red herring prospectus or prospectus with the ROC, make a pre-
issue advertisement in one English national daily newspaper with wide circulation,
Hindi national daily newspaper with wide circulation and one regional language
newspaper with wide circulation at the place where the registered office of the issuer
is situated.
6. 1

2. It shall be in the format and shall contain the disclosures specified in the schedule
attached to the regulations.

ISSUE OPENING AND ISSUE CLOSING ADVERTISEMENT FOR PUBLIC ISSUE
(REGULATION 48)
An issuer may issue advertisements for issue opening and issue closing in the formats
specified in Schedule XIII of the regulations.

POST- ISSUE REPORTS (REGULATION 65)
In public issue, the lead merchant banker shall submit final post-issue report as specified
in Part C of Schedule XVI, within 7 days of the date of finalization of basis of allotment or
within 7 days of refund of money in case of failure of issue.
In rights issue, the lead merchant banker shall submit post-issue reports as
follows:-
a) Initial post issue report, within 3 days of closure of the issue;
b) Final post issue report, within 15 days of the date of finalization of basis of allotment
or within 15 days of refund of money in case of failure of issue. ”
The lead merchant banker shall submit a due diligence certificate in the prescribed
format along with the final post issue report.

POST-ISSUE ADVERTISEMENTS (REGULATION 66)
The post-issue merchant banker shall ensure that advertisement giving details relating
to
ü Oversubscription,
ü Basis of allotment,
ü Number,
ü Value and percentage of all applications including ASBA (Application Supported by
Blocked Amount) number,
ü Value and percentage of successful allottees for all applications,
ü Date of completion of despatch of refund orders or instructions to Self Certified
Syndicate Banks by the ROC,
ü Date of despatch of certificates and
ü Date of filing of listing application, etc.
is released within 10 days from the date of completion of the various activities in at least
one English national daily newspaper with wide circulation, one Hindi national daily
newspaper with wide circulation and one regional language daily newspaper with wide
circulation at the place where registered office of the issuer is situated.

The post-issue merchant banker shall ensure that issuer, advisors, brokers or any other
entity connected with the issue shall not publish any advertisement stating that issue has
been oversubscribed or indicating investors’ response to the issue, during the period
when the public issue is still open for subscription by the public.

6. 2

DISCLOSURES UNDER SEBI TAKEOVER CODE 2011

DISCLOSURES OF SHAREHOLDING AND CONTROL [REGULATIONS 28-31]

Regulation Made by shareholding Timing Made to
29(1) Acquirer acquiring 5% or more shares Within 2 Stock exchange

of the target company working days and target
company
29(2) Acquirer if there has been change in Within 2 Stock exchange
shareholding since last working days and target
disclosure and such change company
exceeds 2% of total
shareholding or voting rights
in the target company by the
Acquirer + PAC holding 5% or
more shares of the target
company.
30(1) Acquirer Any Person + PAC holding Within 7 Stock exchange
more than 25% shares or working days and target
voting rights in the target to from 31st company
disclose their aggregate March
shareholding and voting rights
30(2) Acquirer Promoters + PAC to disclose Within 7 Stock exchange
their aggregate shareholding working days and target
and voting rights from31st company
march
31(1) Acquirer Promoter + PAC pledging or Within 7 Stock exchange
creating encumbrance on the working days and target
shares of the target company from pledge company
31(2) Acquirer Invocation or release of the Within 7 Stock exchange
pledge or encumbrance on the working days and target
shares of the target company from company
invocation

DISCLOSURES UNDER BOARD REPORT

DISCLOSURES BY BOARD OF DIRECTORS IN THE BOARD’S REPORT

Disclosures under Section 134
(a) An extract of annual return u/s 92(3)
(b) Board report shall report on the highlights of performance of subsidiaries, associates
and joint venture companies and their contribution to the overall performance of the
company during the period.
(c) Number of Board Meetings.
(d) Director’s Responsibility Statement.
(e) Statement on declaration given by independent director u/s 149(6).
6. 3

(f) Particulars of loan, guarantees or investments u/s 186.

(g) The state of company’s affairs.
(h) Particulars of contracts and arrangements with related parties.
(i) Statement relating to risk management policy.
(j) Statement on corporate social responsibility.
(k) The amount proposed to carry to any reserve conservation of energy.
(l) Technology absorption.
(m) Foreign exchange earnings and out flow.

Directors’ Responsibility Statement 134(5)
It shall state that -
1. In the preparation of the annual accounts, the applicable accounting standards had
been followed along with proper explanation relating to material departures;
2. The directors had selected such accounting policies and applied them consistently
and made judgments and estimates that are reasonable and prudent so as to give a
true and fair view of the state of affairs of the company at the end of the financial year
and of the profit and loss of the company for that period;
3. The directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the
assets of the company and for preventing and detecting fraud and other irregularities;
4. The directors had prepared the annual accounts on a going concern basis; and
5. The directors, in the case of a listed company, had laid down internal financial controls
to be followed by the company and that such internal financial controls are adequate
and were operating effectively.
6. The directors, had devised proper systems to ensure compliance with the provisions
of all applicable laws and that such systems were adequate and operating effectively.

FORMAL ANNUAL EVALUATION [Rule 8(4) of Companies (Accounts) Rules 2014]
ü Every listed company and
ü Every other public company having a PSC ≥ Rs. 25 Cr. calculated at the end of the
preceding financial year
Shall include, in its Board’s Report, a statement indicating the manner in which formal
annual evaluation has been made by the Board of its own performance and that of its
committees and individual directors

REPORTING OF CORPORATE SOCIAL RESPONSIBILITY (CSR)
According to Rule 8 of the Companies (Corporate social Responsibility Policy) Rules 2014
The Board’s Report of a company covered under these rules pertaining to a financial year
commencing on or after the 1st day of April, 2014 shall include an annual report on CSR
containing particulars specified in Annexure to these rules.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT (MDAR)
In case of listed companies, the MDAR should either form a part of the Board’s Report or
be given as an addition thereto in the annual report to the shareholders. The MDAR
should include a discussion on the following matters within the limits set by the
company’s competitive position: -
6. 4

ü Industry structure and developments

ü Opportunities and threats
ü Segment-wise or product-wise performance
ü Outlook
ü Risks and areas of concern
ü Internal control systems and their adequacy
ü Discussion on financial performance with respect to operational performance

MDAR should be considered and approved by the Board in a meeting of the Board and
not through resolution passed by circulation. It is desirable that MDAR is signed in the
same manner as in the case of the Board’s Report.

DECLARATION FROM INDEPENDENT DIRECTORS
Every Independent Director in his 1st board meeting participated after appointment and
1st board meeting in every financial year or whenever there is any change give declaration
that he meets the criteria of independence.
The Company may obtain from every independent director a declaration to this effect as
a matter of good practice. The declaration placed before the Board shall be reviewed and
its decision recorded in the minutes.

Other Disclosures under Companies Act. 2013
a) Appointment of independent director
b) Disclosure about the composition of audit committee u/s 177(8) and also the
recommendation of audit committee
c) Details of establishment of vigil mechanism [section 177(9)]
d) Policies by the nomination and remuneration committee
e) Secretarial report given by a company secretary in practice.

DISCLOSURES UNDER SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS,
2015
It was issued by SEBI on 15th January, 2015 based on recommendations of Sodhi
committee. These Regulations were effective from 120th day of the date of notification
i.e. on and from 15th May, 2015, by repealing SEBI (Prohibition of Insider Trading)
Regulations 1992.

The Disclosure requirements under these Regulations are discussed below
Disclosures of trading by Insiders
Regulations 6 (2)
The disclosures to be made by any person shall include those relating to trading by such
person’s immediate relatives, and by any other person for whom such person takes
trading decisions.
It is intended that disclosure of trades would need to be of not only those executed by the
person concerned but also by the immediate relatives and of other persons for whom the
person concerned takes trading decisions.
These regulations are primarily aimed at preventing abuse by trading when in possession
of unpublished price sensitive information and therefore, what matters is whether the
6. 5

person who takes trading decisions is in possession of such information rather than
whether the person who has title to the trades is in such possession.

Regulations 6(3)
The disclosures of trading in securities shall also include trading in derivatives of
securities and the traded value of the derivatives shall be taken into account for purposes
of this Chapter, provided that trading in derivatives of securities is permitted by any law
for the time being in force.

Regulations 6(4)
The disclosures made shall be maintained by the company, for a minimum period of 5
years, in such form as may be specified.

Disclosures by certain persons - Initial Disclosure
Regulation 7 (1)
(a) Every promoter, KMP and director of every Listed company shall disclose his security
holding, to the company within 30 days of these regulations taking effect;
(b) Every person on appointment as a KMP or a director of the company or upon
becoming a promoter shall disclose his security holding of the company as on the date
of appointment or becoming a promoter, to the company within 7 days of such
appointment or becoming a promoter.

CONTINUAL DISCLOSURES
Regulation 7(2)
(a) Every promoter, employee and director of every company shall disclose to the
company the number of such securities acquired or disposed of within 2 trading days
of such transaction if the value of the securities traded, whether in one transaction or
a series of transactions over any calendar quarter, aggregates to a traded value in
excess of ten lakh rupees or such other value as may be specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on
which the securities are listed within 2 trading days of receipt of the disclosure or
from becoming aware of such information.

CODE OF FAIR DISCLOSURE
REGULATION 8 (1)
The BOD of Listed company, shall formulate and publish on its official website, a code of
practices and procedures for fair disclosure of unpublished price sensitive information
that it would follow in order to adhere to each of the principles set out in Schedule A to
these regulations, without diluting the provisions of these regulations in any manner.

Every such code of practices and procedures for fair disclosure of unpublished price
sensitive information and every amendment thereto shall be promptly intimated to the
designated stock exchanges. This provision is aimed at requiring transparent disclosure
of the policy formulated.

Principles of Fair Disclosure for purposes of Code of Practices and Procedures for
Fair Disclosure of Unpublished Price Sensitive Information -
6. 6

Regulation 81:
1. Prompt public disclosure of unpublished price sensitive information that would
impact price discovery no sooner than credible and concrete information comes into
being in order to make such information generally available.
2. Uniform and universal dissemination of unpublished price sensitive unpublished
price sensitive information to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with
dissemination of information and disclosure of unpublished price sensitive
information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed
selectively, inadvertently or otherwise to make such information generally available.
5. Appropriate and fair response to queries on news reports and requests for
verification of market rumours by regulatory authorities.
6. 7

Accounting and Audit Related Issues, RPT and

Vigil Mechanism

Many of the recent corporate failures like Maxwell in UK, Enron in US and Satyam in India
could be attributed to a lack of integrity on the part of management where individuals
were involved in aggressive accounting, earnings management or fraudulent financial
reporting to manipulate share prices, borrowings and bonus plans. In each of these cases
executives were able to con investors by manipulating and falsifying financial accounts
of the company. The auditors of the companies were either negligent or an accomplice in
allowing incorrect and misleading financial statements to be issued.

There is a clear need to restore confidence in capital markets and elsewhere by enhancing
corporate governance in order to provide financial information of the highest quality.
Confidence in financial reporting, and in audit, is a key factor in ensuring confidence in
capital markets.

The Cadbury Committee long back had recommended increasing auditors’ effectiveness,
setting up an audit committee to provide financial oversight and strengthen financial
reporting standards for improved disclosures. The Companies Act 2013 and SEBI LODR
Regulations provide various provisions for the strengthening of financial standards,
auditing standards, mandatory internal audit and secretarial audit for certain class of
companies, rotation of auditor’s constitution of NFRA etc.

STRENGTHENING FINANCIAL REPORTING STANDARDS
Better financial standards are required to reduce scope for management and auditor’s
discretion in preparing financial statements.

The CG, in consultation with the NACAS, had notified the Companies (IAS) Rules, 2015 in
exercise of the powers conferred by sec 133 & sec 469 of the Companies Act, 2013

There are now two separate sets of Accounting Standards in India –
1. Indian accounting Standards (Ind AS): Ind AS are the accounting standards
prescribed u/s 133 of the Companies Act, 2013. These accounting standards are
converged with corresponding IFRS.
2. Accounting standards: The CG in consultation with NACAS, has notified Companies
(Accounting Standards) Rules, 2006. Under these rules, 28 AS as recommended by the
ICAI are prescribed. These AS are as per the Generally Accepted Accounting Principles
of India and not converged with IFRS.

Regulation 48 of SEBI (LODR) Regulations, 2015 also provides that the listed entity shall
comply with all the applicable and notified Accounting Standards from time to time.

7. 1

Disclosure requirements pertaining to Accounting Standards
Section 129(5) of the Companies Act Regulation34(3) read with Schedule V
2013 provides- of SEBI LODR Regulations, 2015
Where the financial statements of a provides-
company do not comply with the Where in the preparation of financial
accounting standards, the company shall statements, a treatment different from
disclose in its financial statements, the that prescribed in an AS has been
deviation from the accounting standards, followed, the fact shall be disclosed in the
the reasons for such deviation and the financial statements, together with the
financial effects, if any, arising out of such management’s explanation as to why it
deviation. believes such alternative treatment is
more representative of the true and fair
view of the underlying business
transaction in the Corporate Governance
Report.

IMPROVING AUDITORS’ EFFECTIVENESS
Auditors are responsible for evaluating the validity and reliability of the company’s
financial statements. Statutory auditors are independent accounting professionals that
audit the financial statements on behalf of the shareholders to make sure they provide a
true and fair presentation of the financial status of the company. Thus it is the
shareholders who appoint auditors in the AGM.

The auditors must be a CA or a CA firm and they must carry out their work with
professional objectivity and due care. They should maintain a professional and
independent relationship with the management.

Provisions of co. act 2013 with reference to Auditors are as follows:

To maintain Auditor’s independence
Sec 141 provides for Eligibility, Qualifications and Disqualifications of auditors which
says, following can not be appointed as Auditor –
1. An officer or employee of the company.
2. A person who is partner or who in the employment, of an officer or employee of the
company.
3. A person who or his relative or partner -
a) is holding any security or interest in the company or the subsidiary or the holding
or associate co. or subsidiary of such holding co. Provided that the relative may
hold security or interest in the company of FV ≤ Rs. 1Lakh.
b) is indebted to the company or a subsidiary or its holding or associate co. or a
subsidiary of such holding co., in excess of Rs. 5 Lakh.
c) Has given a guarantee or provided any security towards indebtedness of any 3rd
party to the co., or its subsidiary, or its holding or associate co. or subsidiary of
such holding co. in excess of Rs. 1 Lakh.
4. person or a firm who (whether directly or indirectly) has business relationship with
the company, or its subsidiary, or its holding or associate company or subsidiary of
such holding company or associate company.
7. 2

5. A person whose relative is a director or is in the employment of the company as a
director or any other KMP.
6. A person who is in full time employment elsewhere or a person or a partner of a firm
holding employment as its auditor, if such person or partner is at the date of such
appointment, holding appointment as auditor of more than 20 companies.
7. A person who has been convicted by the court of an offence involving fraud and a
period of 10 years has not elapsed from the date of such conviction.
8. Any person whose subsidiary or associate company or any other form of entity is
engaged as on the date of appointment in consulting and specialized services as
provided in Section 144 (auditors not to render certain services).

Auditor’s Remuneration
Though Companies Act, 2013 does not specify any restrictions on auditor’s remuneration
it should be reasonable, adequate but not excess, keeping the scope of the audit and
auditor’s capabilities in mind. Excess Remuneration is an incentive to retain the client
and reduces their objectivity.

Non-Audit Services
Non – audit services may affect the independence of the auditor hence the following
are prohibited u/s 144.
a) accounting and book keeping services;
b) internal audit;
c) design and implementation of any financial information system;
d) actuarial services;
e) investment advisory services;
f) investment banking services;
g) rendering of outsourced financial services;
h) management services; and
i) any other kind of services as may be prescribed.

Oversight of Auditors:
To ensure independence and effectiveness of statutory auditors, the audit committee will
review and monitor the auditor’s independence, the audit scope and process, and
performance of the audit team and accordingly recommend appointment, remuneration
and terms of appointment of auditors of the company.

Reporting of Fraud by Auditors:
Section 143 (12) of the Companies Act 2013 read with Companies (Audit and Auditors)
rules, 2015 provides that If an auditor of a company, in the course of the performance of
his duties as statutory auditor, has reason to believe that an offence of fraud, which
involves or is expected to involve individually an amount of rupees one crore or above, is
being or has been committed against the company by its officers or employees, the
auditor shall report the matter to the Central Government. In case of a fraud involving
lesser than the above amount the auditor shall report the matter to Audit Committee
constituted u/s 177 OR to the Board immediately but not later than 2 days of his
knowledge of the fraud and he shall report the matter specifying the following: -
ü Nature of Fraud with description;
7. 3

ü Approximate amount involved; and
ü Parties involved.

When the same auditors continue in the same company for years and years, it results in
a close relationship between management and auditors which increases the chances of
fraud. Both Enron and Satyam saw this happen. Hence section 139 of the Companies Act
was introduced for mandatory rotation of auditors.
Section 139(2) read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014
–
ü No listed company or
ü A company belonging to the following classes of companies excluding OPC and small
companies
a) All unlisted public companies having PSC ≥ Rs. 10 Cr;
b) All private limited companies having PSC ≥ Rs. 20 Cr;
c) All companies having PSC of below threshold limit mentioned in (a) & (b), but
having public borrowings from financial institutions, banks or public deposits of
Rs. 50 Cr or more.
shall appoint or re-appoint –
a) an individual as auditor for more than 1 term of 5 consecutive years; and
b) an audit firm as auditor for more than 2 terms of 5 consecutive years.
Also, an individual auditor who has completed his term of 5 consecutive years shall not
be eligible for re-appointment as auditor in the same company for 5 years from the
completion of his term.

1. An audit firm which has completed 2 terms of 5 consecutive years, shall not be eligible
for re- appointment as auditor in the same company for 5 years from the completion
of such term.
2. Provided further that as on the date of appointment no audit firm having a common
partner or partners to the other audit firm, whose tenure has expired in a company
immediately preceding the financial year, shall be appointed as auditor of the same
company for a period of 5 years.

Example:
If ABC & Co. is auditor of M/S XYZ Ltd. and the balance sheet of M/S XYZ Ltd. is being
signed by Mr. A who is also a partner in other firm PQR & Co. If the original tenure of
appointment of ABC & Co. is expiring on 20th August, 2020. The firm PQR & Co. can’t take
the appointment of auditor of M/S XYZ Ltd. for the period of 5 years starting from 21st
August, 2020 and up to 20th August, 2025.

In the above example, PQR & Co. can take the advantage of being appointed as auditor on
a date starting after the expiry of financial year 2020-2021. In simple words, PQR & Co. is
being eligible for appointment of auditor of M/S XYZ Ltd. after the start of new financial
year from the expiry of original tenure of ABC & Co., as the proviso mentions only of one
preceding financial year.

AUDITING STANDARDS
The Standards on Auditing have been accorded legal sanctity in the under the Companies
7. 4

Act 2013. Auditors are now mandatorily bound by to ensure compliance with Standards
on Auditing.
It is the duty of every auditor to comply with the auditing standards. (Sec 143(9))
CG may prescribe auditing standards as recommended by ICAI in consultation with NFRA.
(Sec 143(10))
However, until any auditing standards are notified, any standard or standards of auditing
specified by the ICAI shall be deemed to be the auditing standards.

Internal Audit
Internal Audit is an independent management function, which involves a continuous and
critical appraisal of the functioning of an entity with a view to suggest improvements
thereto and add value to and strengthen the overall governance mechanism of the entity
including entity’s strategic risk management and internal control system.
An effective internal audit function can play a significant role within the corporate
governance framework of a company. Over the last decade internal audit has developed
and grown in importance. Efficient internal audit functions provide objective
assurance/assessments to the board (and to the audit committee) about the adequacy
and effectiveness of the processes by which risks are identified and prioritised; managed,
controlled, and mitigated.

Internal Audit is an independent appraisal activity within an organization for the review
of systems, procedures, practices, compliance with policies for accounting, financial and
other operations as a basis for service to management.
It is a tool of control -
ü To measure and evaluate the effectiveness of the working of an organization
ü To ensure that all the laws, rules and regulations governing the operations of the
organization are adhered to
ü To identify risks and also suggests remedial measures, thereby acting as a catalyst for
change and action.

Section 138 of the Companies Act, 2013 provides for the mandatory appointment of an
internal auditor who shall either be a CA or a cost accountant, or such other professional
as may be decided by the Board to conduct internal audit of the functions and activities
for classes of company as specified below –
1. Every Listed company
2. Every unlisted public company having –
a) PSC ≥ Rs. 50 Cr during the preceding FY; or
b) turnover ≥ Rs. 200 Cr. during the preceding FY; or
c) outstanding loans or borrowings from banks or PFI exceeding ≥ Rs.100 Cr at any
point of time during the preceding FY; or
d) outstanding deposits of ≥ Rs. 25 Cr. at any point of time during the preceding
financial year; and
3. Every private company having –
a) turnover ≥ Rs. 200 Cr during the preceding FY; or
b) outstanding loans or borrowings from banks or PFI exceeding Rs. 100 Cr. at any
point of time during the preceding FY.
The internal auditor may or may not be an employee of the company. The Audit
Committee of the company or the Board shall, in consultation with the Internal Auditor,
7. 5

formulate the scope, functioning, periodicity and methodology for conducting the
internal audit.

SECRETARIAL AUDIT
Secretarial Audit facilitates monitoring compliances with the requirements of law
through a formal compliance management programme which can produce positive
results to the stakeholders of a company. The Secretarial Audit provides an in-built
mechanism for enhancing corporate compliance generally and helps to restore the
confidence of investors in the capital market through greater transparency in corporate
functioning.

Only a member of the ICSI holding certificate of practice can conduct Secretarial Audit
and furnish the Secretarial Audit Report to the company. As per section 204(1) of
Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration
of Managerial Personnel) Rules, 2014, the following companies are required to obtain
Secretarial Audit Report –
ü Every listed company;
ü Every public company having a PSC ≥ Rs. 50 Cr; OR
ü Every public company having a turnover ≥ Rs. 200 Cr.
Here
“Turnover” means the aggregate value of the realisation of amount made from the sale,
supply or distribution of goods or on account of services rendered, or both, by the
company during a financial year.

Regulation 24A of SEBI (LODR) regulations, 2015 provides that, every listed entity and
its material unlisted subsidiaries incorporated in India shall undertake secretarial audit
and shall annex with its annual report, a secretarial audit report, given by a PCS, in such
prescribed form with effect from the year ended March 31, 2019.

CONSTITUTION OF NATIONAL FINANCIAL REPORTING Authority (NFRA)
NFRA is an independent regulator established u/s 132 of the Companies Act, 2013 to
oversee the auditing profession. It is similar to the Public Company Accounting Oversight
Body set by in the USA by the Sarbanes Oxley Act 2002.

The Authority shall have power to monitor and enforce compliance with accounting
standards and auditing standards, oversee the quality of service or undertake
investigation the auditors of the following class of companies and bodies corporate,
namely:-
a) companies whose securities are listed on any stock exchange in India or outside India;
b) unlisted public companies having PSC ≥ Rs. 500 Cr OR having annual turnover ≥ Rs.
1000 Cr OR having, in aggregate, outstanding loans, debentures and deposits ≥ Rs.
500 Cr as on the 31st March of immediately preceding FY;
c) insurance companies, banking companies, companies engaged in the generation or
supply of electricity, companies governed by any special Act for the time being in force
or bodies corporate incorporated by an Act;
d) any body corporate or company or person, or any class of bodies corporate or
companies or persons, on a reference made to the Authority by the CG in public
7. 6

interest; and
e) a body corporate incorporated or registered outside India, which is a subsidiary or
associate company of any company or body corporate incorporated or registered in
India as referred to in clauses (a) to (d), if the income or net worth of such subsidiary
or associate company exceeds 20% of the consolidated income or consolidated net
worth of such company or the body corporate.

Functions and duties of the Authority:
a) maintain details of particulars of auditors appointed in the companies and bodies
corporate;
b) recommend accounting standards and auditing standards for approval by the CG;
c) monitor and enforce compliance with AS and SA;
d) oversee the quality of service of the professions associated with ensuring compliance
with such standards and suggest measures for improvement in the quality of service;
e) promote awareness in relation to the compliance of AS and SA;
f) co-operate with national and international organisations of independent audit
regulators in establishing and overseeing adherence to AS and SA; and
g) perform such other functions and duties as may be necessary or incidental to the
aforesaid functions and duties.

Powers of NFRA
NFRA can:
1. investigate either suo-moto or on the reference made to it by Central Govt. into the
matters of professional or other misconduct, committed by any member or firm of
chartered accountants, registered under the Chartered Accountants Act, 1949.
2. impose penalties of not less than Rs. 1 Lakh which may extend to 5 times of the fees
received, in case of individual’s professionals and of not less than Rs. 10 Lakh which
may extend to 10 times of the fees received, in case of professional firms; IF the
misconduct is proved.
3. debarring the member or the firm from engaging himself or itself from practice as the
member of the ICAI for a minimum period of 6 months which may extend to a period
of 10 years.

RELATED PARTY TRANSACTIONS
A related party transaction can present a potential or actual conflict of interest and might
not be aligned with the best interests of the company and its shareholders, especially
minority shareholders. It can result in situations where such transactions are used as a
conduit to channel funds out of the company into another entity which is a “related party.”
These transactions can also be considered as a business opportunity that is lost to a
related party to the detriment of the interests of the company and its shareholders. Thus,
these conflicts of interest are inherently linked to the governance structure of a company,
which can either enhance or limit the board’s effectiveness. The board carries the main
responsibility for reviewing and guiding corporate strategy and for effectively
monitoring management, and is accountable to the company and its shareholders.

The various types of RPTs that are commonly observed are:
ü Financial assistance through provisions of loans, guarantees and collateral
7. 7

ü Asset sales and purchases between related parties
ü The sale, purchase or supply of any goods, materials or services in the ordinary course
of business
ü Bailouts

The requirements concerning related party transactions under Companies Act
2013 and SEBI (LODR) Regulations, 2015 may be divided into four key parts, viz.,
ü Identification of Related Parties
ü Identification of Related Party Transactions
ü Approval Process
ü Disclosure requirements

According to Section 2(76) of Companies Act 2013, “related party”, with reference
to a company, means—
i. A director or his relative;
ii. A key managerial personnel or his relative;
iii. A firm, in which a director, manager or his relative is a partner;
iv. A private company in which a director or manager is a member or director;
v. A public company in which a director or manager is a director or holds along with
his relatives, more than 2% of its PSC;
vi. Any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
vii. Any person on whose advice, directions or instructions a director or manager is
accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply
to the advice, directions or instructions given in a professional capacity;
viii. Any company which is –
ü A holding, subsidiary or an associate company of such company; or
ü A subsidiary of a holding company to which it is also a subsidiary;
ix. Such other person as may be prescribed;
Note: A director other than an independent director or KMP of the holding
company or his relative with reference to a company shall be deemed to be related
party.

Relative [Sec 2(77)]
Anyone who is related to another, if –
a) They are members of a Hindu Undivided Family;
b) They are husband and wife; or
c) One person is related to the other in the following manner, namely-
ü Father including step-father.
ü Mother including the step-mother.
ü Son including the step-son.
ü Son’s wife
ü Daughter
ü Daughter’s husband
ü Brother: Provided that the term “Brother” includes the step-brother;
7. 8

ü Sister: Provided that the term “Sister” includes the step-sister.

The definition of relative is harmonised under Regulation 2(1)(zd) of Listing Regulations.
Regulation 2(1) (zb) of Listing Regulations defines that “related party” means a related
party as defined u/s 2(76) of the Companies Act, 2013 or under the applicable AS.

As per Ind AS 24: A related party is a person or entity that is related to the entity that is
preparing its financial statements (i.e. the ‘reporting entity’)
a. A person or a close member of that person’s family is related to a reporting entity if
that person -
i. has control or joint control over the reporting entity;
ii. has significant influence over the reporting entity; or
iii. is a member of the key management personnel of the reporting entity or of a
parent of the reporting entity.

b. An entity is related to a reporting entity if any of the following conditions applies:
i. The entity and the reporting entity are members of the same group (which means
that each parent, subsidiary and fellow subsidiary is related to the others).
ii. One entity is an associate or joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member).
iii. Both entities are joint ventures of the same third party.
iv. One entity is a joint venture of a third entity and the other entity is an associate of
the third entity.
v. The entity is a post-employment bene t plan for the bene t of employees of either
the reporting entity or an entity related to the reporting entity. If the reporting
entity is itself such a plan, the sponsoring employers are also related to the
reporting entity.

i. The entity is controlled or jointly controlled by a person identified in (a).
ii. A person identified in (a)(i) has significant influence over the entity or is a member of
the KMP of the entity (or of a parent of the entity)
Thus, the term ‘related party’ is broader under listing regulations. The definition includes
all related parties under the Act and under IND AS 24. The definition of ‘related party’
under listing regulations is likely to result in identification of significantly higher number
of related parties vis-à-vis those under the Act. LODR is likely to result in identification of
much higher number of related parties and identification on a more consistent basis.

Identification of Related Party Transactions
Section 188 (1) of the Companies Act 2013 deals with the RPT with respect to:
ü Sale, purchase or supply of any goods or materials
ü Selling or otherwise disposing of, or buying, property of any kind
ü Leasing of property of any kind
ü Availing or rendering of any services
ü Appointment of any agent for purchase or sale of goods, materials, services or
property
ü Related party’s appointment to any office or place of pro t in the company, its
subsidiary company or associate company, and
7. 9

ü Underwriting the subscription of any securities or derivatives thereof, of the
company.
Under Regulation 2(1)(zc) of SEBI (LODR) Regulations, 2015 “related party transaction”
means a transfer of resources, services or obligations between a listed entity and a related
party, regardless of whether a price is charged and a “transaction” with a related party
shall be construed to include a single transaction or a group of transactions in a contract.

Approval process
A company shall enter into any contract or arrangement with a related party with respect
to RPT only with the consent of the BOD given by a BR and subject to certain conditions
as prescribed u/r 15 of the Companies (Meetings of board and its Powers) Rules, 2014.

The agenda of the Board meeting at which the resolution is proposed to be moved
shall disclose-
a) The name of the related party and nature of relationship;
b) The nature, duration of the contract and particulars of the contract or arrangement;
c) The material terms of the contract or arrangement including the value, if any;
d) Any advance paid or received for the contract or arrangement, if any;
e) The manner of determining the pricing and other commercial terms, both included as
part of contract and not considered as part of the contract;
f) Whether all factors relevant to the contract have been considered, if not, the details
of factors not considered with the rationale for not considering those factors; and
g) Any other information relevant or important for the Board to take a decision on the
proposed transaction.

Provisions under SEBI (LODR) Regulations, 2015
Policy on materiality of related party transactions:
Regulation 23(1)- The listed entity shall formulate a policy on materiality of related party
transactions and on dealing with related party transactions including clear threshold
limits duly approved by the board of directors and such policy shall be reviewed by the
board of directors at least once every 3 years and updated accordingly.

When will a transaction with a related party be material?
Regulation 23(1) and (1A)- A transaction with a related party shall be considered
material if the transaction(s) to be entered into individually or taken together with
previous transactions during a FY, exceeds 10% of the annual consolidated turnover of
the listed entity as per the last audited financial statements of the listed entity.
With effect from July 01, 2019, a transaction involving payments made to a related party
with respect to brand usage or royalty shall be considered material if the transaction(s)
to be entered into individually or taken together with previous transactions during a FY,
exceed 2 % of the annual consolidated turnover of the listed entity as per the last audited
financial statements of the listed entity.

Approval of Audit Committee
Regulation 23(2)- All related party transactions shall require prior approval of the audit
committee.

7. 10

Omnibus Approval:
Regulation 23(3) - Audit committee may grant omnibus approval for related party
transactions proposed to be entered into by the listed entity subject to the following
conditions, namely-
a. the audit committee shall lay down the criteria for granting the omnibus approval in
line with the policy on related party transactions of the listed entity and such approval
shall be applicable in respect of transactions which are repetitive in nature;
b. the audit committee shall satisfy itself regarding the need for such omnibus approval
and that such approval is in the interest of the listed entity;
c. the omnibus approval shall specify:
i. The names of the related party, nature of transaction, period of transaction,
maximum amount of transactions that shall be entered into,
ii. The indicative base price / current contracted price and the formula for variation
in the price if any; and
iii. Such other conditions as the audit committee may deem fit:
Provided that where the need for related party transaction cannot be foreseen and
aforesaid details are not available, audit committee may grant omnibus approval for such
transactions subject to their value not exceeding Rs. 1 Cr. per transaction.
d. The audit committee shall review, at least on a quarterly basis, the details of related
party transactions entered into by the listed entity pursuant to each of the omnibus
approvals given.
e. Such omnibus approvals shall be valid for a period not exceeding 1 year and shall
require fresh approvals after the expiry of 1 year:

Approval of the shareholders
Regulation 23(4) - All material RPT shall require approval of the shareholders through
resolution and no related party shall vote to approve such resolutions whether the entity
is a related party to the particular transaction or not:
Provided that the requirements specified under this sub-regulation shall not apply in
respect of a resolution plan approved u/s 31 of the IBC 2016, subject to the event being
disclosed to the RSE within 1 day of the resolution plan being approved;

Exemptions
Regulation 23 (5) - The provisions of Regulation 23 (2), (3) and (4) shall not be
applicable in the following cases:
a) Transactions entered into between 2 government companies;
b) Transactions entered into between a holding company and its WOS whose accounts
are consolidated with such holding company and placed before the shareholders at
the general meeting for approval.

Other provisions
ü Regulation 23 (6) The provisions of this regulation shall be applicable to all
prospective transactions.
ü Regulation 23 (7) For the purpose of this regulation, all entities falling under the
definition of related parties shall not vote to approve the relevant transaction
irrespective of whether the entity is a party to the particular transaction or not.
ü Regulation23(8) All existing material related party contracts or arrangements
7. 11

entered into prior to the date of notification of these regulations and which may
continue beyond such date shall be placed for approval of the shareholders in the first
General Meeting subsequent to notification of these regulations.
ü Regulation 23 (9) The listed entity shall submit within 30 days from the date of
publication of its standalone and consolidated financial results for the half year,
disclosures of RPT on a consolidated basis, in the format specified in the relevant
accounting standards for annual results to the stock exchanges and publish the same
on its website.
ü The relevant disclosures to be made under RPT have already been covered in the
previous chapter.

Vigil Mechanism/ Whistle blower
Meaning: - The term “whistle-blowing” originates from the practice of British policemen
who blew their whistles whenever they observed commission of a crime. The term
‘whistle-blowing’ is a relatively recent entry into the vocabulary of public and corporate
affairs although the phenomenon itself is not new.

The concept of a Whistle blower was in existence even in Ancient India, Kautilya had
proposed- “Any informant (súchaka) who supplies information about embezzlement just
under perpetration shall, if he succeeds in proving it, get as reward 1/6th of the amount
in question; if he happens to be a government servant (bhritaka), he shall get for the same
act 1/12th of the amount.”

Whistle blowing means calling the attention of the top management to some wrongdoing
occurring within an organization. A whistle blower may be an employee, former
employee or member of an organisation, a government agency, who have willingness to
take corrective action on the misconduct.

Types of Whistle blowers
1. Internal: When the whistle blower reports the wrong doings to the officials at higher
position in the organization. The usual subjects of internal whistle blowing are
disloyalty, improper conduct, indiscipline, insubordination, disobedience etc.
2. External: Where the wrongdoings are reported to the people outside the
organization like media, public interest groups or enforcement agencies it is called
external whistle blowing.
3. Alumini: When the whistle blowing is done by the former employee of the
organization it is called alumini whistle blowing.
4. Open: When the identity of the whistle blower is revealed, it is called Open Whistle
Blowing.
5. Personal: Where the organizational wrongdoings are to harm one person only,
disclosing such wrong doings it is called personal whistle blowing.
6. Impersonal: When the wrong doing is to harm others, it is called impersonal whistle
blowing.
7. Government: When a disclosure is made about wrong doings or unethical practices
adopted by the officials of the Government.
8. Corporate: When a disclosure is made about the wrongdoings in a business
corporation, it is called corporate whistle blowing.
7. 12


Whistle Blowing under SOX
Section 302 of Sarbanes Oxley Act of 2002, an Act enacted by U.S. congress to protect
investors by improving the accuracy and reliability of corporate disclosures made
pursuant to the securities laws, and for other purposes contains following provisions for
whistle-blowers:
ü Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner
discriminate against” whistle blowers
ü Establish criminal penalties of up to 10 years for executives who retaliate against
whistle blowers
ü Require board audit committees to establish procedures for hearing whistle blower
complaints
ü Allow the secretary of labour to order a company to rehire a terminated employee
with no court hearing.
ü Give a whistle blower the right to a jury trial, bypassing months or years of
administrative hearings

Vigil Mechanism under Companies Act, 2013
Every listed company and the companies belonging to the following class or classes shall
establish a vigil mechanism for their directors and employees to report their genuine
concerns or grievances-
a) the Companies which accept deposits from the public;
b) the Companies which have borrowed money from banks and PFI in excess of Rs. 50
Cr.
(Section 177(9) & Rule 7(1) of Companies (Meetings of Board and its Powers) Rules,
2014)

The vigil mechanism shall provide for adequate safeguards against victimisation of
persons who use such mechanism and make provision for direct access to the
chairperson of the Audit Committee in appropriate or exceptional cases.

The details of establishment of such mechanism shall be disclosed by the company on its
website, if any, and in the Board’s report.
The companies which are required to constitute an audit committee shall oversee the
vigil mechanism through the committee and if any of the members of the committee have
a conflict of interest in a given case, they should recuse themselves and the others on the
committee would deal with the matter on hand.

In case of other companies, the BOD shall nominate a director to play the role of audit
committee for the purpose of vigil mechanism to whom other directors and employees
may report their concerns.

The vigil mechanism shall provide for adequate safeguards against victimisation of
employees and directors who avail of the vigil mechanism and also provide for direct
access to the Chairperson of the Audit Committee or the director nominated to play the
role of Audit Committee, as the case may be, in exceptional cases.

7. 13

In case of repeated frivolous complaints being led by a director or an employee, the audit
committee or the director nominated to play the role of audit committee may take
suitable action against the concerned director or employee including reprimand.

Vigil mechanism under SEBI Listing Obligations and Disclosure Requirements,
2015
ü The listed entity shall formulate a vigil mechanism for directors and employees to
report genuine concerns.
ü The vigil mechanism shall provide for adequate safeguards against victimization of
directors or employees or any other person who avail the mechanism and also
provide for direct access to the chairperson of the audit committee in appropriate or
exceptional cases.
ü The listed entity shall disseminate the details of establishment of vigil mechanism/
Whistle Blower policy.
ü The disclosure regarding the details of establishment of vigil mechanism, whistle
blower policy, and affirmation that no personnel has been denied access to the audit
committee shall be made in the section on the corporate governance of the annual
report.
Case Example: Enron, a Houston-based energy company founded by a brilliant
entrepreneur, Kenneth Lay.

The company was created in 1985 by a merger of 2 American gas pipeline companies in
Nabraska and Texas. Lay assumed the role of chairperson and CEO, a position he held
through most of the next 16 years, until the company’s downfall in 2001. In a period of
16 years the company was transformed from a relatively small concern, involved in gas
pipelines, oil and gas exploration, to the world’s largest energy trading company. In 2001
Enron became a household name-and probably in most households in most countries
around the world. On 2 December, 2001 Enron, one of the 10 largest companies in the US,
led for bankruptcy.

During the boom years of the late 1990s the company positioned itself as a trader of
virtually any type of asset: pulp and paper, weather derivatives, commodities, credits, and
so on. It also expanded into areas that it thought would bene t from rapid growth,
including water (following deregulation measures), fiber optic capacity/ Internet
bandwidth, and so on. At the end of 1999, Enron launched its Internet based trading
platform—Enron online. In February 2001, the company’s stock market value was USD
4.60 billion.

In early 2001, as Lay handed the CEO role to Skilling, Enron reached an apex: the company
reported revenues of US $ 100 billion and ranked seventh on the Fortune500 list of
largest global companies.

In early 2001, however, the company’s problems started mounting: the expensive
expansion into the broadband sector became questionable. Enron’s stock prices started
falling. In August 2001 the chief executive Je ery Skilling, left the company following
concerns about the company’s management. Former CEO Lay returned to his old role
(retaining the board chair as well).

7. 14

Whistle blowers within the firm – aware of widespread financial improprieties—were
attempting to convey information to the board of directors; one employee, Sherron Watkins,
Enron’s vice president of corporate development, was finally successful in alerting certain
board members that all was not well. In November 2001, it became clear that Enron was
facing serious financial problems.

7. 15

CS Praveen Choudhary Governance & shareholder’s Right
Corporate Governance and Shareholders Rights

INTRODUCTION
Protection of shareholder rights is very important for good corporate governance.
It is one of the pillars of corporate governance.

INVESTOR PROTECTION IN INDIA
SEBI is the capital market regulator and nodal agency in India who regulates the security
market. One of the objectives of the SEBI is to provide a degree of protection to the
investors and to safeguard their rights, steady flow of savings into market and to promote
the development of and regulate the securities market. Investors should be safeguarded
not only against frauds and cheating but also against the losses arising out of unfair
practices.
Such practices may include:
ü Deliberate misstatement in offer statements to investors.
ü Price manipulations.
ü Insider trading.

SEBI has issued many guidelines and regulations to regulate the capital market and
to protect the investors.
Some of the guidelines are:
ü SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
ü SEBI (Ombudsman) Regulation 2003 - designed to redress the investor’s grievance
against listed companies or intermediaries or both for amicable settlement
ü SEBI (Prohibition of fraudulent and unfair Trade Practices relating to securities
market) Regulations 2003
ü SEBI (Prohibition of Insider Trading) Regulations 1992 and amended in 2002. The
basic objective is to prohibit persons who have more access to company’s information
which can be used to benefit the individual or group of individual or agency.
6. 1

ü SEBI has set up a separate cell to address the grievances of investors - SEBI
Complaints Redressal System (SCORES)

Companies Act, 2013 provides for some measures to protect the interest of
minority shareholders.
It includes the following:
Where a company, which has raised money from public through prospectus and still has
any unutilized amount out of the money so raised and which proposes to change its
objects, then the promoter and shareholders having control of a company are required
to provide an exit to the dissenting shareholders in accordance with regulations to be
specified by SEBI.

Where any benefit accrues to promoter, director, manager, KMP, or their relatives, either
directly or indirectly as a result of non-disclosure or insufficient disclosure in the
explanatory statement annexed to the notice of general meeting then such persons shall
hold such benefit in trust for the company and shall be liable to compensate the company
to the extent of the benefit received by him.

Class action suit:
In case of oppression / mismanagement, specified number of members or depositors are
entitled to file class action suit before NCLT for seeking prescribed reliefs. They may also
claim damages / compensation for fraudulent / unlawful / wrongful acts from or against
the company / directors / auditors / experts / advisors etc.
Some of the actions that can be taken are as under:
1. Restrain company from any act which is ultra vires the AOA / MOA.
2. Restrain company for breach of provisions of MOA / AOA, act or any other law.
3. Declare a resolution void if material facts are not provided.
4. Restrain company/ directors from acting on such resolutions.
5. Restrain company from taking action contrary to any resolution passed by
shareholders.
6. 2

6. Claim damages or compensation or demand any other suitable action.

7. Seek other remedies as tribunal may deem fit.

RIGHTS OF SHAREHOLDERS

GENERAL RIGHTS OF SHAREHOLDERS
1) Voting rights on issues that affect the corporation as a whole.
2) Rights related to the assets of the company.
3) Rights related to the transfer of stock.
4) Rights to receive dividends as declared by the BOD of the company.
5) Right to receive financial statements.
6) Rights to inspect the records and books of the company.
7) Rights to bring suit against the corporation for wrongful acts by the directors and
officers of the company.
8) Rights to share in the proceeds recovered when the corporation liquidates its assets.

SHAREHOLDERS RIGHT UNDER COMPANIES ACT 2013
1. Right to receive copies of the Audited Financial statements.
2. Right to receive copies of the Report of the Cost Auditor, if so directed by the
Government.
3. Right to receive copies of the Contract for the appointment of the MD or WTD.
4. Right to receive copies of the Notices of the general meetings of the company
5. Right to inspect Debenture trust deed.
6. Right to inspect Register of Charges.
7. Right to inspect Register of Members, Debenture holders and Index Registers, Annual
Returns.

SHAREHOLDER ACTIVISM
Shareholder activism refers to the active involvement of stockholders in their
organization.
6. 3

Shareholders can ensure that the company follows good corporate governance practices
and implements beneficial policies.

THE SHAREHOLDER ACTIVISM MEANS
a. Establishing dialogue with the management on issues that concern.
b. Influencing the corporate culture.
c. Using the corporate democracy provided by law.
d. Increasing general awareness on social and human rights issues concerning the
organization.

BENEFITS OF SHAREHOLDER ACTIVISM
1) Shareholders can ensure that the company follows good corporate governance
practices and implements beneficial policies.
2) Active participation in company meetings is a healthy practice. They can resolve
issues laid down in the annual and other general meetings and can raise concerns over
financial matters or even social causes such as protection of the environment.
3) Shareholder activists include public pension funds, mutual funds, unions, religious
institutions, universities, foundations, environmental activists and human rights
groups.

INVESTOR RELATIONS (IR)
Investor Relations (IR) is a strategic management responsibility that integrates
finance, communication, marketing and securities law compliance to enable the most
effective two- way communication between a company, the financial community, and
other constituencies, which ultimately contributes to a company’s securities achieving
fair valuation.
Typically, investor relation is a department or person reporting to the Chief Financial
Officer. In some companies, investor relation is managed by the public relations or
corporate communications departments, and can also be referred to as financial public
relations or financial communications.
6. 4

The investor relations function must be aware of current and upcoming issues that an
organization or issuer may face, particularly those that relate to fiduciary duty and
organizational impact.

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
OECD Principles of Corporate Governance were 1st released in May 1999 and revised in
2004. The principles are one of the 12 key standards for International Financial
stability of the Financial Stability Board and form the basis for the corporate governance
component of the Report on the Observance of Standards and Codes of the World Bank
Group.

The OECD Principles of Corporate Governance are:
1) Ensuring the Basis for an Effective Corporate Governance Framework.
2) The Rights of Shareholders and Key Ownership Functions
3) The Equitable Treatment of Shareholders
4) The Role of Stakeholders in Corporate Governance
5) Disclosure and Transparency
6) The Responsibilities of the Board

The OECD Principles II and III are very much relevant for this chapter and are
described as under:
Principle II :
The Rights of Shareholders and Key Ownership Functions
1) Shareholders should have the right to participate in, and to be sufficiently informed
on, decisions concerning fundamental corporate changes
2) Shareholders should have the opportunity to participate effectively and vote in
general shareholder meetings and should be informed of the rules, including voting
procedures, that govern general shareholder meetings:
3) Capital structures and arrangements that enable certain shareholders to obtain a
degree of control disproportionate to their equity ownership should be disclosed.
6. 5

4) Markets for corporate control should be allowed to function in an efficient and

transparent manner.
5) The exercise of ownership rights by all shareholders, including institutional investors,
should be facilitated.
6) Shareholders, including institutional shareholders, should be allowed to consult with
each other on issues concerning their basic shareholder rights as defined in the
Principles, subject to exceptions to prevent abuse.

Principle III:
The Equitable Treatment of Shareholders
1) All shareholders of the same series of a class should be treated equally.
2) Insider trading and abusive self-dealing should be prohibited.
3) Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest
in any transaction or matter directly affecting the corporation.

ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNANCE
Institutional investors are organizations which pool large sums of money and invest
those sums in companies. Their role in the economy is to act as highly specialized
investors on behalf of others.

In India, there are broadly the following types of institutional investors
1. Development oriented financial institutions such as IFCI, IDBI.
2. State financial corporations & Insurance Companies- LIC, GIC.
3. Banks.
4. Mutual funds etc.

INSTITUTIONAL SHAREHOLDERS SHOULD REFLECT THE FOLLOWING
CHARACTERISTICS:
1. Take active interest in the composition of BOD.
2. Be vigilant.
6. 6

3. Ensure that voting intentions are translated into practice.

4. Evaluate Corporate Governance performance of the company.

THE PROS AND CONS ON THE ROLE OF THE INSTITUTIONAL INVESTORS IN
PROMOTING THE GOOD CORPORATE GOVERNANCE
Pros Cons
The institutional investors have Mutual fund investors have the short term
significant stakes in the companies and vision hence their performance
so of the voting power. measurement may not be a significant
evaluation in assessing the corporate
governance while making the investment
decision.
They are in better position to have the The investment objectives are also a
access of the information about the deciding factor while making the investment
company. decision.
The stock market performance can Institutional investors may off-load the
visualised with the adoption of the holding if there is mis-matching in their
better corporate governance. asset-liability / liquidity position.
They may influence in attracting the A common man’s investment portfolio is
FDI in India. effected with the decision of the investment
by the institutional investors.

INSTITUTIONAL INVESTORS — GLOBAL TRENDS

THE UK STEWARDSHIP CODE
The UK stewardship code traces its origins to ‘the responsibilities of institutional
shareholders and agents: statement of principles,’ 1st published in 2002 by the
institutional shareholders committee (ISC), and which the ISC converted to a code in
2009.

6. 7

Following the 2009 walker review of governance in financial institutions, the Financial
Reporting Council (FRC) was invited to take responsibility for the code. In 2010, the FRC
published the 1st version of the UK stewardship code, which closely mirrored the ISC
code.

This edition of the code does not change the spirit of the 2010 code.
1) Stewardship aims to promote the long term success of companies in such a way that
the ultimate providers of capital also prosper. Effective stewardship benefits
companies, investors and the economy as a whole.
2) In publicly listed companies responsibility for stewardship is shared. The primary
responsibility rests with the board of the company, which oversees the actions of its
management. Investors in the company also play an important role in holding the
board to account for the fulfilment of its responsibilities.
3) The UK corporate governance code identifies the principles that underlie an effective
board. The UK stewardship code sets out the principles of effective stewardship by
investors. In so doing, the code assists institutional investors better to exercise their
stewardship responsibilities, which in turn gives force to the “comply or explain”
system.
4) For investors, stewardship is more than just voting. Activities may include monitoring
and engaging with companies on matters such as strategy, performance, risk, capital
structure, and corporate governance, including culture and remuneration.
Engagement is purposeful dialogue with companies on these matters as well as on
issues that are the immediate subject of votes at general meetings.
5) Institutional investors’ activities include decision-making on matters such as
allocating assets, awarding investment mandates, designing investment strategies,
and buying or selling specific securities. The division of duties within and between
institutions may span a spectrum, such that some may be considered asset owners
and others asset managers.
6) Broadly speaking, asset owners include pension funds, insurance companies,
investment trusts and other collective investment vehicles. As the providers of capital,
they set the tone for stewardship and may influence behavioural changes that lead to
better stewardship by asset managers and companies. Asset managers, with day-to-
6. 8

day responsibility for managing investments, are well positioned to influence

companies’ long-term performance through stewardship.
7) Compliance with the Code does not constitute an invitation to manage the affairs of a
company or preclude a decision to sell a holding, where this is considered in the best
interest of clients or beneficiaries.

Seven Principles for Institutional Investors under UK Stewardship
1) They should publicly disclose their policy on how they will discharge their
stewardship responsibilities.
2) They should have a robust policy on managing conflicts of interest in relation to
stewardship which should be publicly disclosed.
3) They should monitor their investee companies.
4) They should establish clear guidelines on when and how they will escalate their
stewardship activities.
5) They should be willing to act collectively with other investors where appropriate.
6) They should have a clear policy on voting and disclosure of voting activity.
7) They should report periodically on their stewardship and voting activities.

PRINCIPLES FOR RESPONSIBLE INVESTMENT (PRI)
The united nations-supported Principles for Responsible Investment (PRI) initiative is an
international network of investors working together to put the 6 principles for
responsible investment into practice. Its goal is to understand the implications of
sustainability for investors and support signatories to incorporate these issues into their
investment decision making and ownership practices.

The principles are voluntary and aspirational. The principles are designed to be
compatible with the investment styles of large, diversified, institutional investors that
operate within a traditional fiduciary framework.

Principle 1: we will incorporate ESG issues into investment analysis and decision-
making processes.
6. 9

Principle 2: we will be active owners and incorporate ESG issues into our ownership
policies and practices.
Principle 3: we will seek appropriate disclosure on ESG issues by the entities in which
we invest.
Principle 4: we will promote acceptance and implementation of the principles within the
investment industry.
Principle 5: we will work together to enhance our effectiveness in implementing the
principles.
Principle 6: we will scrutinise each report on our activities and progress towards
implementing the principles.

CODE FOR RESPONSIBLE INVESTING IN SOUTH AFRICA (CRISA)
The code for responsible investing in South Africa (CRISA) gives guidance on how the
institutional investor should execute investment analysis and investment activities and
exercise rights so as to promote sound governance.

CRISA applies to:
Institutional investors as asset owners, for example, pension funds and insurance
companies.
Service providers of institutional investors, for example, asset and fund managers and
consultants.

Purpose:
The king code was written from the perspective of the board of the company as the focal
point of corporate governance.
CRISA is intended to give guidance on how the institutional investor should execute
investment analysis and investment activities and exercise rights so as to promote sound
governance. Read together, the king code and CRISA provide a framework that relates to
the function of all role players in the overall governance system, including boards of
companies, institutional shareholders, their service providers And the ultimate
beneficiaries.
6. 10

The objective of providing such a framework is to ensure that sound governance is

practised
which results in better performing companies that deliver both economic value as well
as value within its broader meaning.

CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM (CALPER)
(MARCH 16, 2015)
The California public employees’ retirement system (CALPERS, system) is the largest U.S.
Public pension fund, with assets totalling approximately $300 billion spanning domestic
and international markets as of June 30, 2014.
Its mission is to provide responsible and efficient stewardship of the system to deliver
promised retirement and health benefits, while promoting wellness and retirement
security for members and beneficiaries. This mission was adopted by the CALPERS board
of administration in serving more than 1.6 million members and retirees.

The CALPERS board of administration is guided by the CALPERS board’s investment
committee, investment beliefs and core values: quality, respect, accountability, integrity,
openness, and balance.
CALPERS management and more than 380 investment office staff carry out the daily
activities of the investment program.

The CALPERS board, through its investment committee, has adopted the global
governance principles (global principles). The global principles create the framework by
which CALPERS:
1) Executes its shareowner’s proxy voting responsibilities.
2) Engages investee companies to achieve long-term sustainable risk-adjusted returns.
3) Requests internal and external managers of CALPERS capital to take into
consideration when making investment decisions.

THE SARBANES-OXLEY ACT
6. 11

The Sarbanes-Oxley Act of 2002 significantly increased the importance of investor

relations in the financial markets. The act established new requirements for corporate
compliance and regulatory governance, with an increased emphasis on accuracy in
auditing and public disclosure. Notable provisions of the act which apply to investor
relations include enhanced financial disclosures and accuracy of financial reports, real-
time disclosures, off- balance-sheet transaction disclosures, pro-forma financial
disclosures, management assessment of internal controls, and corporate responsibility
for financial reports.

REPORTING STANDARDS
Companies these days need to disclose much more. The current legal requirements are
prompting companies to refine their reporting standards too.
6. 12

CS Praveen Choudhary Governance & other stakeholders
CORPORATE GOVERNANCE AND OTHER

STAKEHOLDERS

STAKEHOLDER CONCEPT
In a business context, customers, investors and shareholders, employees, suppliers,
government agencies, communities, and many others who have a “stake” or claim in some
aspect of a company’s products, operations, markets, industry, and outcomes are known
as stakeholders. These groups are influenced by business, but they also have the ability
to affect businesses.

STAKEHOLDER CONCEPT DEPENDS UPON TWO PRINCIPLES

Principles of corporate legitimacy
The corporation should be managed for the benefit of its stakeholders:

ü Customers
ü Suppliers
ü Owners
ü Employees & local communities.
The rights of these groups must participate, in some sense, in decisions that substantially
affect their welfare.
Stakeholder fiduciary principle

ü Management bears a fiduciary relationship to stakeholders and to the corporation
as an abstract entity.
ü It must act in the interest of the stakeholders as their agent, and it must act in the
interests of the corporation to ensure the survival of the firm, safeguarding the long-
term stakes of each group.

7. 1

TYPES OF STAKEHOLDERS
Primary stakeholders
Those whose continued association is absolutely necessary for a firm’s survival; these
include employees, customers, investors, and shareholders, as well as the governments
and communities that provide necessary infrastructure.

Secondary stakeholders
They do not typically engage in transactions with a company and thus are not essential
for its survival; these include the media, trade associations and special interest
groups.
STAKEHOLDER ENGAGEMENT
Stakeholder engagement is an alliance-building tool. Corporations practice stakeholder
engagement in an effort to understand the needs of their stakeholders, create
partnerships and to promote dialogue. Stakeholder engagement identifies stakeholders,
assesses stakeholder needs, develops stakeholder relations plans and forms alliances
with stakeholders.

STAKEHOLDER ENGAGEMENT leads to increased transparency, responsiveness,
compliance, organizational learning, quality management, accountability and
sustainability.

STAKEHOLDER ENGAGEMENT is a central feature of sustainability performance.

Stakeholder engagement is undertaken for numerous reasons which include:
ü Improved corporate responsibility and financial performance across the globe.
ü To avoid conflict through negotiation, mediation and collaborative learning.
ü Development of a shared vision to direct future business decisions and operations.
ü To innovate through collaboration.

9. 2

STAKEHOLDER ANALYSIS
Stakeholder analysis is the identification of a project's/activity‘s key stakeholders, an
assessment of their interests, and the ways in which these interests affect project
riskiness and viability.

Doing a stakeholder analysis can:

ü Draw out the interests of stakeholders in relation to the problems which the project
is seeking to address (at the identification stage) or the purpose of the project (once
it has started).
ü Identify conflicts of interests between stakeholders,
ü Help to identify relations between stakeholders which can be built upon, and may
enable establish synergies
ü Help to assess the appropriate type of participation by different stakeholders.

ACTIVITY ANALYSIS
The ethical dimension of an activity can be determined with the help of the following grid
which is self-explanatory:
Activity Analysis (Ethical)
1) Parasite 3) Win-win Situation
Helping self Helping self
Injuring Others Helping Others
2) Martyr 4) Total Loss
Helping Others Injuring self
Injuring self Injuring Others

9. 3

THE CAUX ROUND TABLE

The Caux Round Table (CRT) is based on the belief that the world business community
should play an important role in improving economic and social conditions.

The Caux Round Table was founded in 1986 by Frederick Phillips, former President of
Philips Electronics and Olivier Giscard d’Estaing, former Vice-Chairman of INSEAD, as a
means of reducing escalating trade tensions. The CRT Principles for Business were
formally launched in 1994, and presented at the United Nations World Summit on Social
Development in 1995.
The Principles are comprehensive statement of responsible business practice formulated
by business leaders for business leaders.

THESE PRINCIPLES ARE ROOTED IN TWO BASIC ETHICAL IDEALS

KYOSEI
The Japanese concept of “Kyosei” means living and working together for the common
good enabling cooperation and mutual prosperity to coexist with healthy and fair
competition.
HUMAN DIGNITY
“Human dignity” refers to the sacredness or value of each person as an end, not simply as
a mean to the fulfilment of others’ purposes or even majority prescription.

CRT PRINCIPLES FOR BUSINESS

SECTION 1 : PREAMBLE
The mobility of employment, capital, products and technology is making business
increasingly global in its transactions and its effects.
Law and market forces are necessary but insufficient guides conduct. Responsibility for
the policies and actions of business and respect for the dignity and interests of its
stakeholders are fundamental.
9. 4

SECTION 2: GENERAL PRINCIPLES

Principle 1: The Responsibilities of Businesses
Principle 2: The Economic and Social Impact of Business

Principle 3: Business Behaviour
Principle 4: Respect for Rules
Principle 5: Support for Multilateral Trade

SECTION 3: STAKEHOLDER PRINCIPLES

ü Customers
ü Employees
ü Owners/Investors
ü Suppliers
ü Competitors
ü Communities
THE CLARKSON PRINCIPLE OF STAKEHOLDER MANAGEMENT

Principle 1
Managers should acknowledge and actively monitor the concerns of all legitimate
stakeholders, and should take their interests appropriately into account in decision-
making and operations.
Principle 2
Managers should listen to and openly communicate with stakeholders about their
respective concerns and contributions, and about the risks that they assume because of
their involvement with the corporation
Principle 3
Managers should adopt processes and modes of behaviour that are sensitive to the
concerns and capabilities of each stakeholder constituency
Principle 4
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Managers should recognize the interdependence of efforts and rewards among

stakeholders, and should attempt to achieve a fair distribution <5f the benefits and
burdens of corporate activity among them, taking info account their respective risks and
vulnerabilities.
Principle 5
Managers should work cooperatively with other entities, both public and private, to
insure that risks and harms arising from corporate activities are minimized and, where
they cannot be avoided, appropriately compensated.
Principle 6
Managers should avoid altogether activities that might jeopardize inalienable human
rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be
patently unacceptable to relevant stakeholders
Principle 7
Managers should acknowledge the potential conflicts between (a) their own role as
corporate stakeholders, and (b) their legal and moral responsibilities for the interests of
all stakeholders, and should address such conflicts through open communication,
appropriate reporting and incentive systems and, where necessary, third party review.

GOVERNMENT AS A STAKEHOLDER
Government is the largest stakeholder. Government policy and the legal environment set
the tone for the desired corporate governance practices by the corporate sector.
Government in any country plays a key role in setting the mandatory limit and
recognition of voluntary efforts of corporate sector. Since, it is a well maintained
proposition that you can’t legislate good behavior, therefore, the Government role is to
differentiate between the voluntary and mandatory measures becomes more important
so that in regulatory role, it should not burden the corporate sector with the legal
compliances.
9. 6

In India, MCA prescribed the following voluntary measures in the

context of Corporate Governance:
1. Corporate governance voluntary guidelines 2009
2. Corporate social responsibility (CSR) voluntary guidelines, 2009
3. National voluntary guidelines on social, environmental & economic responsibilities of
business
SOCIETY AS A STAKEHOLDER
1. What society wants from good governance in the aggregate is maximum production
of economic well-being.
2. This requires innovation and experimentation as well as it also requires control,
probity, and risk management to seize the activities involving hazard to the local
community.
3. Now a day’s Companies are spending voluntarily for the social and community
development which is well recognized by the society and government as well.
4. Business was perceived to maximize profit by exploiting environmental and social
systems. These perceptions and attitude forced society to revalue their expectations
from business.
5. It was realized that increased economic development at all costs would not be
desirable.
6. Only industrial development which does not reduce the quality of life should be
encouraged. Thus if businesses do not have in a socially responsible manner, their
activities will have a negative impact on the society and the society will have a
negative impact.
7. As a result of change in society’s attitude towards business, relations between society
and business firms first became strained, and this change triggered a sense of
frustration for corporate management in the early stage of this awareness.
9. 7

CS Praveen Choudhary Governance & Compliance Risk
Governance and Compliance Risk

“The risk management needs to lift up from risk control to risk intelligence which can
identify the potential business growth opportunities.”
– Pearl Zhu

“Governance is the culture, values, mission, structure, layers of policies, processes and
measures by which organizations are directed and controlled”.

Governance defines how the organization should perform, describing through policies what
is acceptable and unacceptable and compliance is the area responsible for inspecting and
proving that they are adequate, being implemented and followed.

Every organisation has a responsibility to identify existing and emerging legislation relevant
to its business and ensure that risks that may arise from the compliance requirements are
well understood by the board and management. The risks that may stem from non-
compliance with key legislative requirements can be very costly and damaging to an
organisation and the custodians of governance within the organisation.

The consequences of non-compliance range from penalties and fines, to imprisonment,
withdrawal of licenses, lawsuits and reputational risk which may individually and or
collectively have a fundamental impact on the organisation’s sustainability as a going
concern; as well as the impact that a lack of good corporate governance at board and
business levels can have on the business. The impact and probability of the risks that the
legislation represents depend on the attention paid to the legislation and how well risk and
compliance management is entrenched within the organisation. It is therefore critical that
an organisation implements relevant structures and processes to effectively manage and
monitor the compliance process to ensure that these are entrenched in a way that
compliance becomes “second nature”. The residual risk will also be high until the
organisation is able to implement measures or controls that effectively mitigate the new
risks arising out of compliance requirements for the new legislation.

COMPLIANCE RISK
Compliance risk is exposure to legal penalties, financial forfeiture and material loss an
organization faces when it fails to act in accordance with industry laws and regulations,
internal policies or prescribed best practices. Compliance risk is also sometimes known as
integrity risk. Many compliance regulations are enacted to ensure that organizations operate
fairly and ethically. For that reason, compliance risk is also known as integrity risk.

This risk is closely interconnected with the operational risk, legal and reputation, so that
from one follows the other.

Compliance risk is the threat posed to a company’s earnings or capital as a result of violation
or non conformance with laws, regulations, or prescribed practices. Companies that fail to
10. 1

comply with the necessary standards may be subjected to fines, payment of damages, and
voided contracts. This, in turn, can lead to diminished reputation and limited business
opportunities as the company finds its franchises reduced in value and its potential for
expansion curtailed. In extreme cases, the company may find it is no longer capable of
enforcing its contracts.

CONSEQUENCES/ RISKS OF NON-COMPLIANCE
Failing to comply with rules, regulations, and specifications could have costly consequences.
In the famous Sahara case, the Group was accused of failing to refund over 200 billion rupees
to its more than 30 million small investors that it had collected through two unlisted
companies of Sahara. In 2011, SEBI ordered Sahara to refund this amount with interest to
the investors, as the issue was not in compliance with the requirements applicable to the
public offerings of securities. Later in 2014, Mr Subrata Roy, the chairman of Sahara was
arrested for the said fraud. His proposal to settle the matter was rejected by the court and
SEBI.

Following are some of the risks of non compliance
1. Penalties and Fines:
Penalties include financial fines, limitations on activities, additional barriers to approval
and even imprisonment. Even if the organization sometimes is not given an actual
penalty, an investigation by a government body costs many hours of work and costs in
form of potential legal and contractor fees. Penalties for non compliance can lead to the
organization’s loss of reputation and business opportunities, as well as the devaluation
of its franchises.
Below are a few examples of penalties imposed under the laws and regulations in
India-
ü U/S 88 of the Co. Act 2013, if a company fails to maintain a register of members, the
company and every officer of the company in default shall be punishable with a ne
ranging from Rs. 50,000 to Rs. 3 Lakh. Further, u/s 92 of the Act, if a company fails to
file a copy of annual return within the prescribed timeline, the company shall be
punishable with a fine ranging from Rs. 50,000 to Rs. 5 Lakh.
ü U/S 13 of the FEMA 1999 imposes a penalty on every person who contravenes any
provision of this Act, or contravenes any rule, regulation, notification, direction or
order issued in exercise of the powers under this Act, or contravenes any condition
subject to which an authorisation is issued by the Reserve Bank. The said penalty can
equal up to three times the sum involved in such contravention where the amount is
quantifiable, or up to 200,000 rupees where the amount is not quantifiable. Where
such contravention continues, further penalties can be levied of up to Rs. 5,000 for
each day after the 1st day during which the contravention continues.
ü U/S 21 of the Maternity Benefit Act 1961 states that every employer who does not
comply with the provisions of the Act shall be punishable with imprisonment of up to
3 months, with a ne of up to Rs. 500 or with both.
ü Section 22A of the Minimum Wages Act 1948 imposes a penalty on every employer
who contravenes any provision of this Act or any rule or order made thereunder with
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a ne of up to Rs. 500.
ü Via its circular dated 15 June 2017, SEBI has imposed certain penalties for non-
compliance with certain provisions of the SEBI (ICDR) Regulations 2018, which
includes inter alia a penalty of Rs. 20,000 a day for delay in completion of bonus issue,
until the date of actual compliance.
ü Section 43A of the Competition Act 2002 imposes penalties on any person or
enterprise who fails to give notice to the commission with respect to forming a
combination. The penalty imposed may extend to 1% of either the total turnover or
the assets, whichever is the higher amount.
ü Penalty for non filing of Income Tax Return attracts interest u/s 234A of the Income
Tax Act,1961 and i.e. if the assessee fails to le its income tax return within the time
prescribed by section 139, the he shall be liable to pay interest @ 1% per month or
part of the month from the due date of ling of return to the actual date of ling of its
return. A further penalty can be levied up to Rs. 5,000 for non- filing of tax returns u/s
271F.
ü Penalty for Non- Preparation of Financial Statements is punishable with
imprisonment for a term which may extend to one year or with ne which shall not be
less than Rs. 50,000 but which may extend to Rs. 5,00,000 or both under the
Companies Act 2013.
ü Additional fee is leviable for Non- filing of Annual ROC forms as per specified MCA
slabs, which may extend up to 12 times of original fees. Apart from this, provisions
for striking of the company and prosecution are also present.

2. Criminal Charges:
Criminal charges are a potential consequence for certain regulatory non-compliance.
Failure to comply in areas pertaining to staff management, workplace safety, marketing,
supply chain, corporate governance, stock management and due diligence laws could
result in jail time for director or board member or other officials.

3. Reputational Damage:
A business’ public image is a key to its success. When a company is thrust into the public
eye for failing to comply with regulations, there are reputational repercussions, which
eventually lead to distrust. Once that happens, loyal customers may leave, new
customers may be put o and potentially beneficial partnerships may never develop.

Today because of the increased awareness and focus on good governance practices, all
the stakeholders want to do business with companies practicing legally and ethically.
Compliance violations can turn customers or suppliers away which damages the
reputation of the company. The companies tend to lose existing customer base and there
are few to no new customers to vouch for the trustworthiness of the company. The
damage to brand reputation can often cost even more than those fines.

4. Access to Markets and Product Delays:
Every country has its own labor and employment laws, and multinational companies are
10. 3

obligated to comply with local laws and regulations also. Also businesses are required
to meet a host of regulations if they wish to do business with government. Non-
compliance across enterprise and business network could result in exclusion from the
tendering processes and supplier databases. In addition, companies that place value on
corporate compliance may avoid doing business with companies which are non
compliant as they would want to ensure that they meet their own regulatory obligations.
Non compliances may also result into financially damaging events like having products/
services blocked at the border, forced to issue a recall or forced to destroy merchandise
due to compliance issues etc.

5. Roadblock in Funding:
The pre-requisite of any funding exercise is the status of tax and regulatory compliances.
A company cannot get funded, even in the seed investment level, whose compliances are
not up-to date. Banks also require compliance documents like audited financials,
auditor’s report, auditor’s certificate for the last 3 years or as the case may be. Chances
of a non-compliant company availing bank loans are next to 0 %.

POSSIBLE RISKS OF NON – COMPLIANCE
Compliance Area Possible risk of Non-compliance
Direct tax compliance ü Imposition of penalty Prosecution of directors
ü Loss of reputation
Indirect tax compliance ü Cancellation of licences Withdrawal of tax benefits
Stoppage of operations
Labour law compliance ü Imposition of penalty
ü Prosecution of directors / occupier Loss of reputation
ü Employee dissatisfaction
Environment, health & ü Stoppage of operations
safety laws ü Loss of reputation
ü Imposition of penalty
Corporate law compliance ü Imposition of penalty
ü Vacation / prosecution of directors or management

COMPLIANCE RISK MANAGEMENT
Compliance risk management is the process of managing corporate compliance to meet
regulations within a workable timeframe and budget. Compliance Risk management is part
of the collective governance, risk management and compliance discipline. The 3 fields
frequently overlap in the areas of incident management, internal auditing, operational risk
assessment, and compliance with various regulations.

In recent years, perception of compliance has undergone a sea change. The traditional and
narrow outlook that compliance is limited to statutory lings, required to run a business, has
10. 4

widened considerably. Compliance practices are now a cross-functional responsibility. They
need to be integrated in the policies and procedures of various functions like HR, quality,
risk, facilities, Finance, delivery, sales, marketing, procurement, security and more.

Further, laws and regulations in different countries at the national, state and local levels have
made compliance more complicated. Therefore, a culture must be instilled in an enterprise
to ensure minimum statutory compliance and compliance to other commitments such as
social, industry, client consumer etc. This calls for a systematic approach towards
compliance management.

Steps in Compliance Risk Management
1. Understand compliance obligations
The primary element to manage compliance is to understand compliance obligation in
the light of strategic goals and objectives. Compliance obligations stem from: Laws and
regulations, industry or generic standards, internal policies, processes and procedures
and contracts executed with clients and other stakeholders.

It is important to understand that obligations are either requirements or commitments.
Obligations that an enterprise has no control over are termed as compliance
requirements, for example, one resulting from new laws and regulations. While
obligations that an enterprise may choose to abide by – for example certain industry
standards or best practices – are termed as compliance commitments.

Here, a mechanism to ensure compliance obligations are kept up-to-date must be
established. An enterprise may choose to restrict the scope of compliance management
to compliance requirement but for a higher assurance, it may include compliance
commitments, too.

2. Assess risks
Once compliance obligations are established, a compliance risk assessment exercise
should be undertaken to identify risks, causes, the areas they impact and the
consequences thereof. A risk analysis to have better understanding of the risks should
follow. Such an analysis should consider the factors affecting the consequences and
likelihood of these consequences occurring as well as the controls in place. Looking at
the level of risk arrived at from the analysis exercise, a compliance risk evaluation should
be done to take appropriate decisions on treatment. This exercise is to prioritise the
treatment; it should be used as a tool to accept compliance risks. Compliance risks
analysed as low should also be monitored and subjected to corrective action.

3. Address all compliance risks:
An enterprise should ensure an effective action plan to address all compliance risks with
clear ownership, responsibility, accountability and closure timelines. This can be driven
with ease, if the enterprise ensures a documented compliance policy, objectives,
processes and procedures. Further, compliance responsibilities must be clearly
10. 5

identified, assigned and established as part of the job descriptions at different levels.

To ensure risks are addressed effectively, the management should ensure that all
employees with compliance obligation are competent. Periodic training and awareness
must be carried out and any other medium to communicate assigned responsibilities
should be explored. A continuous communication mechanism is required to ensure all
employees understand compliance and contribute to it by reporting risks and
discharging their responsibilities effectively.

4. Evaluate performance:
A mechanism to measure and monitor the performance of the compliance practices and
its impact on strategic goals and objectives must be developed. Developing compliance
performance indicators is one of the tools. It can be as simple as the number of employees
trained on compliance practices to mature indicators such as risks of non-compliance
and trends. Feedbacks from clients, stakeholders, suppliers, vendors, employees and
government agencies are a good source of data to ascertain compliance performance.
Governance mechanisms in the form of management reviews, internal audits and
periodic compliance reporting give great insights on the performance of compliance
practices.

COMPLIANCE RISK MITIGATION
New ethics, compliance, and reputational risks appear each day. At the same time, the recent
global recession has forced many organizational functions to closely examine their budgets
and resources. Together, these factors have created a tension between growing regulatory
obligations and the pressure to do more with less.

There are a number of critical questions organizations should ask related to
compliance risks and the program(s) in place to mitigate those risks:
Ø What kinds of compliance failures would create significant brand risk or reputational
damage? Could the failures arise internally, in the supply chain, or with regard to third
parties operating on the organization’s behalf?
Ø What is the likely impact of that damage on the organization’s market value, sales, pro t,
customer loyalty, or ability to operate?
Ø What kinds of compliance missteps could cause the organization to lose the ability to sell
or deliver products/services for a period of time?
Ø How should the compliance program design, technology, processes, and resource
requirements change in light of growth plans, acquisitions, or product/category/ service
expansions?
Ø Is the organization doing enough to inform customers, investors, third parties, and other
stakeholders about its vision and values? Is it making the most of ethics, compliance, and
risk management investments as potential competitive differentiators?
Ø What are the total compliance costs—beyond salaries and benefits at the centralized
level—and how are costs aligned with the most significant compliance risks that could
impact the brand or result in significant fines, penalties, and/ or litigation?
10. 6

Ø How well-positioned is the compliance function? Does it have a seat “at the table” in
assessing and influencing strategic decisions?
Ø What are the personal and professional exposures of executive management and the
board of directors with respect to compliance?

While it is impossible to eliminate all of an organization’s risk exposure, the risk framework
and methodology help the organization prioritize which risks it wants to more actively
manage. Developing a framework and methodology helps organizations determine the
extent to which the organization’s existing risk-mitigation activities (for example, testing and
monitoring or employee training programs) are able to reduce risk.

Embedding compliance with all key legislation in the organisation is a function of certain
critical activities and stems from collaboration across key functions such as Legal,
Compliance, Risk Management, Business and Internal Audit. These functions all form part of
the “three lines of defence”. The success of any compliance management and monitoring
programme depends on the existence, functioning and integration of these lines of defence
in the performance of their duties.

The Risk Management function should support the Compliance Office with the risk rating of
the relevant legislation once such legislation becomes operational in the business. A
compliance risk register for the regulatory universe, showing both the inherent and residual
ratings of each piece of legislation, based on impact and likelihood, should be the product of
this process. The penalties - financial, imprisonment, etc - and other business risks
associated with key provisions of the legislation should be identified and captured on the
compliance risk register for the regulatory universe as management should know if a piece
of legislation will affect shareholder value.

In conducting a review of compliance within the organisation, Internal Audit should
ask the following questions:
ü What are the pieces of legislation that should be reviewed?
ü What new processes are being put in place as a result of compliance requirements?
ü What new systems are being put in place to support and monitor compliance?

The span of the internal audit review will be as follows:
Legislation – Policy – Procedures – Systems / Processes.

Internal Auditors should be able to map the legislation to the existence of a policy and a risk
map. They need to substantiate and audit compliance risk ratings that have changed,
especially where residual ratings show improved controls. For example, if the organisation
has had many complaints escalated to an ombudsman, it is a likely indication of non-
compliance and hence the applicable residual rating cannot be acceptable (green); it should
probably be yellow or red.

Thus the compliance framework needs to be comprehensive, dynamic, and customizable,
10. 7

allowing the organization to identify and assess the categories of compliance risk to which it
may be exposed. Some compliance risks are specific to an industry or organization—for
example, worker safety regulations for manufacturers or rules governing the behavior of
sales representatives in the pharmaceutical industry. Other compliance risks transcend
industries or geographies, such as conflicts of interest, harassment, privacy, and document
retention.

Essentials of a Successful Compliance Risk management Program
ü Active board and senior management oversight
ü Effective policies and procedures
ü Compliance risk analysis and comprehensive controls
ü Effective compliance monitoring and reporting
ü Testing

NEW DEVELOPMENTS- GOVERNANCE AND RISK COMPLIANCE (GRC)
Till now, compliance was seen as a separate business practice, along with governance and
risk management. However, over the past decade, these 3 disciplines have developed a
considerable number of overlapping activities, such as internal audits, incident management,
operational risk assessment, or compliance with regulatory programs. Today, many
companies take an integrated approach to these three areas, referring to them collectively
as Governance, Risk Management and Compliance (GRC).

GRC is the integrated collection of capabilities that enable an organization to reliably achieve
objectives, address uncertainty and act with integrity. Governance, risk and compliance
(GRC) refers to a strategy for managing an organization’s overall governance, enterprise risk
management and compliance with regulations. GRC is a set of processes and practices that
runs across departments and functions. GRC might be enabled by a dedicated platform and
other tools, although this is not mandatory. While organizations generally don’t need to
maintain a separate GRC department, most organizations have a team in place to manage the
GRC platform and tools. The scope of GRC doesn’t end with just governance, risk, and
compliance management, but also includes assurance and performance management,
information security management, quality management, ethics and values management, and
business continuity management.

Effective GRC implementation helps the organization to reduce risk and improve control
effectiveness, security and compliance through an integrated and unified approach that
reduces the ill effects of organizational silos and redundancies.

As the world becomes more complex, enterprises need a range of GRC skills and capabilities
that may not all be present with a single provider or a single business function. Some may lie
with a consulting firm, others with a data or content firm, and still others with a technology
platform provider or a system integrator. Going forward, the emphasis will be on how we
can bring more of these companies and their capabilities together in a single, comprehensive
GRC community – one that fosters open and transparent communication, and enables people
10. 8

to learn from each other’s best practices and mistakes.

GRC professionals are increasingly being given a seat at the company strategy table, the
revenue generating side. Decision-makers need them to interpret risk pro les and data, and
provide intelligence on how to increase revenue and sales.

10. 9

CS Praveen Choudhary Corporate Governance Forum
Corporate Governance forum

The world has become a borderless global village. The spirit to implement internationally
accepted norms of corporate governance standards found expression in private sector,
public sector and the government thinking. The need to find an institutional framework
for corporate governance and to advocate its cause has resulted in the setting up and
constitution of various corporate governance forums and institutions the world over.

INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

Vision and Mission Statements
Recognising the fact that Corporate Governance is the key to development of corporate
sector, the Institute has adopted a farsighted vision “To be a global leader in promoting
Good Corporate Governance”
The Mission of the Institute is “To develop the high calibre professionals facilitating
good Corporate Governance”.

The ICSI, after extensive research, has taken a lead step in defining Corporate Governance
as “the application of best management practices, compliance of law in letter and spirit
and adherence to ethical standards for effective management and distribution of wealth
and discharge of social responsibility for sustainable development of all stakeholders.”

The ICSI National Awards for Excellence in Corporate Governance

In pursuit of excellence and to identify, foster and reward the culture of evolving globally
acceptable standards of corporate governance among Indian companies, the “ICSI
National Award for Excellence in Corporate Governance” was instituted by ICSI in the
year 2001.

11. 1

The Awards comprising citation and trophy are based on the outcome of concerted and
comprehensive process of evaluation which enables the Jury to judge on the basis of
parameters, the practices of corporate governance as followed by Indian corporates and
acknowledge the best practices worthy of being exemplified.

The underlying guideline for the Corporate Governance Award is to identify the
corporates, which follow the best corporate governance norms in letter and spirit.

ICSI INITIATIVES
ICSI has set up the ICSI- centre for corporate governance research and training
(CCGRT) with the objective of fostering and nurturing research initiatives among
members of the company secretaries profession and other researchers.

ICSI national award for excellence in corporate governance was instituted by the ICSI
in 2001 to identify, foster and reward the culture of evolving global best practices of
corporate governance among Indian companies. Each year, the award is conferred upon
two best governed companies and ICSI life time achievement award for translating
excellence in corporate governance into reality is bestowed on an eminent
personality.

Focus on corporate governance in the course curriculum - considering

corporate governance as core competency of company secretaries, education and
training for company secretary significantly focuses on corporate governance. One full
paper on corporate governance titled “ethics, governance and sustainability” forms
part of the syllabus in the professional programme.

Secretarial Standards - as a pioneering initiative, ICSI issues secretarial standards

to integrate, harmonise and standardise the diverse secretarial practices prevalent in the
corporate sector. Two secretarial standards issued by ICSI - SS-1: meetings of the board
11. 2

of directors and SS-2: general meetings have been notified in the official gazette under
section 118 (10) of the Companies act 2013 which provides that every company shall
observe secretarial standards with respect to general and board meetings specified by
the institute of company secretaries of India and approved as such by the central
government. They have been effective from July 1,2015. Prior to the promulgation of the
companies act, 2013, the secretarial standards were recommendatory in nature and ICSI
had issued 10 secretarial standards. With the introduction of SS in the statute book has
marked a new era of healthy secretarial practices among professional.
Corporate governance publications - The institute regularly brings out

publications of interest to members and corporate sector to inculcate the culture of good
governance. One of the major Publications of ICSI is ‘corporate governance - beyond
letters’. The revised edition of this publication is brought out regularly by incorporating
the best practices of the corporates participating in the award.

National policy on corporate governance - The MCA vide office memorandum

dated march 7, 2012 had constituted a committee to formulate a policy document on
corporate governance under the chairmanship of Mr. Adi Godrej. The president, ICSI was
the member secretary/convener. The concept paper prepared by ICSI was the base paper
for discussion for this committee. The committee submitted its report, which is
articulated in the form of guiding principles of corporate governance, to the government
of India on 18th September, 2012.

Founder member of national foundation for corporate governance - The

ICSI is one of the four founder trustees of national foundation for corporate governance,
along with MCA, CII and ICAI. The vision of NFCG is to - be a catalyst in making India the
best in corporate governance practices.

NATIONAL FOUNDATION FOR CORPORATE GOVERNANCE (NFCG)
11. 3

With the goal of promoting better corporate governance practices in India, the Ministry
of Corporate Affairs, Government of India, has set up NFCG in partnership with CII, ICSI
and ICAI.

Mission of NFCG
ü To foster a culture for promoting good governance, voluntary compliance and
facilitate effective participation of different stakeholders;
ü To create a framework of best practices, structure, processes and ethics;
ü To make significant difference to Indian Corporate Sector by raising the standard of
corporate governance in India towards achieving stability and growth.
THE INTERNAL GOVERNANCE STRUCTURE OF NFCG CONSISTS

Governing Council
Governing Council of NFCG works at the apex level for policy making. It is chaired by
Minister in-charge, Ministry of Corporate Affairs, Government of India.

Board of Trustees
Board of Trustees deal with the implementation of policies and programmes and lay
down the procedure for the smooth functioning. It is chaired by Secretary, Ministry of
Corporate Affairs, Government of India.

Executive Directorate
The Executive Directorate provides the internal support to NFCG activities and
implements the decisions of the Board of Trustees. The Executive Director is the Chief
Executive Officer of NFCG.
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

(OECD)
11. 4

The Organisation for Economic Co-operation and Development (OECD) was established
in 1961. The OECD was one of the first non-government organizations to spell out the
principles that should govern corporates.

In order to contribute to the development of the world economy, the OECD’s focus
includes a growing number of other countries, in addition to its 30 members. It now
shares its expertise and accumulated experience with more than 70 developing and
emerging markets.

The OECD Principles of Corporate Governance has provided governments, regulators and
other standard setters with an international benchmark. The OECD works closely with a
large number of developing and emerging market countries. In particular, the OECD
organises Regional Corporate Governance Roundtables in Asia, Latin America, Eurasia,
Southeast Europe and Russia. These Roundtables have used the OECD Principles to
formulate regional reform priorities and are now actively engaged in implementing these
recommendations.

Principles of Corporate Governance - OECD

a. They call on governments to have in place an effective institutional and legal
framework to support good corporate governance practices.
b. They call for a corporate governance framework that protects and facilitates the
exercise of shareholders ’rights.
c. They also strongly support the equal treatment of all shareholders, including minority
and foreign shareholders.
d. They recognise the importance of the role of stakeholders in corporate governance.
e. They look at the importance of timely, accurate and transparent disclosure
mechanisms
f. They deal with board structures, responsibilities and procedures.

11. 5

GLOBAL CORPORATE GOVERNANCE FORUM (GCGF)

The Global Corporate Governance Forum (the Forum) was founded in 1999 by the World
Bank and the Organisation for Economic Co-operation and Development (OECD)
following the financial crises in Asia and Russia in the latter part of the 1990’s. It was
established to promote initiatives to raise corporate governance standards and practices
in developing countries and emerging markets, using the OECD Principles of Corporate
Governance as the basis for its work. The Forum’s work program was launched in 2002
in Monterrey, Mexico at the Financing for Development meetings organized by the United
Nations.

Forum’s four Focus Areas - GCGF

a. raising awareness and building consensus for implementation of reform through
meetings, briefings, policy papers, and conferences;
b. sponsoring research relevant to the needs of developing countries to underpin reform
efforts by sound analysis through sponsoring papers and building sustainable
networks for academics in developing countries;
c. disseminating best practice materials and publications and guidelines developed with
leading global specialists and practitioners; and
d. supporting institution and capacity building and providing technical assistance to
ensure implementation at the field level through training programs, toolkits and other
direct assistance.

THE INSTITUTE OF DIRECTORS, UK
The IOD is a non party-political business organisation established in United Kingdom in
1903. The IOD seeks to provide an environment conducive to business success.

11. 6

Objects of IOD
1. To promote for the public benefit high levels of skill, knowledge, professional
competence and integrity on the part of directors, and equivalent office holders
however described, of companies and other organisations;
2. To promote the study, research and development of the law and practice of corporate
governance, and to publish, disseminate or otherwise make available the useful
results of such study or research;
3. To represent the interests of members and of the business community to government
and in all public forums, and to encourage and foster a climate favourable to
entrepreneurial activity and wealth creation; and
4. To advance the interests of members of the Institute, and to provide facilities, services
and benefits for them.
COMMONWEALTH ASSOCIATION OF CORPORATE GOVERNANCE (CACG)

The Commonwealth Association of Corporate Governance (CACG) was established in
1998 with the objective of promoting the best international standards germane to a
country on corporate governance through education, consultation and information
throughout the Commonwealth as a means to achieve global standards of business
efficiency, commercial probity and effective economic and social development.

INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN)

The International Corporate Governance Network (“ICGN”) is a not-for-profit company
limited by guarantee and not having share capital under the laws of England and Wales
founded in 1995. It has four primary purposes:
a. To provide an investor-led network for the exchange of views and information about
corporate governance issues internationally;
b. To examine corporate governance principles and practices; and
c. To develop and encourage adherence to corporate governance standards and
guidelines;
d. To generally promote good corporate governance.
11. 7

THE EUROPEAN CORPORATE GOVERNANCE INSTITUTE (ECGI)

The European Corporate Governance Institute (ECGI) was founded in 2002. It has been
established to improve corporate governance through fostering independent scientific
research and related activities.

The Institute articulates its work by expanding on the activities of the European
Corporate Governance Network, disseminating research results and other relevant
material.

CONFERENCE BOARD
The Conference Board was established in 1916 in the United States of America. The
Conference Board is a not- for-profit organization The Conference Board creates and
disseminates knowledge about management and the marketplace to help businesses
strengthen their performance and better serve society.

THE ASIAN CORPORATE GOVERNANCE ASSOCIATION (ACGA)

The Asian Corporate Governance Association (ACGA) is an independent, non-profit
membership organisation dedicated to working with investors, companies and
regulators in the implementation of effective corporate governance practices throughout
Asia. ACGA was founded in 1999 from a belief that corporate governance is fundamental
to the long-term development of Asian economies and capital markets.

ACGA’S SCOPE OF WORK COVERS THREE AREAS
Research:
Tracking corporate governance developments across 11 markets in Asia and producing
independent analysis of new laws and regulations, investor activism and corporate
practices.
11. 8


Advocacy:
Engaging in a constructive dialogue with financial regulators, stock exchanges,
institutional investors and companies on practical issues affecting the regulatory
environment and the implementation of better corporate governance practices in Asia

Education:
Organising conferences and seminars that foster a deeper understanding of the
competitive benefits of sound corporate governance and ways to implement it effectively.

CORPORATE SECRETARIES INTERNATIONAL ASSOCIATION (CSIA) CSIA,

A Geneva- registered body, which was established on March 2010 is an international
organization whose members comprise national bodies of professionals at the frontline
of governance. It is dedicated to promoting the values and practices of governance
professionals in order to create, foster or enhance the environment in which business can
be conducted in a fair, profitable and sustainable manner.
CSIA issued Practical Steps to Better Corporate Governance.

A. Check that non-executive directors have the necessary skills, experience, and courage
B. Consider the calibre of the non-executive directors. Review the role and contribution
of non-executive directors
C. Ensure that all directors have a sound understanding of the company
D. Confirm that the board’s relationship with executive management is sound
E. Check that directors can access all the information they need
F. Consider whether the board is responsible for formulating strategy
G. Recognize that the governance of risk is a board responsibility.
11. 9

CS Praveen Choudhary Risk Management
Risk Management

INTRODUCTION
What Do We Mean by Risk Management & Internal Control?
Organizations face a wide range of uncertain internal and external factors that may affect
achievement of their objectives—whether they are strategic, operational, or financial.
The effect of this uncertainty on their objectives can be a positive risk (opportunities) or
a negative risk (threats).

RISK MANAGEMENT focuses on identifying threats and opportunities, while INTERNAL
CONTROL helps counter threats and take advantage of opportunities.

Why are Risk Management and Internal Control Important?
Proper risk management and internal control assist organizations in making informed
decisions about the level of risk that they want to take and implementing the necessary
controls to effectively pursue their objectives.
Risk management and internal control are therefore important aspects of an
organization’s governance, management, and operations. Successful organizations
integrate effective governance structures and processes with performance-focused risk
management and internal control at every level of an organization and across all
operations.

However, risk management and internal control are not objectives in themselves. They
should always be considered when setting and achieving organizational objectives and
creating, enhancing, and protecting stakeholder value.

RISK MANAGEMENT
Any organization, public or private, large or small, faces internal and external
uncertainties that affect its ability to achieve its objectives. The effect of uncertainty on
an organization’s objectives is “risk.” Risk management, commonly known in the business
community as enterprise risk management (ERM), can provide for the structured and
explicit consideration of all forms of uncertainty in making any decision.
12. 1


Risk management can enhance the environment for identifying and capitalizing on
opportunities to create value and protect established value.

MEANING OF RISK
Risk may also be defined as the possibility that an event will occur and adversely affect
the achievement of the Company’s objectives and goals.
A business risk is the threat that an event or action will adversely affect an organisation’s
ability to achieve its business objectives/targets.

Classification of risks
Risk may be classified according to controllability, i.e controllable risk and uncontrollable
risk. In other words, the controllable risk is categorised as unsystematic risk and
uncontrollable risk is categorised as systematic risk. The concept of controllable and
uncontrollable risk may be further explained as under:

Systematic risk:
ü It is uncontrollable by an organisation,
ü It is not predictable, o It is of macro nature.
ü It affects a large number of organisations operating under a similar stream,
ü It cannot be assessed in advance.
ü It depends on the influence of external factors on an organisation which are normally
uncontrollable by an organisation.
ü The example of such type of risk is interest rate risk, market risk, purchasing power
risk.
Unsystematic risk:
ü It is controllable by an organisation, o It is predictable, o It is micro in nature, o It
affects the individual organisation.
ü It can be assessed well in advance and risk mitigation can be made with proper
planning and risk assessment techniques.
ü The example of such risk is business risk, liquidity risk, financial risk, credit risk,
operational risk.

12. 2

Types of risks
The risk may broadly be segregate as financial risk and non-financial risk.

Financial risk:
The risk which has some financial impact on the business entity is treated as financial
risk. These risks may be market risk, credit risk liquidity risk, operational risk, legal risk
and country risk. The following chart depicts the various types of financial risks.

TYPES OF FINANCIAL RISK
Political Risks:
These risks relate to political uncertainties namely: Elections, War risks, Country/Area
risks, Insurance risks like fire, strikes, riots and civil commotion, marine risks, cargo risks,
etc. And Fiscal/Monetary Policy Risks including Taxation risks.
Interest rate risk:
The financial assets which are connected with interest factors such as bonds/ debentures,
faces the interest rate risk. Interest rate risk adversely affects value of fixed income
securities. Any increase in the interest reduces the price of bonds and debts instruments
in debt market and vice versa. So it can be said that the changes in the interested rates
have an inverse relationship with the price of bonds.

Liquidity Risks:
These are financial risk factors namely:
1. Financial solvency and liquidity risks
2. Borrowing limits, delays
3. Cash/Reserve management risks
4. Tax risks.

Currency risk:
The volatility in the currency rates is called the currency risk. These risks affect the firms
which have international operations of business and the quantum of the risk depends on
the nature and extent of transactions with the external market.

Credit Risks:
These risks relate to commercial operations namely:
ü Creditworthiness risks
12. 3

ü Risks in settlement of dues by clients

Equity risk:
It means the depreciation in one’s investment due to the change in market index. Beta (
β) of a stock tells us the market risk of that stock and it is associated with the day-to-day
fluctuations in the market.
Legal Risks:
These risks relate to the following Contract risks, Contractual Liability, Frauds, Judicial
risks and Insurance risks.

Non-financial risk:
This type of risk does not have immediate financial impact on the business, but its
consequence are very serious and later may have the financial impact. This type of risk
may include, business/industry & service risk, strategic risk, compliance risk, fraud risk,
reputation risk,

TYPES OF NON-FINANCIAL RISK:
Disaster risk: on account of natural calamities like floods, fire, earthquake, manmade
risks due to extensive exploitation of land for mines activity, land escalation, risk of
failure of disaster management plans formulated by the company etc

Industry & Services Risks:
These risks can be broadly categorised as follows, namely:
ü Economic risks
ü Services risks
ü Market structure
ü Business dynamics
ü Competition risks
ü Customer relations risks
ü Reputational risk

Compliance risk:
This risk arises on account of non-compliance of breaches of laws/ regulations which the
entity is supposed to adhere. It may result to deterioration to public reputation, penalty
and penal provisions

12. 4

Transaction risk:
Transaction risk arises due to the failure or inadequacy of internal system, information
channels, employees integrity or operating processes.

Fraud risk:
Fraud is perpetrated through the abuse of systems, controls, procedures and working
practices. It may be performed by the outsider or even from the insider. Often the most
trusted employee attempt to do this. Fraud may not be detected immediately, but is still
usually discovered by chance, but the detection should be proactive rather than reactive.

Reputation risk:
This type of risk arises from the negative public opinion. Such type of risk may arise from
the failure to assess and control compliance risk and can result in harm to existing or
potential business relationships.

STEPS IN RISK MANAGEMENT
STEP - 1 RISK IDENTIFICATION
Any business exists in an atmosphere of perpetual change. Hence, the process of risk
identification must be an ongoing one and any failure in proper risk identification would
result in passive retention of the risk by the company. One is required to be alert to note
the changes in environment and react.

STEP - 2 RISK EVALUATION
The risk measurement process requires a mathematical approach and considerable data
on the j past losses. The data available from the concern itself may not be adequate
enough to lend itself amenable to analytical exercise. Hence, it becomes necessary to
resort to data on industry basis, at national and sometimes even at international level.
Risk evaluation includes the determination of:
1. The probability or chances that losses will occur.
2. The impact the losses would have upon the financial affairs of the firm should they
occur.
STEP - 3 RISK HANDLING (4 WAYS OF HANDALING THE RISK)
Firms are not entirely free to decide on how they shall handle their risks. In every country
there are governmental and official regulations governing health and safety at work like
fire precautions, hygiene, environmental pollution, food, handling of dangerous
12. 5

substances and many other matters relating to properties, personal injuries and other
risks.

STEP - 4 IMPLEMENTATION OF DECISION
The last step in the risk management process is the implementation of the decision. The
Risk Manager should recommend to the Board or an organization various alternatives of
tackling the risks. After getting it approved, initiate measures to implement it.
Systematic approach to risk management requires an integration of different disciplines
and holistic assessment techniques. It is desirable to have a generic approach to risk
assessment that avoids compartmentalization or castling of risks.

HOW TO HANDLE RISK?
RISKS CAN BE HANDLED BROADLY IN FOUR WAYS:

RISK AVOIDANCE
It is a rare possibility to avoid a risk completely. A riskless situation is rare. Generally risk
avoidance is only feasible at the planning stage of an operation.

RISK REDUCTION
In many ways physical risk reduction (or loss prevention, as it is often called) is the best
way of dealing with any risk situation and usually, it is possible to take steps to reduce
the probability of loss. Again, the ideal time to think of risk reduction measures is at the
planning stage of any new project when considerable improvement can be achieved at
little or no extra cost.

RISK TRANSFER
This refers to legal assignment of cost of certain potential losses to another. The insurance
of ‘risks’ is to occupy an important place, as it deals with those risks that could be
transferred to an organization that specialises in accepting them, at a price. Usually, there
are 3 major means of loss transfer:

RISK RETENTION
It is also known as risk assumption or risk absorption. It is the most common risk
management technique. This technique is used to take care of losses ranging from minor
to major break-down of operation.
There are two types of retention methods for containing losses as under:
12. 6

1. Risk retained as part of deliberate management strategy after conscious evaluation of

possible losses and causes. This is known as active form of risk retention.
2. Risk retention occurred through negligence. This is known as passive form of risk
retention.

ADVANTAGES OF RISK MANAGEMENT
a) Better informed decision making - for example in assessing new opportunities;
b) Less chances of major problems in new and ongoing activities; and
c) Increased likelihood of achieving corporate objectives.

FRAUD RISKS MANAGEMENT
The term ‘fraud’ is generally defined in the law as an intentional misrepresentation of
material existing fact made by one person to another with knowledge of its falsity and for
the purpose of inducing the other person to act, and upon which the other person relies
with resulting injury or damage.

Section 25 of Indian Penal Code, 1860 defines the word “Fraudulently”. It says “A
person is said to do a thing fraudulently if he does that thing with intent to defraud but
not otherwise.”
For the corporate it becomes more important to proactively incorporate Fraud
Management policy or a plan aligned to its internal control and risk management plan.

The fraud risk management policy will help to strengthen the existing anti-fraud
controls by raising the awareness across the company and:
1. Promote an open and transparent communication culture.
2. Promote zero tolerance to fraud/misconduct.
3. Encourage employees to report suspicious cases of fraud/misconduct.
4. Spread awareness amongst employees and educate them on risks faced by the
company.

REPUTATION RISK MANAGEMENT
Reputation is the trust that an organization has gained over the years by the products,
services, brands it has provided to the society. Corporates are at a risk of losing such
reputation, reputation damage are irreparable. It is an intangible asset that is broad and
far-reaching and includes image, goodwill and brand equity. If ruined can devastate the
financial health and welfare of an organization.

12. 7

REPUTATION LOST WILL DAMAGE:

a) Brand Value
b) Share Price
c) Strategic Relationship
d) Regulatory relationship
e) Recruitment/ Retention

ISO STANDARD ON RISK MANAGEMENT
ISO 31000:2009:
International organization for standardization (ISO) is a worldwide federation of national
Standards bodies (ISO member bodies). The work of preparing international standards
is normally carried out through ISO technical committees. Each member body interested
in a subject for which a technical committee has been established has the right to be
represented on that committee. International organizations, governmental and non-
governmental, in liaison with ISO, also take part in the work. The main task of technical
committees is to prepare international standards.

Every activity of an organization involves risk. Organizations manage risk by identifying
it, analysing it and then evaluating whether the risk should be modified by risk treatment
in order to satisfy their risk criteria. Throughout this process, they communicate and
consult with stakeholders and monitor and review the risk and the controls that are
modifying the risk in order to ensure that no further risk treatment is required. This
international standard describes this systematic and logical process in detail. Risk
management can be applied to an entire organization, at its many areas and levels, at any
time, as well as to specific functions, projects and activities.

ISO 31000 published on the 13th of November 2009, provides a standard on the
implementation of risk management. ISO 31000 seeks to provide a universally
recognised paradigm for practitioners and companies employing risk management
processes. Accordingly, the general scope of ISO 31000 - is not developed for a particular
industry group, management system or subject matter field in mind, rather it provides
best practice structure and guidance to all operations concerned with risk management.
The scope of this approach to risk management is to enable all strategic, management and
operational tasks of an organization throughout projects, functions, and processes be
aligned to a common set of risk management objectives.

Reporting of Fraud under companies Act 2013
12. 8

The Companies Act, 2013 has introduced many new reporting requirements for the
statutory auditors of companies. One of these requirements is given under the Section
143(12), which requires the statutory auditors or cost accountant or PCS to report to the
Central Government about the fraud/suspected fraud committed against the company by
the officers or employees of the company.

It states,
“Notwithstanding anything contained in this section, if an auditor of a company, in the
course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or
employees of the company, he shall immediately report the matter to the Central
Government within such time and in such manner as may be prescribed.”

The reporting requirement under Section 143(12) is for the statutory auditors of the
company and also equally applies to the cost accountant in practice, conducting cost audit
under Section 148 of the Act; and to the company secretary in practice, conducting
secretarial audit under Section 204 of the Act.

Section 143(12) includes only fraud by officers or employees of the company and does
not include fraud by third parties such as vendors and customers.

Role of company secretaries in risk management
The company secretaries are governance professionals whose role is to enforce a
compliance framework to safeguard the integrity of the organization and to promote high
standards of ethical behavior. He/ she has a significant role in assisting the board of the
organization to achieve its vision and strategy. The activities of the governance
professional encompass legal and regulatory duties and obligations and additional
responsibilities assigned by the employer.

However, in essence, the functions of a governance professional include:
ü Advising on best practice in governance, risk management and compliance.
ü Championing the compliance framework to safeguard organizational integrity.
ü Promoting and acting as a ‘sounding board’ on standards of ethical and corporate
behavior.
ü Balancing the interests of the board or governing body, management and other
stakeholders.
12. 9

CS Praveen Choudhary COMPLIANCE MANAGEMENT
COMPLIANCE MANAGEMENT

CONCEPT
Compliance Management means management of all the compliances that are applicable to an
organization and ensuring that all the applicable laws/rules/regulations and provisions are
complied in time. The system/process/hierarchical structure, which ensures the timely
compliance is known as Compliance Management System.

Thus, compliance management system is the method by which corporate manage the entire
compliance process. It includes the compliance program, compliance audit, compliance report
etc, together they are known as compliance solution.

Company secretaries with core competence in compliance and corporate Governance play a
crucial role in the corporate compliance management as it involves a full process of research and
analysis as well as investigation and evaluation.

Similarly, for ensuring effective implementation of the Compliance Management System, the
participation of the senior management in the development and maintenance of a compliance
program is necessary.

Companies that go extra mile with their compliance programs lay the foundation for the control
environment and can easily avoid the penalties. Moreover, the companies that follow effective
compliance management programme often enjoy healthy return and stronger market
capitalization.

NEED FOR COMPLIANCE
13. 1

Business executives and management faces tremendous pressure to comply with multiple
regulations. Corporate Accountability is fixed which makes it obligatory for corporates to ensure
timely compliance with all the applicable laws.

The organizations face mounting pressures that are driving them towards a structured approach
to enterprise wide compliance management. Increased liability and regulatory oversight has
amplified risk to a point where it demands continuous evaluation of compliance management
systems.

Further, the various compliances that the organizations face increase the risk of non-compliance,
which may have potential civil and criminal penalties.

The pressure and the urge to timely comply with all the laws, rules and regulations has resulted
in putting onerous responsibility on the Company Secretaries to guide the companies and make
them compliant. Thus, now, the Company Secretary must ensure that the Companies adhere to
necessary industry and government regulations, change business processes according to
legislative change and react quickly and cost effectively.

SIGNIFICANCE OF CORPORATE COMPLIANCE MANAGEMENT
v Better compliance with law
v Real time status of legal/statutory compliances
v Real time status on the progress of pending litigation
v Cost savings by avoiding penalties
v Better brand image and positioning of the company in the market
v Enhanced credibility and credit worthiness
v Goodwill among the shareholders, investors and stakeholders
v Recognition as good corporate citizen.

13. 2

RISK OF NON-COMPLIANCE
v Cessation of business activity
v Civil action by the authorities
v Punitive action resulting in fine against the company and officials
v Imprisonment of the defaulting officers
v Public embarrassment
v Damage to the reputation of the company and its employees
v Plummeting stock prices and threat of delisting of shares
v Attachment of Bank accounts

SCOPE OF CORPORATE COMPLIANCE MANAGEMENT
Corporate compliance management should broadly include the compliances of:
Scope of Corporate
Compliance Management
Local and Other

Corporate & Applicable Laws

Economic Laws

Industry Specific
Securities Laws
Laws

Commercial Laws Pollution /
Fiscal Laws Labour Laws Environment Laws

CORPORATE & ECONOMIC LAWS:
v Companies Act along with rules, regulations and procedures
v Secretarial Standards/Accounting standards
v FEMA
v FCRA
v Competition Act
v Prevention of Money Laundering Act
13. 3

v Emblems and Names (Prevention of Improper Use) Act, 1947

v Essential Commodities Act
v Intellectual Property Rights Laws

SECURITIES LAWS:
v SEBI Act
v SCRA
v Provisions of listing agreement
v Depositories Act
v Various rules, regulations and guidelines issued by SEBI

COMMERCIAL LAWS INCLUDING IPLAWS:
v Indian contract act
v Transfer of property Act
v Arbitration and Conciliation ct
v Negotiable Instrument Act
v Sale of goods act

FISCAL LAWS:
v Income Tax Act
v Central Excise Act
v Customs Act
v CST/VAT GST
v Service Tax

LABOUR LAWS
v Minimum wages Act
v Payment of Bonus Act
13. 5

v Payment of Gratuity Act
v Factories Act
v Industrial Dispute Acts
v Employees Provident Fund and Misc. Provisions Act
v Employees State Insurance Act
v Employees Compensation Act
v Maternity Benefit Act
v Contract Labour (Regulation & Abolition) Act

POLLUTION/ENVIRONMENT CONTROLLAWS
v Air (Prevention and Control of Pollution) Act, 1981
v Water (Prevention and Control of Pollution) Act, 1974
v Environment Protection Act
v Public Liability Insurance Act
v National Green Tribunal Act

INDUSTRY SPECIFIC LAWS
As may be applicable to specific categories of Industry.

LOCAL ANDOTHER APPLICABLE LAWS
Local administrative, civic, shops/establishment and related laws.

COMPLIANCE MANAGEMENT PROGRAMME
The Objective of Compliance Programme is to manage the compliance risk effectively, to
promote ethical culture in the organization. Compliance management through systematic
processes helps in achieving 100% compliance with letter and spirit.

OBJECTIVES OF COMPLIANCE PROGRAMME
13. 170

i. To establish and maintain centralized mechanism to ensure compliance

ii. To establish and maintain effective co-ordination of functional units
iii. Effective communication of the changes in the regulatory mandates
iv. To provide training on compliance requirements at regular intervals.
v. To establish effective monitoring and control systems.
vi. To introduce effective whistle blowing mechanism
vii. To establish compliance dashboard.

Compliance is a permanent and integral part of business process that is ongoing and needs
continuous tuning in line with the business environment and the applicable regulatory ambit.

The Corporate Compliance Officer (CCO) is the custodian of the Corporate Compliance Plan. The
CCO should report on compliance activities from time to time. Similarly, the Board may
constitute Corporate Compliance Committee to oversee the workings relating to compliances
and also create a checklist specially designed for compliance systems.
COMPLIANCE PROGRAM SHOULD PROVIDE PROCESSES FOR:

i. Preventing non-compliances through various mechanisms
ii. Detecting non-compliances through mechanisms such as effective whistle blowing, audits
etc.
iii. Responding to non-compliance through remedial action, implementation of control tolls
for non-recurrence of such non-compliance etc.

ESTABLISHMENT OF COMPLIANCE MANAGEMENT FRAMEWORK
Compliance identification

Compliance Ownership
13. 3

Compliance Awareness

Compliance Reporting

COMPLIANCE IDENTIFICATION
This process involves the identification of compliances under various legislations applicable to
the company, in consultation with functional heads. The legal team has to identify the
legislations applicable to the company and identify the compliances that are required under each
legislation or rules and regulations made there under.

COMPLIANCE OWNERSHIP
The next important aspect of compliance management is ownership. The ownership of the
various compliances has to be described function wise and individual wise. Clear description of
primary and secondary ownership is important. The primary owner is mainly responsible
whereas the secondary owner has to supervise the compliance.

COMPLIANCE AWARENESS
The next important step in establishing a legal compliance management is creation of awareness
of the various legal compliances amongst those responsible. Many a times, compliances are
handled by persons who are not fully aware of the requirements of the legislations and hence
creating appropriate awareness amongst the owners is very important.
13. 4


COMPLIANCE REPORTING
Compliances or Non-compliances should be reported to the concerned. Reporting of non-
compliances ensures that appropriate corrective action is taken by the responsible person.

Corporate Compliance Reporting (CCR):
A brief process of Compliance MIS or CCR is as follows:
a. Functional heads for the reporting of various laws has to be identified
b. Each of the functional heads may collect and classify the relevant information from the
various units/locations
c. The report shall carry an affirmation from the functional heads that the said report has
been prepared based on the inputs received from the various units/officers and then list
out the specific compliances/non-compliances
d. Each of the functional head will forward their respective compliance report to the CS/MD
e. The CS would brief the MD, give his opinion and then MD will consolidate all the reports
and give under his signature a comprehensive CCR to the Board for its information,
advice and noting.

The whole process of CCR is contingent on the creation and implementation of comprehensive
legal Management Information System.

PERIODICAL COMPLIANCE MIS
For effective implementation of Corporate Compliance Management System, a Management
Information System (MIS) must be developed which will ensure periodical compliances with all
the applicable laws and regulations. An effective reporting framework, fixing responsibility and
creating awareness are just few of the steps, which will ensure timely compliance and reporting
under the Compliance Management System.

13. 5

Information technology can be used to create a real time and more effective MIS for compliance
management.

ROLE OF INFORMATION TECHNOLOGY IN COMPLIANCE
MANAGEMENT SYSTEMS THROUGH WEB BASED COMPLIANCE
SYSTEMS:
'Real Time Monitoring' of the audit compliance is a must and thus information technology plays
an effective role in implementation of the Corporate Compliance Management Program across
various departments of an organization.

Information Technology can play an effective role in implementation of a Corporate Compliance
Management Program across various departments of an organization in terms of real time
compliance reminders, generation of reports, sending warning signals, generation of compliance
calendar etc.

Many companies are introducing Comprehensive, web based compliance system that links the
entire organization and offers a full-fledged compliance management system. Web based
compliance software are available industry wise and tailor made compliance software can also
be made according to the company specifications which has to be updated on continuous basis.

ROLE OF ETHICS IN COMPLIANCE MANAGEMENT SYSTEM
Ethics is the intent to observe the spirit of law. An ethical compliance management programme
ensures that the mechanisms are in place to provide early warning of deviations from guidelines
and regulations. It is essential to create or expand a culture of trust, enthusiasm and integrity.

FUNCTIONS OF COMPLIANCE MANAGEMENT SYSTEM/SYSTEMS
APPROACH TO COMPLIANCE MANAGEMENT
13. 6

A well designed compliance management programme has abilities to perform the following key
functions across the enterprise:

COMPLIANCE DASHBOARD (PLATFORM)
The compliance programs provide a single enterprise wide platform for all users to track and
trend compliance events. External, Internal auditors and compliance officers can use the
dashboards to make decisions on the compliance status of an organization.

POLICY AND PROCEDURE MANAGEMENT
A Compliance management system provides a well-designed document management system
which forms the basis of managing the entire lifecycle of policies and procedures within an
enterprise.

EVENT MANAGEMENT
The compliance management system gives a readily available way to track events, cases and
incidents across the extended enterprise.

RULES AND REGULATIONS
A well designed compliance management system provides the capability for the organisation to
continuously stay in sync with changing rules and regulations.

As soon as there are any regulatory changes or amendments, the various departments should be
notified proactively through' 'email based' approach. Thus, a well-designed compliance
management program offers upto date regulatory alerts across the enterprise.
AUDIT MANAGEMENT
13. 7

Audits have now become part of the enterprise core infrastructure. In addition to financial
audits, appropriate evidence gathered in internal Audits become critical in defending
compliance to regulations.

QUALITY MANAGEMENT
A well-designed compliance management program incorporates and supports on-going quality
initiatives. Organizations generally have quality initiatives as per the industry mandates such as
ISO certifications. Compliance and Quality are two sides of the same coin.

TRAINING MANAGEMENT
Most of the compliance program often requires evidence of employee training. To ensure this,
the compliance office has to work closely with HR department to facilitate employee training.

COMPLIANCE TASK MANAGEMENT
Organizations must plan, manage and report status of all compliance related activities from a
centralized solution.

APPROACHES TO COMPLIANCE SOLUTIONS
There are various companies offering compliance solutions. Following approaches are adopted
for creating or enhancing an ethics and compliance programs for companies:

RISK/CULTURAL ASSESSMENT
Through employee surveys, interviews and document reviews, a company's culture of ethics and
compliance at all levels of the organization is validated and reports and recommendations are
prepared accordingly.

PROGRAM DESIGN UPDATE
13. 8

In this phase, compliance solution providers help company in creating guideline documents that
outline the reporting structure, communications methods and other key components of code of
ethics and compliance program.

POLICIES AND PROCEDURES
In this phase, compliance solution providers help company to develop or enhance the detailed
policies of the program, including issues of financial reporting, antitrust, conflicts of Interest,
gifts and entertainment, records accuracy etc.

COMMUNICATION, TRAINING AND IMPLEMENTATION
Even the best policies and procedures are useless if they are not institutionalized and thus the
new policies must be very clearly communicated, proper training is to be provided and the
compliance solutions should be implemented on time basis.
ONGOING SELF ASSESSMENT, MONITORING AND REPORTING

The cultural assessment, mechanisms and processes put in place including employee surveys,
internal controls and monitoring and auditing programs, help organizations achieve sustained
success.

APPARENT, ADEQUATE AND ABSOLUTE COMPLIANCE
Corporates are expected to comply with the regulatory prescriptions in their true letter and
spirit. Good corporate governance demands compliances level that match the intentions of the
legislature, expectations of stakeholders and requirements of regulators. The compliances
generally fall in three categories as follows:

13. 9

APPARENT COMPLIANCE
It is a disguise form of non-compliance, which is worse than non-compliance. The classic
example is preparing notice, agenda and minutes of the meeting, which are not actually held.

ADEQUATE COMPLIANCE
It is compliance in letters. The aspects specified in law are complied in letters without getting
into the spirit of the law. eg : box ticking practices.

ABSOLUTE COMPLIANCE
These compliances are those, which are in line with the spirit and intent of the law. When a
company complies with law in spirit, it gains public confidence as well.

Example: Infosys is considered to be a trendsetter and its report is even recommended by SEC as
ideal report. The company has achieved trust of stakeholders by having a strategic balance
between wealth and welfare.

Experts view Annual Report as self-appraisal report of the Company. The shift from shareholder
concept to stakeholder concept has necessitated the corporates to provide a transparent report,
which is viewed by all stakeholders.

SECRETARIAT AUDIT AND THE COMPLIANCE MANAGEMENT SYSTEM
The compliance management system and processes in a company are dependent mainly on the
following factors:
v Nature of business
v Geographical domain of its area of operations
v Size of the company both in terms of operations as well as investments, technology,
multiplicity of business activities and manpower employed.
v Jurisdiction in which it operates
13. 10

v Whether the company is a listed company

v Other important details

Based on the above, the Secretarial Auditor can constitute a broad idea about the desired system
and process to be adopted by a Company. Auditing of compliance system is not a fault finding
exercise, rather a device to scale up compliance mechanism of the company commensurate to its
size and operations.

It is desired that Secretarial Auditor as an expert in corporate compliance would advice the
companies to build up strong corporate compliance system in case if the system appears to be
insufficient during the audit process.

ROLE OF COMPANY SECRETARY IN COMPLIANCE MANAGEMENT
SYSTEM
A Company Secretary is the Compliance Manager of the Company. Corporate disclosures, which
play a vital role in enhancing corporate valuation is the forte of a Company Secretary. A
Company secretary has to ensure that these disclosures are made to shareholders and other
stakeholders in true letter and spirit.

Thus, a company secretary is the professional who guides the Board and the company in all
matters, renders advice in terms of compliance and ensures that the Board procedures are duly
followed, best global practices are brought in and the organization is taken forward towards
good corporate citizenship.
13. 11

CS Praveen Choudhary Internal Control System
INTERNAL CONTROL SYSTEM

A system of internal control is a proactive approach that balances the risk and control in
the Company which helps in exploiting business opportunities fully.
They help to ensure that a company is not unnecessarily exposed to avoidable financial
risks and that the financial information used within the business and for publication is
reliable. They also contribute to the safeguarding of assets, including the prevention and
detection of fraud.

THE SYSTEM WILL INCLUDE:
ü Control activities;
ü Information and communications processes; and
ü Processes for monitoring the continuing effectiveness of the system of internal
control.

INTERNAL CONTROL DEFINED
Internal control is defined as a process, affected by an organization’s people and
information technology (IT) systems, designed to help the organization accomplish
specific goals or objectives.
It is a means by which an organization’s resources are directed, monitored, and
measured. It plays an important role in preventing and detecting fraud and protecting the
organization’s resources, both physical (e.g., machinery and property) and intangible
(e.g., reputation or intellectual property such as trademarks).
At the organizational level, internal control objectives relate to the reliability of financial
reporting, timely feedback on the achievement of operational or strategic goals, and
compliance with laws and regulations.

IMPORTANCE OF INTERNAL CONTROL
ü A sound system of internal control contributes to safeguarding the shareholders’
investment and the company’s assets.
ü Internal control facilitates the effectiveness and efficiency of operations, helps ensure
the reliability of internal and external reporting and assists compliance with laws and
regulations.
ü It ensure that the company is not unnecessarily exposed to avoidable financial risks
and that financial information used within the business and for publication is reliable.
ü It also contribute to the safeguarding of assets, including the prevention and detection
of fraud.

COSO’s INTERNAL CONTROL Framework
Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a U.S.
private sector initiative. COSO has defined internal controls as “a process, effected by an
14. 1

entity’s board of directors, management, and other personnel, designed to provide

reasonable assurance regarding the achievement of objectives relating to operations,
reporting, and compliance”

COMPONENTS OF INTERNAL CONTROL
1 Control The control environment is the set of standards, processes,
environment: and structures that provide the basis for carrying out internal
control across the organization. The control environment
comprises the integrity and ethical values of the
organization; the parameters enabling the board of directors
to carry out its governance oversight responsibilities; the
organizational structure and assignment of authority and
responsibility; the process for attracting, developing, and
retaining competent individuals.
2 Risk Every entity faces a variety of risks from external and
assessment: internal sources. Risk assessment involves a dynamic and
iterative process for identifying and assessing risks to the
achievement of objectives. A precondition to risk assessment
is the establishment of objectives, linked at different levels of
the entity. Risk assessment also requires management to
consider the impact of possible changes in the external
environment and within its own business model that may
render internal control ineffective.
3 Control Control activities are the actions established through policies
activities: and procedures that help ensure that management’s
directives to mitigate risks to the achievement of objectives
are carried out. Control activities are performed at all levels
of the entity, at various stages within business processes, and
over the technology environment.
4 Information Information is necessary for the entity to carry out internal
and control responsibilities to support the achievement of its
communication: objectives. Management obtains or generates and uses
relevant and quality information from both internal and
external sources to support the functioning of other
components of internal control. Communication is the
continual, iterative process of providing, sharing, and
obtaining necessary information.

WHAT INTERNAL CONTROL CAN DO:
ü Internal control can help an entity achieve its performance and profitability targets,
and prevent loss of resources.
ü It can help ensure reliable financial reporting.
ü It can help ensure that the enterprise complies with laws and regulations, avoiding
damage to its reputation and other consequences.
14. 2

ü In sum, it can help an entity get to where it wants to go, and avoid pitfalls and
surprises along the way.

WHAT INTERNAL CONTROL CANNOT DO
ü Internal control cannot change an inherently poor manager into a good one.
ü Internal control cannot ensure success, or even survival in case of shifts in
government policy or programs, competitors' actions or economic conditions, since
these are beyond the management's control.
ü An internal control system, no matter how well conceived and operated, can provide
only reasonable—not absolute—assurance to management and the board regarding
achievement of an entity's objectives.
ü The likelihood of achievement is affected by limitations inherent in all internal control
systems

ELEMENTS OF INTERNAL CONTROL
The essential requirements for the success of a business are the implementation
of organisational objectives, plans and philosophy. With this end in view the
following may be considered as the elements of internal control.
i. Segregation of duties
ii. Organisational structure
iii. Objectives and Policy Statements
iv. Authorisation and approval
v. Personnel
vi. Management
vii. Records and Reports
viii. Accounting Controls
ix. Protection of assets
x. Supervision

TECHNIQUES OF INTERNAL CONTROL SYSTEM
i. There should be clear division of the work.
ii. Segregation of the work should be in such a manner that the work done by
one person is the beginning of the work for another person.
iii. There should be the clarity of the responsibility.
iv. The work flow process be documented or standardized so that the staff may
perform the work as suggested in the work flow chart.
v. No single persons should be allowed to have access or control over any
important business operation.
vi. There should be job rotation of the staff duties periodically.
vii. Staff should be asked to go on mandatory leave periodically so that other
person may come to know if someone is playing foul with the system.
viii. Persons having the charge of the important assets should not be allowed to
have access to the books of accounts.
ix. Periodical inspection of the physical assets be carried out to ensure its
14. 3

physical existence as well in good working conditions.

x. The valuable items like cash and others, by physically inspected and the
periodicity should be at irregular intervals, so that the person under whose
charge the assets are, cannot know in advance, when the inspection will
took place and manage the affairs.

The following methods are adopted for Internal Control in modern
organisation:
i. Internal Check
ii. Internal Audit
iii. Flow Charts
iv. Internal Control Questionnaire
v. Inter firm and Intra firm Comparisons.

Internal Check
As per ICAE&W, internal check as the allocation of authority and work in such a
manner as to effort the checks on the day to day transactions which operate
continuously as part of routine system whereby the work of one person is
automatically proved independently or is complementary to the work of another,
the object being prevention or early detection of error and frauds.

The following are the important objects of internal check system:
i. To assign to a specific person, the responsibility of particular acts, defaults
or omissions by allocation of specific duties.
ii. To obtain physical and financial confirmation of facts and entries physical
and financial by creation and preservation of necessary records.
iii. To facilitate the breakdown of accounting procedures where required so as
to avoid bottlenecks and establish an even flow of work and operations.
iv. To reduce the possibilities of fraud and errors.

Essential Features of Internal Check
1. There should be proper division of work and responsibilities.
2. The duties of each person should be properly defined so as to fix definite
responsibilities of each individual.
3. Possibilities of giving absolute control to anybody should not be left out
unchecked.
4. Too much confidence on a person should be avoided.
5. The duties of staff should be rotated and one person should not be allowed to
occupy a particular area of operation for long.
6. Necessary safeguards should be provided so as to avoid collusion of thoughts
which quite often leads to commission of fraud.
7. The person handling cash, stock, securities should be given compulsory leave
so as to prevent their having uninterrupted control.
14. 4

8. Physical inventory of fixed assets and stocks should be taken periodically.

9. Assets should be protected from unauthorised use.
10. To prevent loss or misappropriation of cash, mechanical devices such as the
automatic cash register, should be employed.

Internal Audit
Internal auditing though part of an internal control is a function in itself as
administration, production, personnel, marketing etc. Whereas internal check
devises the form and flow of operations of an entity so that automatic checks are
carried out as the transactions occur; internal audit is a critical appraisal of
functioning of various operations of an enterprise including the system of internal
check. This is evident in its definition itself as “an independent appraisal function”.

'Internal auditing' in its traditional parlance, meant an audit on behalf of
management to ensure only:
a) The adequacy and effectiveness of internal controls;
b) Accuracy and timeliness of financial and other records and reports;
c) Adherence to the laid down policies and procedures by each unit of the
organisation.

The Internal Audit can be defined as –
1. An independent appraisal function;
2. Established within the organization;
3. To examine and evaluate the activities as a service to the management;
4. To assist the members for effective discharge of their responsibilities;
5. To furnish with analyses, appraisals, suggestions etc.

The following are the main aspects of internal auditing:
1. Review, appraisal and evaluation of the soundness, adequacy and application
of financial, accounting and other operating controls.
2. Ascertaining the adequacy and reliability of management information and
control systems.
3. Ascertaining the achievement of management objectives and compliance
with established plans, policies and procedures.
4. Ensuring proper safeguards for assets - their utilization and accounting
thereof.
5. Detection and prevention of fraud and error.
6. Ascertaining the integrity of management data in an organisation.
7. Identifying the areas of cost reduction, coupled with increased production,
improved productivity and improved systems.
8. Ascertaining the quality of performance and undertaking 'value for money'
exercises.
9. Compliance with statutory laws and rules including adherence to the
14. 5

Companies (Auditors' Report) Order, 2003 to avoid adverse comments from

the statutory auditors.
10. Undertaking special reviews and assignments directed by management to
ensure economical and efficient use of resources.

STEPS FOR INTERNAL CONTROL
In order to establish the internal control mechanism, the following points are to
be kept in view:
1. Identify the key areas where the internal control mechanism is to be
established.
2. Every work flow should be so documented that it is not complete if another
person has not checked it out.
3. The other person’s role should start when the first person’s role comes to an
end.
4. Establish the surprise check mechanism where the money matters are
involved.
5. Reporting of the non-adherence of key compliance areas.
6. Review mechanism of the control units.

SEBI (LODR) Regulations, 2015
The CEO or the MD or manager or in their absence, a WTD appointed in terms
of Companies Act, 2013 and the CFO 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 :
1. these statements do not contain any materially untrue statement or omit
any material fact or contain statements that might be misleading;
2. 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.
B. There are, to the best of their knowledge and belief, no transactions entered
into by the company during the year which are fraudulent, illegal or violative
of the company’s code of conduct.
C. They accept responsibility for establishing and maintaining internal controls
for financial reporting and that they have evaluated the effectiveness of
internal control systems of the company pertaining to financial reporting and
they have disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of such internal controls, if any, of which they are aware
and the steps they have taken or propose to take to rectify these deficiencies.
D. They have indicated to the auditors and the Audit committee:
1. significant changes in internal control over financial reporting during the
year;
2. significant changes in accounting policies during the year and that the
same have been disclosed in the notes to the financial statements; and
3. instances of significant fraud of which they have become aware and the
14. 6

involvement therein, if any, of the management or an employee having a

significant role in the company’s internal control system over financial
reporting.

14. 7

CS Praveen Choudhary Reporting
REPORTING

REPORTING
Reporting means providing information to the stake holders as per the requirement of
the law. The companies are reporting through their annual report. The annual report
contains the financial reporting as well as non financial reporting.
FINANCIAL REPORTING
Financial reporting is the process of producing statements that disclose an organisation's
financial status to management, investors and the government.

Financial reporting serves 2 primary purposes -
1. It helps management to engage in effective decision- making concerning the
company's objectives and overall strategies. The data disclosed in the reports can
help management determine the strengths and weaknesses of the company, as well
as its overall financial health.
2. Financial reporting provides vital information about the financial health and activities
of the company to its stakeholders including its shareholders, potential investors,
consumers, and government regulators. It's a means of ensuring that the company is
being run appropriately.
Financial Reporting involves the disclosure of financial information to the various

stakeholders about the financial performance and financial position of the organisation
over a specified period of time.
The main components of financial reporting are:
1. The financial statements –Balance Sheet, Statement of Profit & Loss, Cash flow
statement & Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)
ICAI have issued various accounting standards and guidance notes which are applied for
the purpose of financial reporting. This ensures uniformity across various diversified
industries when they prepare and present their financial statements.
Objectives
1. Providing information to management of an organisation which is used for the
purpose of planning, analysis, benchmarking and decision making.
2. Providing information to investors, promoters, debt provider and creditors which
is used to enable them to male rational and prudent decisions regarding investment,
credit etc.
3. Providing information to shareholders & public at large in case of listed companies
15. 1

about various aspects of an organisation.
4. Providing information as to how an organisation is procuring & using various
resources.
5. Providing information to the statutory auditors which in turn facilitates audit.

Limitations
The financial reporting model is like “looking in the rear-view mirror,” when in fact the
road ahead is very turbulent and there are huge impacts on the company, both societal
and environmental.
It is not necessarily the volume of information, but the lack of a comprehensive story,
which is where improvements in corporate reporting are needed.

Investors expect information about:
• Business model and strategy,
• Intangible factors and sustainability (i.e. economic, environmental, social)
commitments,
• Impacts and performance that affect a company’s value today and its ability to create
value in the future,
• Key aspects of corporate governance, Internal controls,
• Human rights / diversity practices and policies.

NON FINANCIAL REPORTING
• It contains the information relating to the company’s performance during the
previous year, future projections, award achievements and penalty imposed, if any by
any regulators, are apprised to the stake holders by way of reporting in the annual
report.
• It is a structured way of presenting information about ones performance.
• Non-Financial (NFR) or Sustainability Reporting (SR), is the practice of measuring,
disclosing and being accountable to internal and external stakeholders for
organisational performance towards the goal of sustainable and inclusive
development.
• Non-financial reporting is an opportunity to communicate in an open and transparent
way with stakeholders. In their non-financial reports, firms volunteer an overview of
their environmental and social impact during the previous year. The information in
non-financial reports contributes to building up a company’s risk-return profile.
• Non-financial reporting includes
Ø Board’s Report,
Ø Corporate Social Responsibility Report
Ø Corporate Sustainability Reporting

BOARD’S REPORT
The Companies Act, 2013, requires the Board of Directors of every company to attach its
report to the financial statements to be laid before the members at the annual general
meeting.
15. 2

The Board’s Report is an important means of communication by the Board of Directors
of a company with its stakeholders.
The Board’s Report provides the stakeholders with both financial and non-financial
information, including the performance and prospects of the company, relevant changes
in the management and capital structure, further issue of capital and other relevant
information.
The Board’s Report should be based on the company’s standalone financial statement and
not on the consolidated financial statement and should relate to the financial year for
which such financial statement is prepared.
The Board’s Report should avoid repetition of information. If any information is
mentioned elsewhere in the financial statement, a reference thereof should be given in
Board’s Report instead of repeating the same.

CORPORATE SOCIAL RESPONSIBILITY REPORTING
The Board of the Company is mandated to prepare a CSR Report u/s 134(3)(o) of the
Companies Act, 2013.
The format for the annual report on CSR activities to be included in the Board’s
report is as follows:
1. A brief outline of the company’s CSR policy, including overview of projects or
programs proposed to be undertaken and a reference to the web-link to the CSR
policy and projects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for the last three financial years
4. Prescribed CSR expenditure
5. Details of CSR spent during the financial year
Ø Total amount to be spent for the financial year:
Ø Amount unspent, if any:
Ø Manner in which the amount spent during the financial year is detailed below
6. In case the company has failed to spend the 2 % of the average net profit of the last 3
financial years or any part thereof, the company shall provide the reasons for not
spending the amount in its Board report.

A responsibility statement of the CSR Committee that the implementation and monitoring
of CSR Policy, is in compliance with CSR objectives and Policy of the company.
If a company has a website, the CSR policy and the report containing details of such
activities have to be made available on the company’s website for informational
purposes.

CORPORATE SUSTAINABILITY REPORTING
• Corporate sustainability is an approach that creates long-term stakeholder value by
implementing a business strategy that considers every dimension of how a business
operates in the ethical, social, environmental, cultural, and economic spheres.
• A sustainability report is an organizational report that gives information about
economic, environmental, social and governance performance.
15. 3

• Sustainability reporting aims to communicate an organization’s sustainability
priorities, policies, programs and performance to its investors.
• Sustainability reporting requires companies to gather information about processes
and impacts using Global Reporting Initiative (GRI) Sustainability Reporting
Framework.
• It comprises information on how a company, proactively and beyond regulations, acts
responsibly towards the environment around it and works towards equitable and fair
business practices and brings to life products and services with lower impacts on the
natural environment.
• Such a report describes how a company has implemented a greener supply chain, has
engaged with local communities, is helping tackle climate-change issues, or is
“innovating for the poor”.

Benefits of Corporate Sustainability Reporting
Sustainability reporting can help organizations to measure, understand and
communicate their economic, environmental, social and governance performance, and
then set goals, and manage change more effectively.
A sustainability report is the key platform for communicating sustainability
performance and impacts – whether positive or negative.
• Emphasizing the link between financial and non-financial performance
• Influencing long term management strategy and policy, and business plans
• Streamlining processes, reducing costs and improving efficiency
• Avoiding being implicated in publicized environmental, social and governance
failures
• Improving reputation and brand loyalty

Some of the key drivers of sustainability reporting are-
1. Regulations: Governments, at most levels have stepped up the pressure on
corporations to measure the impact of their operations on the environment. The most
notable shift has been from voluntary to mandatory sustainability, monitoring and
reporting.
2. Customers: Public opinion and consumer preferences are a more abstract but
powerful factor that exerts considerable influence on companies, particularly those
that are consumer oriented. Customers significantly influence a company’s reputation
through their purchasing choices and brand.
3. Loyalty: This factor has led the firms to provide much more information about the
products they produce, the suppliers who produce them, and the product’s
environmental impact starting from creation to disposal.
4. NGO’s and the media: Public reaction comes not just from customers but from
advocates and the media, who shape public opinion. Advocacy organisations, if
ignored or slighted, can damage brand value.
5. Employees: Those who work for a company bring particular pressure to bear on how
their employers behave; they, too, are concerned citizens beyond their corporate
roles.
6. Peer pressure from other companies: Each company is part of an industry, with the
peer pressures and alliances that go along with it. Matching industry standards for
sustainability reporting can be a factor.
15. 4

7. Companies themselves: Corporations, as public citizens, feel their own pressure to
create a credible sustainability policy, with performance measures to back it up, but
with an eye on the bottom line as well.
8. Investors: Increasingly, investors want to know that companies they have targeted
have responsible, sustainable, long-term business approaches.

GLOBAL REPORTING INITIATIVE – SUSTAINABILITY REPORTING
FRAMEWORK
Global Reporting Initiative (GRI) has developed a generally accepted framework to
simplify report preparation and assessment, helping both reporters and report users gain
greater value from sustainability reporting.
GRI is an initiative at the global level to standardize non-financial Reporting (NFR), which
the institutions adopt and has become the standard internationally.
The aim of the Guidelines is to assist reporting organizations and their stakeholders in
articulating and understanding contributions of the reporting organizations to
sustainable development.
The GRI Sustainability Reporting Framework is made up of the Sustainability Reporting
Guidelines, Sector supplements and Indicator Protocols. Together these are known as the
Sustainability Reporting Framework.

Sustainability Reporting Guidelines
• The Guidelines are the core element of the Reporting Framework. They outline
content that is broadly relevant to all organizations regardless of size, sector or
location. The Guidelines developed by the GRI, is a significant system that integrates
sustainability issues in to a frame of reporting.
• GRI launched the fourth generation of its sustainability reporting guidelines: the GRI
G4 Sustainability Guidelines (the Guidelines) in 2013.
• The aim of G4, is to help reporters prepare sustainability reports that matter, contain
valuable information about the organization’s most critical sustainability-related
issues, and make such sustainability reporting standard practice.
• G4 is applicable to all organizations, large and small, across the world.
• It consists of following 2 parts
Ø Part 1- Reporting Principles and Standard Disclosures: It contains the reporting
principles and standard disclosures and also sets out the criteria to be applied by
an organization to prepare its sustainability report in accordance with the
Guidelines.
Ø Part 2 - Implementation Manual: It contains reporting and interpretative guidance
that an organization should consult when preparing its sustainability report.

Reporting Principles and Standard Disclosures
The Reporting Principles are fundamental to achieving transparency in sustainability
reporting and therefore should be applied by all organizations when preparing a
sustainability report. The Implementation Manual outlines the required process to be
followed by an organization in making decisions consistent with the Reporting Principles.
The Principles are divided into 2 groups:
a) Principles for defining report content: They describe the process to be applied to
identify what content the report should cover by considering the organization’s
15. 5

activities, impacts, and the substantive expectations and interests of its stakeholders.
These Principles are designed to be used in combination to define the report content.
b) Principles for Defining Report Quality: They guide on ensuring the quality of
information in the sustainability report, including its proper presentation. Decisions
related to the process of preparing information in a report should be consistent with
these Principles. All of these Principles are fundamental to achieving transparency.

There are 2 different types of Standard Disclosures:
1. GENERAL STANDARD DISCLOSURES
Ø Strategy and Analysis
Ø Organizational Profile
Ø Identified Material Aspects and Boundaries
Ø Stakeholder Engagement
Ø Report Profile
Ø Governance
Ø Ethics and Integrity
2. SPECIFIC STANDARD DISCLOSURES
Ø Disclosures on Management Approach
Ø Indicators

SUSTAINABILITY REPORTING FRAMEWORK IN INDIA
• Considering the importance of sustainability in businesses, MCA launched Corporate
Social Responsibility Voluntary Guidelines in 2009. This voluntary CSR Policy
addresses six core elements – Care for all Stakeholders, Ethical functioning, Respect
for Workers’ Rights and Welfare, Respect for Human Rights, Respect for Environment
and Activities for Social and Inclusive Development.
• To take this further, in 2011 MCA issued ‘National Voluntary Guidelines on Social,
Environmental and Economical Responsibilities of Business’ which encourages
reporting on environment, social and governance issues.
• In line with the above and considering the larger interest of public disclosure
regarding steps taken by listed entities from a Environmental, Social and Governance
(“ESG”) perspective, SEBI decided to mandate inclusion of Business Responsibility
Reports (“BRR reports”) as part of the Annual Reports for listed entities.
• SEBI in its (LODR) Regulations, 2015 has mandated the requirement of submission of
BRR for top 500 listed entities describing initiative taken by them from an
environmental, social and governance perspective in the prescribed format.
• BRR is a disclosure of adoption of responsible business practices by a listed company
to all its stakeholders. This is important considering the fact that these companies
have accessed funds from the public, have an element of public interest involved, and
are obligated to make exhaustive disclosures on a regular basis.
• SEBI has prescribed a format for ‘Business Responsibility Report’. It contains a
standardized format for companies to report the actions undertaken by them towards
adoption of responsible business practices.

15. 6

The BRR framework is divided into 5 sections:
a) Section A: General Information about the Organisation – Industry Sector, Products &
Services, Markets, other general information
b) Section B: Financial Details of the Organisation – Paid up capital, Turnover, Profits,
CSR spend.
c) Section C: Other Details – BR initiatives at Subsidiaries and Supply-chain Partners
d) Section D: BR Information – Structure, Governance & Policies for Business
Responsibility
e) Section E: Principle-wise Performance – Indicators to assess performance on the 9
Business Responsibility principles as envisaged by the National Voluntary Guidelines
(NVGs)

National Guidelines on Responsible Business Conduct (NGRBC)
The MCA has revised the National Voluntary Guidelines on Social, Environmental and
Economic Responsibilities of Business, 2011 (NVGs) and has released the NGRBC in
March 2019. These guidelines urge businesses to actualise the principles in letter and
spirit. This annexure 3 of the Guidelines details the reporting framework associated with
the National Guidelines for Responsible Business Conduct.
It consists of 3 sections:
a) Section A – General Disclosures, covering operational, financial and ownership
related information,
b) Section B – Management and Process Disclosures covering the structures, policies
and processes to integrate the Guidelines, and
c) Section C – Principle-wise Performance Indicators covering how well businesses are
performing in pursuit of these Guidelines.

Businesses may use this reporting framework to voluntarily disclose their commitment
to and performance against their economic, social and environmental impacts. A growing
number of businesses are already doing this and are reporting several benefits, internal
and external, as a result of their commitment to disclosure and reporting.

Challenges in mainstreaming sustainability reporting
1. Government Encouragement: In many jurisdictions, there are no guidelines on
sustainability reporting to encourage the corporate sector. It is the need of the hour
that governments should encourage the corporate in their jurisdiction to adopt the
sustainability reporting as a measure of good corporate governance.
2. Awareness: lack of awareness about the emerging concept of sustainability reporting
is also a major challenge which the government and corporate governance bodies
need to address by arranging the sustainability awareness programme for the
Professionals, Board of Directors and Management in the corporate sector, as these
are the persons who will drive sustainability reporting initiative for an organisation.
3. Expertise Knowledge: Sustainability Reporting is relatively a new concept in many
jurisdictions and organization find it very difficult to prepare a sustainability report
in the absence of expert guidance on the subject. The professional bodies in various
jurisdictions should impart the expert knowledge of sustainability reporting to their
members to develop a good cadre of experts in this emerging area of sustainability
reporting.
15. 7

4. Investor Behaviour: It is a recognized principle that investors should consider the
Environmental, Social and Governance (ESG) issues while making investment
decisions. There are specific regulators guidelines for the institutional investor to be
vigilant on voting aspects and be concerned about the governance practices of the
companies in which they invest. It should be made a practice that the investor fund
flow to those organization following the good governance including reporting on
sustainability aspects.

Integrated Reporting
Integrated reporting is a concept that has been created to better articulate the broader
range of measures that contribute to long-term value and the role, organisations play in
society. Central to this is the proposition that value is increasingly shaped by factors
additional to financial performance, such as reliance on the environment, social
reputation, human capital skills and others. This value creation concept is the backbone
of integrated reporting.
Integrated reporting starts from the position that any value created as a result of a
sustainable strategy —regardless of whether it becomes a tangible or intangible asset —
will translate, at least partially, into performance. Market value will therefore be
impacted.

Integrated Reporting is one step ahead of sustainability reporting and its set to become
the way companies report their annual financial and sustainability information together
in one report. The aim of an integrated report is to clearly and concisely tell the
organization’s stakeholders about the company and its strategy and risks, linking its
financial and sustainability performance in a way that gives stakeholders a holistic view
of the organization and its future prospects.

The International Integrated Reporting Council (IIRC) defines integrated reporting as “a
process that results in communication by an organisation, most visibly a periodic
integrated report, about how an organisation’s strategy, governance, performance, and
prospects lead to the creation of value over the short, medium and long-term.” It
promotes a more cohesive and efficient approach to corporate reporting and aims to
improve the quality of information available to providers of financial capital to enable a
more efficient and productive allocation of capital.

The primary purpose of an integrated report is to explain to providers of financial
capital how an organisation creates value over time.

Fundamental Concepts of Integrated Reporting
• An integrated report aims to provide insight about the resources and relationships
used and affected by an organisation – these are collectively referred to as “the
capitals” in this Framework.
• It also seeks to explain how the organisation interacts with the external environment
and the capitals to create value over the short, medium and long term.
• The ability of an organisation to create value for itself enables financial returns to the
providers of financial capital. This is interrelated with the value the organization
creates for stakeholders and society at large through a wide range of activities,
15. 8

interactions and relationships. When these are material to the organisation's ability
to create value for itself, they are included in the integrated report.

International Integrated Reporting Framework
The following Guiding Principles underpin the preparation and presentation of an
integrated report, informing the content of the report and how information is presented:
a) Strategic focus and future orientation: An integrated report should provide insight
into the organisation’s strategy, and how it relates to the organisation’s ability to
create value in the short, medium and long term and to its use of and effects on the
capitals.
b) Connectivity of information: The report should show a holistic picture of the
combination, interrelatedness and dependencies between the factors that affect the
organisation’s ability to create value over time.
c) Stakeholder relationships: The report should provide insight into the nature and
quality of the organisation’s relationships with its key stakeholders.
d) Materiality: The report should disclose information about matters that substantively
affect the organisation’s ability to create value over the short, medium and long term.
e) An integrated report should be concise
f) Reliability and completeness: An integrated report should include all material
matters, both positive and negative, in a balanced way and without material error.
g) Consistency and comparability: The information in an integrated report should be
presented:
• On a basis that is consistent over time
• In a way that enables comparison with other organisations to the extent it is
material to the organisation’s own ability to create value over time.

An integrated report should include eight Content Elements that are
fundamentally linked to each other and are not mutually exclusive:
1. Organisational overview and external environment
2. Governance
3. Business model
4. Risks and opportunities
5. Strategy and resource allocation
6. Performance
7. Outlook
8. Basis of presentation

Integrated Reporting by Listed Entities in India
SEBI vide its circular dated February 6, 2017 has stated that today an investor seeks both
financial as well as non-financial information to take a well-informed investment
decision. An integrated report aims to provide a concise communication about how an
organisation’s strategy, governance, performance and prospects create value over time.

Also regulation 4(1)(d) of SEBI LODR states “the listed entity shall provide adequate and
timely information to recognised stock exchange(s) and investors”.

IOSCO Principle 16 states “there should be full, accurate and timely disclosure of financial
results, risks and other information that is material to investors´ decisions.”
15. 9

In this regard, the IIRC has prescribed Guiding Principles which underpin the preparation
of an integrated report, specifying the content of the report and how information is to be
presented.
Towards the objective of improving disclosure standards, in consultation with
industry bodies and stock exchanges, the listed entities have been advised to
adhere to the following by the SEBI vide this circular:
a) Integrated Reporting may be adopted on a voluntary basis from the FY 2017-18 by
top 500 companies which are required to prepare BRR.
b) The information related to Integrated Reporting may be provided in the annual report
separately or by incorporating in Management Discussion & Analysis or by preparing
a separate report (annual report prepared as per IR framework).
c) In case the company has already provided the relevant information in any other
report prepared in accordance with national/international requirement/ framework,
it may provide appropriate reference to the same in its Integrated Report so as to
avoid duplication of information.
d) As a green initiative, the companies may host the Integrated Report on their website
and provide appropriate reference to the same in their Annual Report

RELATION BETWEEN INTEGRATED REPORTING AND SUSTAINABILITY REPORTING
• Sustainability reporting is a process that assists organizations in setting goals,
measuring performance and managing change towards a sustainable global economy
– one that combines long term profitability with social responsibility and
environmental care.
• Sustainability reporting – mainly through but not limited to a sustainability report –
is the key platform for communicating the organization’s economic, environmental,
social and governance performance, reflecting positive and negative impacts. The
Aspects that the organization deems to be material, in response to its stakeholders’
expectations and interests, drive sustainability reporting.
• Integrated reporting is an emerging and evolving trend in corporate reporting, which
in general aims primarily to offer an organization’s providers of financial capital with
an integrated representation of the key factors that are material to its present and
future value creation.
• Integrated reporters build on sustainability reporting foundations and disclosures in
preparing their integrated report. Through the integrated report, an organization
provides a concise communication about how its strategy, governance, performance
and prospects lead to the creation of value over time. Therefore, the integrated report
is not intended to be an extract of the traditional annual report nor a combination of
the annual financial statements and the sustainability report. However, the integrated
report interacts with other reports and communications by making reference to
additional detailed information that is provided separately.
• Although the objectives of sustainability reporting and integrated reporting may be
different, sustainability reporting is an intrinsic element of integrated reporting.

15. 10

CS Praveen Choudhary Introduction of E & G
ETHICS AND BUSINESS

INTRODUCTION – ETHICS AND GOVERNANCE
Introduction
The new and emerging concepts in management like
1) Corporate Governance
2) Business Ethics
3) Corporate Sustainability
Are some of the expressions through which this emerging ethical instinct in the corporate world
is trying to express and embody itself in the corporate life.
Meaning of Governance
It means establishment of policies and continuous monitoring of their proper implementations by the
member of organization.
Governance Through Inner Consciousness

According to Sri Aurobindo
To be able to do the right thing in the right way, in each case and at every moment, one must be in the
right consciousness.
Inner consciousness
Ø Inner consciousness is the awareness, the capacity to listen to the inner voice that tells us that there
is someone who is looking up at us and also warns that there is someone who is watching us.
Ø The soul and core of Corporate Governance is not the conduct or behavior that we see outwardly. It
is internalized values that an organization and its top management follow.
Ø The quality our consciousness depends on which part of the consciousness we live. There are two
parts in our consciousness.
Ø First is the lower physical-vital being driven predominantly by self-interest, material needs and
sensuous desires, quite often degenerating into greed.
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Ø The second is the higher mental, moral and spiritual being seeking for truth, beauty, goodness,
harmony and unity.
Ø The corporate governance, to be truly effective and enduring, has to be based on this higher part of
our human nature or consciousness.
Corporate Sustainability
Sustainability is based on simple principle. Everything that we need for our survival and well being
depends, either directly or indirectly on our natural environment. Sustainability creates and maintains
the conditions under which humans and nature can exist in productive harmony, that permit fulfilling
the social, economic and other requirements of present and future generations.
ETHICS
Ø The term “ethics” is derived from the Greek word “ethos”
Ø which refers to
ü character or
ü customs or
ü accepted behaviours.
Ø The Oxford Dictionary states ethics as
ü the moral principle that governs a person’s behavior or
ü how an activity is conducted.
Ø In other words, it is the branch of knowledge concerned with moral principles.
Meaning
Ø Ethics means the rules or principles that define right or wrong conduct.
Ø Ethics refers to a code of conduct that guides an individual while dealing with others.
Ø It is a branch of study dealing with what is the proper course of action for man.
Ø Ethics is a set of principles or standards of human conduct that govern the behavior of individuals
or organizations.
Ø Using these ethical standards, a person or a group of persons or an organization regulate their
behavior to distinguish between what is right and what is wrong as perceived by others.
Ø It is not a natural science but a creation of the human mind.
Ø It is not absolute and is open to the influence of time, place and situation.
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Conclusion
Ø Ethics can be defined as the discipline dealing with moral duties and obligation, and explaining what
is good or not good for others and for us.
Ø Ethics is the study of moral decisions that are made by us in the course of performance of our duties.
Ø Ethics is the study of characteristics of morals and it also deals with the moral choices that are made
in relationship with others.
Ø Ethics is concerned with truth and justice, concerning a variety of aspects like the expectations of
society, fair competition, public relations, social responsibilities and corporate behavior.
BUSINESS ETHICS AND CORPORATE GOVERNANCE ETHICS

BUSINESS ETHICS
Ø Business ethics is a form of applied ethics.
Ø In broad sense ethics in business is simply the application moral or ethical norms to business.
Ø Business ethics refers to a ‘code of conduct’ which businessmen are expected to follow while dealing
with others.
Ø Business ethics comprises the principles and standards that guide behavior in the conduct of
business.
Ø Business ethics stands for the saneness or purity of purpose that is upheld through carefully designed
actual practices of a business enterprise.
Code of conduct
Ø It is a set of principles and expectations that are considered binding on any person who is member
of a particular group.
Ø The alternative names for code of conduct are ‘code of ethics’ or ‘code of practice’.
Coverage of business ethics

Ø The coverage of business ethics is very wide as it deals with norms relating to
ü a company and
ü its employees,
ü suppliers,
ü customers and
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ü neighbors,
Ø Its fiduciary responsibility to its shareholders.
CORPORATE GOVERNANCE ETHICS

Ø Corporate governance is meant to run companies ethically in a manner such that all stakeholders-
ü creditors,
ü distributors,
ü customers,
ü employees and
ü even competitors,
ü the society at large and governments – are dealt with in a fair manner.
Ø Good corporate governance should look at all stakeholders and not just shareholders alone.
Corporate governance ethics

Ø Business ethics and corporate governance of an organization go hand in hand.
Ø An organization that follows ethical practices in all its activities will, in all probability, follow best
corporate governance practices as well.
ETHICS PHILOSOPHIES/ Ethical Theories

Deontological ethics (Kantian Ethics)
Ø Deontology word derived from Greek word “deon” meaning “duty” or “obligatory” and “logos”
meaning “science” is therefore science of duty.
Ø Deontological ethics focus on the relationship between duty and the morality of human actions.
Ø It follows the concept that moral duty is to do good actions and not bad ones.
Ø This ethical model simply suggests adherence to independent moral rules or duties regardless of the
consequences of such actions.
Ø When we follow our duty, we are behaving morally and when we fail to follow our duty, we are
behaving immorally.
Ø Example: If a manager decides that it is his duty to always be on time to meetings is running late for
reasons not in his control, how is he supposed to drive to reach the meeting on time? Is he supposed
to speed, breaking his duty to uphold the law or is he supposed to arrive at his meeting late, breaking
his duty to be on time.
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Ø Bhagavad Gita teaches the following: - “That, without being attached to the fruits of activities, one
should acts as a matter of duty, for by working without attachment one attains the Supreme (Verse
19, Chapter 3).
Teleological Ethics [Dec, 2009]

Ø Teleological word derived from the Greek word ‘telos’ meaning end, purpose and ‘logos’ meaning
logic or reason
Ø It is also known as consequential ethics. These theories that hold the ends or consequences of an act
determine whether an act is good or evil.
Ø Rightness of actions is determined solely by the good consequences.
Ø Teleological analysis of business ethics leads to consideration of the full range of stakeholders in
any business decision, including
ü the management,
ü the staff,
ü the customers,
ü the shareholders,
ü the country,
ü humanity and
ü the environment.
Egoism
Ø The word Egoism derived from Latin word ego, in philosophy, an ethical theory holding that the
good is based on the pursuit of self-interest.
Ø This model takes into account harms, benefits and rights for a person’s own welfare.
Ø In this model an action is morally correct if it increases benefits for the individual in a way that does
not intentionally hurt others, and if these benefits are believed to counterbalance any unintentional
harms that ensue.
Utilitarianism
Ø Utilitarianism is an ethic of welfare.
Ø It is the idea that the moral worth of an action is solely determined by its contribution to overall
utility, that is, its contribution to happiness or pleasure as summed among all persons.
Ø It can be described by the phrase “the greatest good for the greatest number”. For example, one may
be tempted to steal from a rich wastrel to give to a starving family.
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Ø Example: One may be tempted to steal from a rich wastrel to give to a starving family.
Relativism
Ø Relativism is the idea that some elements or aspects of experience or culture are relative to, i.e.,
dependent on, other elements or aspects.
Ø It holds that there are no absolute truths in ethics and that what is morally right or wrong varies from
person to person or from society to society.
Ø The term often refers to truth relativism, which is the doctrine that there are no absolute truths, i.e.,
that truth is always relative to some particular frame of reference, such as a language or a culture.
Virtue Ethics theory

Ø Virtue Ethics theory is a branch of moral philosophy that
Ø emphasizes character,
Ø rather than rules or
Ø consequences,
Ø as the key element of ethical thinking.
Ø Example – when a person of good standing is found possessing a valuable article belonging to
someone else it will be presumed that the article was loaned to him or kept with him for safe-keeping,
whereas if it were in the possession of a person of doubtful or dubious character it would be
presumed that he has stolen article.
Justice Theory
Ø Justice approach is also known as fairness approach.
Ø It is a principle of Equality
Ø Greek philosophers have contributed to the idea that all equals should be treated equally.
Ø Justice does not depend on consequences; it depends on the principle of equality.
SCOPE OF BUSINESS ETHICS
Ethics in Compliance
Ø Compliance is about obeying and adhering to rules and authority.
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Ø The motivation for being compliant could be to do the right thing out of the fear of being caught
rather than a desire to be abiding by the law.
Ø An ethical climate in an organization ensures that compliance with law is fueled by a desire to abide
by the laws.
Ø Organization that value high ethics comply with the laws not only in letter but go beyond what is
stipulated or expected of them
Ethics in Finance
The ethical issues in finance that companies and employees are confronted with include:
Ø In accounting –
ü Window dressing,
ü Misleading financial analysis.
Ø Related party transactions not at arm’s length
Ø Insider trading, securities fraud leading to manipulation of the financial markets.
Ø Executive compensation.
Ø Bribery, kickbacks, over billing of expense, facilitation payments.
Ø Fake reimbursements
ETHICS IN HUMAN RESOURCES (HRM)

Role of ethics in HRM
Ø Human resource management (HRM) plays a decisive role in introducing and implementing ethics.
Ø Ethics should be a pivotal issue for HR specialists.
Ø The ethics of human resource management (HRM) covers those ethical issues arising around the
employer-employee relationship, such as the rights and duties owed between employer and
employee.
The issues of ethics faced by HRM include

Ø Discrimination issues i.e. discrimination on the bases of age, gender, race, religion, disabilities,
weight etc.
Ø Sexual harassment
Ø Affirmative Action
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Ø Issues surrounding the representation of employees and the democratization of the workplace, trade
unionization.
Ø Issues affecting the privacy of the employee: workplace surveillance, drug testing.
Ø Issues affecting the privacy of the employer: whistleblowing
Ø Issues relating to the fairness of the employment contract and the balance of power between
employer and employee.
Ø Occupational safety and health.
ETHICS IN MARKETING
Role of ethics in marketing
Marketing ethics is the area of applied ethics which deals with
Ø the moral principles behind the operation and
Ø regulation of marketing
The ethical issues confronted in this area include

Ø Pricing: price fixing, price discrimination, price skimming.
Ø Anti-competitive practices like manipulation of supply, exclusive dealing arrangements, tying
arrangements etc.
Ø Misleading advertisements
Ø Content of advertisements
Ø Children and marketing
Ø Black markets, grey markets.
Role of ethics in production
Ø This area of business ethics deals with the duties of a company to ensure that products and
production processes do not cause harm.
Ø Some of the more acute dilemmas in this area arise out of the fact that
ü there is usually a degree of danger in any product or production process and
ü it is difficult to define a degree of permissibility, or
ü degree of permissibility may depend on the changing state of preventative technologies or
ü changing social perceptions of acceptable risk.
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The ethical issues confronted in this area include

Ø Defective, addictive and inherently dangerous products and
Ø Ethical relations between the company and the environment include pollution, environmental ethics,
Carbon emissions trading
Ø Ethical problems arising out of new technologies for eg. Genetically modified food
Ø Product testing ethics
ADVANTAGES OF ETHICS
Ethics helps to promote a strong public image
Ø An organization that pays attention to its ethics can portray a strong and positive image to the public.
Ø People see such organizations as valuing people more than profit and striving to operate with the
integrity and honor.
Ø Managing ethical values in businesses besides optimizing profit generation in the long term,
legitimizes managerial actions, strengthens the coherence and balance of the organization’s culture,
improves trust in relationships between individuals and groups, supports greater consistency in
standards and qualities of products, and cultivates greater sensitivity to the impact of the enterprise’s
values and messages.
Ethics programs helps to avoid criminal acts

Ø Ethics programs help to detect ethical issues and violations early,
Ø so that they can be reported or addressed.
Enhanced employee growth

Ø Attention to ethics in the workplace helps employees face the reality, both good and bad in the
organization and
Ø gain the confidence of dealing with complex work situations.
Strong teamwork and greater productivity

Ø Ongoing attention and dialogue regarding values in the workplace
ü builds openness,
ü integrity and
16. 9

ü community,
ü all critical ingredients of strong terms in the workplace.
Ø Employees feel a strong alignment between their values and those of the organization resulting in
strong motivation and better performance.
Improved society
Ø Trusts controlled some markets to the extent that prices were fixed and small businesses stifled.
Ø Influence was applied through intimidation and harassment.
Ø The society reacted and demanded that
ü businesses place high value on ethics, fairness and
ü equal rights resulting in framing of antitrust laws,
ü establishment of Government agencies and recognition of labour unions
Attracting and retaining talent

Ø People aspire to join organizations that have high ethical values.
Ø Companies are able to attract the best talent and an ethical company that is dedicated to taking care
of its employees will be rewarded with employees being equally dedicated in taking care of the
organization.
Ø Retaining talented people is as big a challenge as getting them in the first place.
Ø Work is a means to an end for them, not an end in itself.
Ø The relationship they have with their employer must be a mutual, win-win one, in which their loyalty
should not be taken for granted.
Ø Talented people will invest their energy and talent only in organizations with values and beliefs that
match their own
Investor Loyalty
Ø Investors are concerned about ethics, social responsibility and reputation of the company in which
they invest.
Ø Investors are becoming more and more aware that an ethical climate provides a foundation for
efficiency, productivity and profits.
Ø Relationship with any stakeholder, including investors, based on dependability, trust and
commitment results in sustained loyalty
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Customer satisfaction
Ø Customer satisfaction is a vital factor in successful business strategy.
Ø Repeat purchases/ orders and enduring relationships of mutual respect is essential for the success of
the company.
Ø This is achieved by a company that adopts ethical practices.
Ø Ethical conduct towards customers builds a strong competitive position. It promotes a strong public
image.
16. 11

CS Praveen Choudhary Ethical Principle in Business
Ethical Principle in Business

Introduction
Organization value, influences individual’s decisions.
Here ethical issues depends on
Ø Organization culture
Ø Employees & colleges

Corporate organization culture comprises of: -
Ø Value
Ø Attitude
Ø Experience
Ø beliefs

Collection of values & norms shared by employee or group of organization & controls the
way of interaction between them & outsiders.

Important element organization cultureà Ethical Climate:- Shared set of
understanding about what is correct behavior & how ethical issues will be handled.

Ethical climate is set @ Top level

ü Sets the character for decision making at all level
ü Reflect whether firm has an ethical conscience
ü Function of many factors
ü Their behavior or action will set the way Lower –level employee will act & way of
organization’s act as a whole during ethical dilemma.
Note: à When Ethical Climate is not clear à Ethical dilemma will often result in
unethical behavior.
Structure of organization & ethics (D09)

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¬ Centralized organization
- Decision making authority delegated to top-level management only.
- Very little authority is delegated to lower level.
- Internal & external responsibility is always with top-level management.
Ø Suitable for those organizations
ü Which makes high risk decisions &
ü Whose lower level might not be highly skilled in decision-making.
ü Where production processes are routine & efficiency is of primary importance.

Disadvantage: -
¬ It may lead to unethical act because of top to down approach & because of distance in
between.
¬ If it is much bureaucratic, employee may behave according to letter of law rather than
sprit of law.

Decentralized: -
¬ Authority is delegated at several levels.
¬ They have few formal rules & procedures
¬ Focuses on increasing flow of information
¬ Provides greater flexibility
¬ Main strengthà Adaptability & early recognition of external change so that manager
can react quickly to the change.
¬ Weakness à Difficulty in responding quickly to change in policy & procedures made
by top-level management.
¬ Independent profit centers may divert from organizational objective.

Ethics Programme (J11)
Ø Company should have good ethical program.
Ø So that employees can understand company’s values & he will comply with policy,
procedure & rules, code of conduct
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Ø Following 2 types of Ethics program can be created and both can be adopted
simultaneously.

1) Compliance orientation programme
¬ Creates order by requiring that employees comply with and commit to the
required conduct.
¬ It uses Legal terms, statutes, rules & penalties for non compliance.

2) Value orientation programme
¬ Objective is to develop shared value
¬ Focus is basically on an abstract core of ideals (e.g. respect & responsibility)
¬ instead of relying on coercion, the company’s values are seen as something to
which people willingly aspire.

Most companies start from code of conduct
- Codes of Conduct are Formal statement which describes what the organization expects
from its employees.

Features of Good Business Ethics Programme
Leadership means that executives and supervisors care about ethics and values as
much as they do about the bottom line.
Consistency between words and actions refers that top management “Practices what it
preaches”. This is more important than formal mechanisms, such as hotlines for people
to report wrong doing.
Fairness means that the organization operates fairly. To most employees, the most
important ethical issue is how the organization treats them and their co workers.
Just rewards say that ethical behaviour is fairly rewarded. This has greater influence on
the effectiveness of an ethics programme than the perception that unethical behaviour
is punished.
Openness means that people can talk openly about ethics and values, and that ethics
and values are integrated into business decision making.

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Code of ethics in a company

¬ Shall be Comprehensive
¬ Consist of general statement
¬ Serves as principles & basis for rule of conduct
¬ Desire of management to comply with values, Rules & policy

Shall be developed by president/BOD/CEO with assistance of Legal Staff
¬ Outlines set of fundamental principles
¬ Can be used
1) Basis of operational requirements (things to do)
2) Basis of operational prohibitions (things not to do)

A code of ethics is based on a set of core principles or values and is not designed for
convenience.

¬ Reflects upper management’s desire- for compliance with rules norms & policies
¬ Contains 6 core valuesà
1) Trust worthiness
2) Respect
3) Responsibility
4) Fairness
5) Caring
6) Citizen
& other descriptions & examples of appropriate conduct

In US à Sec 406 of Sarbanes Oxlay Act, 2002 says
¬ Public Company shall disclose
- Whether they have code of ethics
- Any waiver of code for certain members
- Any change of code of ethics.
If they don’t have à explain why?

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¬ A company may either

- File with annual report
- Post on website
- Provide a copy on request without change.

Code of conduct
COC may be defined as a document containing the core values and moral principles which
all those working in the company are expected to follow in the course of their duties as
well as in their daily activities.
It reflects commitment of the company to ensure ethical behaviour on part of its
members. It also indicates how an employee should act in general or in specific situation.
A code of conduct lay down do’s and don’ts. It describes socially acceptable and
responsible behaviour.

The development of Corporate Code Contains standards of business conduct
Guides actions of board & senior management.

Elements of COC (J09)
1) Company’s value
2) Avoidance of conflict of interest
3) Accurate & timely disclosure in reports & documents.
4) Compliance of laws, rules & regulations.
5) Maintaining confidentiality & fair dealings
6) Prohibition of corporate opportunities.

Most of companies have following principles in their Code of Ethics (COE)
è Use of company’s assets
è Avoidance
• Actions of conflict of interest
• Unlawful agreements
• Compromising on commercial relationships
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• Offering or receiving monetary & other inducements

è Confidentiality
è Safety
è Records
è Free & fair competition
è Disciplinary actions

Ethics Training & Communication: (J10/D11/D10)
A major step in developing an effective ethics program would be to implement a training
program and communication systems to train, educate & communicate employees about
the firm’s ethical standards.
Training program
v Can educate firm’s policy & expectations as well as relevant laws & regulations &
general social standards
v Can make employees aware about available resources, support system, designated
personnel who can assist them with ethical and legal advice.
v They empower employees to ask tough questions and make ethical decisions.
Note: Many companies are now incorporating ethics training into their employee and
management development training efforts.

CREDO: - (D12/J13)
Ø It is a Latin word.
Ø Meaning à Set of fundamental belief or a guiding principles,
Ø Statement of common values which allow employees to understand the importance
of stakeholders & services provided.
Ø A good credo gives the company a reason to exist.
Ø It develops the spirit of employees, motivating them at all times.
Ø It is force which make them work together to achieve a consistent high standard.

Sam Walton, founder of Walmart, established 3 basic beliefs as his company’s credo
¬ Respect for the individual
¬ Service to overall customers
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¬ Strive for excellence

SAIL Credo: -
Ø Credo of sail talks about respect of stakeholders & ethical practice
Ø We build lasting relationships with customers, we create a culture, which support
flexibility, learning & its proactive to change.
Ø We value the opportunity & responsibility

Integrity Pact (J13)
è Developed by TI (Transparency International)
è Tool for preventing corruption in public contracting
è Also introduce a monitoring system which will provide independent oversight &
accountability.
è Consist of process which includes an agreement between government departments &
bidders.
• Contains rights & obligations, that they will not pay, demand, offer or accept bribes
or collude with competitors to obtain the contract.
First à “Agreement between government & bidders to protect from bribery &
collusion”.
è Bidder are required to disclose any thing paid by then to anyone for contract- if
violated, they may: -
• Loose or denial of contract.
• Forfeiture of bid.
• exclusion from bidding on future contract.
• Criminal action against them.
Secondà Monitoring System, that provides for independent oversight & increased
government accountability of the public contracting parties process.
Monitors performance functions such as
Ø Overseeing corruption risk
Ø Offering guidance on preventive measures
Ø Informing public about contracting process, transparency and integrity
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Social and ethical accounting

Normally links a company’s values with development of policies & performance targets
& to the assessment & communication of performance
It is a process that helps a company to address: -
ü Issues of accountability to stake holders,
ü To improve performance of all aspects i.e. social, environmental and economics.

Social and ethical accounting has: -
ü No standardized model
ü No standardized balance sheet or unit of currency
ü Issues are defined by the company values and aims by the interest and expectations
of its stake holders and by social norms regulations.

Principles of Social and ethical accounting: - (D10)

The dominant principle of social and ethical accounting is inclusivity. This principle
requires that the aspirations and needs of all stakeholder groups are taken into account
at all stages of the social and ethical accounting process.

Ø Planning: The Company commits to the process of social and ethical accounting,
auditing and reporting, and defines and reviews its values and social & ethical
objectives or targets.
Ø Accounting: The scope of the process is defined, information is collated and analyzed,
and performance targets and improvement plans are developed.
Ø Reporting: A report on the company’s systems and performance is prepared.
Ø Auditing: The process of preparing the report, with the report itself, is externally
audited and the report is made accessible to stakeholders in order to obtain feedback
from them.
Ø Embedding: To support each of the stages, structures and systems are developed to
strengthen the process and to integrate them into the company’s activities.
Ø Stakeholder Engagement: The concerns of stakeholders are addressed at each stage
of the process through regular involvement.
16. 19


The nature of social and ethical reporting is related to the size and nature of the
organization. Even a comprehensive and clear report needs to be trusted to be valuable.

ETHICS AUDIT
They include external societal pressures, risk management, Stakeholder obligations and
identifying a baseline to measure future improvements. In some cases, companies are
driven to it by a gross failure in ethics, which may have resulted in costly legal action or
stricter government regulation. An ethical profile brings together all the factors which
affect a company’s reputation, by examining the way in which it does business.

The following are the some of the suggested steps in ethics audit:
1. The 1st step à Securing the commitment of the firm’s top management.
2. The 2nd step à Establishing a committee or team to oversee the audit process.
3. The 3rd step à Establishing the scope of the audit.
4. The 4th step à A review of the firm’s mission values, goals, and policies.
5. The 5th step àIdentifying the tools or methods that can be employed to measure the
firm’s progress and then collecting and analyzing the relevant information.
6. The 6th step à Having the results of the data analysis verified by an independent
party.
7. The final step à Reporting the audit findings to the BOD and top executives and, if
approved, to external stakeholders.

ETHICS COMMITTEE (D10)
Codes of conduct are an outgrowth of company missions, visions, strategies and values.
Thoughtful and effective corporate codes provide guidance for making ethical business
decisions that balance conflicting interests.

Senior management needs to hold it self to the highest standards of conduct before it can
demand similar integrity from those at lower levels. Writing a code of conduct,
supporting it at top level and communicating it to the employees are just a beginning.
16. 20

Companies should have a committee of independent non executive directors who are
responsible for ensuring that systems are in place in the company to assure employees
compliance with the code of ethics.

Functions of Ethics Committee:

Ø Review of the definitions of standards and procedures
The Committee should review the organization's areas of operation, the activities that
require a formal set of ethical standards and procedures. The ethics committee can
suggest behaviors to upper management that reinforce the organization's guidelines.

Ø Facilitate Compliance
The ethics Committee has the responsibility for overall compliance. It is the responsible
authority for ethics compliance within its area of jurisdiction. It should serve as the court
of last resort concerning interpretations of the organization's standards and procedures.

Ø Due diligence of prospective employees
The ethics committee should define how the organization will balance the rights of
individual applicants and employees against the organization's need to avoid risks that
come from placing known violators in positions of discretionary responsibility.

Ø Oversight of communication and training of ethics programme
The ethics committee should define methods and mechanisms for communicating ethical
standards and procedures. This includes the distribution of documents to ensure that
every employee understands and accepts the organization's ethical guidelines.

Ø Monitor and audit compliance
Compliance is an ongoing necessity and the ethics committee should design controls
which monitor, audit and demonstrate employees' adherence to published standards and
procedures.

16. 21

Ø Enforcement of disciplinary mechanism

Disciplinary provisions should be in place to ensure consistent responses to similar
violations of standards and procedures

Ø Analysis and follow-up
When violations occur, the ethics committee should have ways to identify why they
occurred. It is also important that lessons learned from prior violations are systematically
applied to reduce the chances of similar violations taking place in future.

Concept of Whistleblower (vigil mechanism)
A whistleblower is a person who publicly complains concealed misconduct on the part of
an organization or a body of persons, usually from within that same organization. This
misconduct may be classified in many ways.
For example: a violation of a law, rule, regulation and a direct threat to the public
interest, such as fraud, health/ safety violations and corruption.

LODR 2015 provides provisions for vigil mechanism as follows:
The company shall establish a vigil mechanism for directors and employees to report
concerns about unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy.
• This mechanism should also provide for adequate safeguards against victimization of
directors/employees who avail the mechanism and also provide for direct access to
the chairman of the audit committee in exceptional cases.
• The details of establishment of such mechanism shall be disclosed by the company on
its website and in the Board’s Report.
Types of Whistleblowers
1. Internal: When the whistleblower reports the wrong doings to the officials at
higher position in the organization. The usual subjects of internal whistle
blowing are disloyalty, improper conduct, indiscipline, insubordination,
disobedience etc.
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2. External: Where the wrong doings are reported to the people outside the
organization like media, public interest groups or enforcement agencies it is called
external whistle blowing
3. Alumini: When the whistle blowing is done by the former employee of the
organization it is called alumini whistle blowing
4. Open: When identity of the whistleblower is revealed, it is called open whistle
blowing.
5. Personal: Where the organizational wrongdoing is to harm one person only,
disclosing such wrong doings it is called personal whistle blowing.
6. Impersonal: when the wrong doing is to harm others, it is called as impersonal
whistle blowing.
7. Corporate: When a disclosure is made about the wrong doing in a business
corporation, it is called corporate whistle blowing.

Whistleblowing under Sarbanes – Oxley Act, 2002 (SOX) (sec 302)
An act enacted by US congress to protect investors by improving the accuracy and
reliability of corporate disclosures made pursuant to the securities laws and for other
purposes contains following provisions for whistleblowers:
a) Makes it illegal to “discharge, demote, suspend, threaten, harass or in any manner
discriminate against” whistleblowers.
b) Establish criminal penalties of up to 10 years for executives who retaliate against
whistleblowers.
c) Require board or audit committees to establish procedures for hearing whistleblower
complaints.
d) Allow the secretary of labour to order a company to rehire a terminated employee
with no court hearing.
e) Give a whistleblower the right to a jury trial, by passing months or year of
administrative hearings.
Vigil Mechanism under Co. Act 2013
Every listed company and the following companies shall establish a vigil mechanism for
their directors and employees to report their genuine concerns or grievances –
1. The companies which accept deposits from the public
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2. The companies which have borrowed money from banks and public financial
institutions in excess of Rs. 50 Cr.

Sec 177(9) read with Rule 7(1) of companies (meeting of board and its power)
Rules 2014
The vigil mechanism shall provide for adequate safeguards against victimization of
persons who use such mechanism and make provision for direct access to the
chairperson of the audit committee in appropriate or exceptional cases.
The details of establishment of such mechanism shall be disclosed by the company on its
website, if any, and in the board’s report.

Ethical Dilemma (J10/J09/J11/J13)

Dilemma is a situation that requires a choice between options that are or seem equally
unfavorable or mutually exclusive. By definition, an ethical dilemma involves the need to
choose from among 2 or more morally acceptable courses of action, when one choice
prevents selecting the other or the need to choose between equally unacceptable
alternatives.
A dilemma could be right vs. wrong situation in which the right would be more difficult
to pursue and wrong would be more convenient. A right vs. wrong dilemma is not so easy
to resolve. It often involves an apparent conflict between moral imperatives, in which to
obey one would result in transgressing the other. This is also called an ethical paradox.

An ethical dilemma involves a situation that makes a person question what is right or
wrong thing to do. They make individuals think about their obligations, duties or
responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier
dilemmas involve a right vs. wrong answer, whereas, complex ethical dilemma involve a
decision between right and another right choice. However, any dilemma needs to be
resolved.

Steps to resolving an Ethical Dilemma: - (J10/J11)
(i) What are the options?
16. 24

List the alternative courses of action available.

(ii) Consider the consequences
Think carefully about the range of positive and negative consequences associated
with each of the different paths of action available.
ü Who/what will be helped by what is done?
ü Who/What will be hurt?
ü What kinds of benefits and harms are involved and what are their relative values?
ü What are the short-term and long term implications?

(iii) Analysis the actions
Actions should be analyzed in a different perspective, i.e. viewing the action perse
disregard the consequences concentrating instead on the actions and looking for that
option which seem problematic. How do the options measure up against moral
principles like honesty, fairness, equality and recognition of social and environmental
vulnerability?
In the case you are considering, is there a way to seem one principle as more
important than the others?

(iv) Make decision and act with commitment
Now, both parts of analysis should be brought together and a conscious and informed
decision should be made once the decision is made, act on the decision assuming
responsibility for it.

(v) Evaluate the system.
Think about the circumstances which led to the dilemma with intention of identifying
and removing the conditions that allowed it to arise.

16. 25

CS Praveen Choudhary PRINCIPLE OF ABSOLUTE LIABILITY
PRINCIPLES OF ABSOLUTE LIABILITY.

It is the fundamental principle of law that
SIC UTERE TUO UT ALIENUM NON LAEDAS MEANS:

(ENJOY YOUR OWN PROPERTY IN SUCH A MANNER AS NOT TO INJURE ANOTHER
PERSONS)
But there are certain occasions and activities, by which there are chances of causing harm
or injury to the useful peoples.
TYPES OF LIABILITIES
STRICT LIABILITY ABSOLUTE LIABILITY
RYLAND V. FLETCHER OLEUM GAS LEAK CASE
IN ENGLAND IN INDIA
STRICT LIABILITY RULE IN RYLAND V. FLETCHER

The person who, for his own purpose, brings on his land
and collects and keeps there anything likely to do mischief
if it escapes, must keep it in at his peril; and if he does not
do so is prima facie answerable for all the damage which
is the natural consequence of its escape.”

The liability under this rule is strict and it is no defence that the thing escape without that
persons wilful act, default or negligence or that he had no knowledge of its existence.
16. 26

CASE FACTS
The defendant was a mill owner, and he employed some independent contractors who
were apparently competent, to construct a reservoir on his land to provide water for his
mill. In the course of work the contractors came upon some old shafts and passages on
the defendant’s land. They communicated with the mines of the plaintiff, a neighbour of
the defendant, although no one suspected this, for the shafts appeared to be filled with
earth. The contractors did not block them up, and when the reservoir was filled the water
from it burst through the old shafts and flooded the plaintiffs mines. It was found as a fact
that the defendant had not been negligent, although the contractors had been. But the
House of Lords held the defendant liable.
On the basis of liability in this case rule propounded by the house of lord.
For the application of the rule therefore the following three essentials
should be there:
(1) Some dangerous thing must have been brought by a person on his land.
(2) The thing thus brought or kept by a person on his land must escape.
(3) It must be non-natural use of land.

EXCEPTIONS TO THE RULE

The following exceptions to the rule have been recognized by RYLANDS V FLETCHER
(1) Default of the claimant
(2) Act of God
(3) Statutory Authority
(4) Consent of the claimant
(5) Act of third party.

16. 27

ABSOLUTE LIABILITY (NO EXCEPTION FROM ABSOLUTE LIABLITY)

THIS Rule laid down by Supreme Court of India in the OLEUM GAS LEAK CASE
Where an enterprise is engaged in a hazardous

or inherently dangerous activity, the
enterprise is strictly and absolutely liable to
compensate all those who are affected by the
accident and such liability is not subject to any
exceptions.
The enterprise cannot escape liability by showing it had taken all reasonable care and
there was no negligence on its part.

This principle, however, has been rarely applied since it was formulated.
CASE FACTS:
Shriram Food and Fertilizers Industry a subsidiary of Delhi Cloth Mills Limited was
producing caustic and chlorine.

On December 4th and 6th 1985, a major leakage of Oleum gas took place from one of
the units of Shriram Food and Fertilizers Limited in the heart of the capital city of Delhi
which resulted in the death of several persons that one advocate practicing in the Tis
Hazari Courts died.

The leakage was caused by a series of mechanical and human errors. This leakage
resulted from the bursting of the tank containing oleum gas as a result of the collapse of
the structure on which it was mounted and it created a scare amongst the people residing
in that area.
16. 28

Hardly had the people got out of the shock of this disaster when, within two days, another
leakage, though this time a minor one took place as a result of escape of oleum gas from
the joints of a pipe.

On 6th December, 1985 by the District Magistrate, Delhi under Section 133(1) of Cr.P.C,
directed Shriram that within two days Shriram should cease carrying on the occupation
of manufacturing and processing hazardous and lethal chemicals and gases including
chlorine, oleum, super-chlorine, phosphate, etc at their establishment in Delhi and within
7 days to remove such chemicals and gases from Delhi.

At this juncture M.C.Mehta moved to the Supreme Court to claim compensation by filing
a PIL for the losses caused and pleaded that the closed establishment should not be
allowed to restart.
ABOUT M.C. MEHTA (MAHESH CHANDER MEHTA)

M.C Mehta (Mahesh Chander Mehta) Mahesh Chandra Mehta is a public interest attorney
from India. He was awarded the Goldman Environmental Prize in 1996 for his continuous
fights in Indian courts against pollution-causing industries.

He received the Ramon Magsaysay Award for Asia for Public Service in 1997. M.C Mehta
established MC Mehta Environmental Foundation MCMEF is a non-profit, non-
governmental committed organization working nationwide for the protection of the
environment, the rights of the people to clean and fresh water and air, the promotion of
sustainable development, and the protection of the cultural heritage of India.
Mission:
We pledge to create an interactive movement at the national level for environmental and
social justice.
• To provide a forum for concerned citizens, NGOs and activists working for the survival
of living beings, sustainable development and social change.
16. 29

• To provide training to and sharpen the skills of young lawyers, scientists and activists
in order to strengthen environmental law and policy.

BHOPAL GAS DISASTER

On the night of Dec. 2nd-3rd, 1984, the most
tragic industrial disaster in history occurred in
the city of Bhopal, Madhya Pradesh.
Bhopal Gas Disaster being the worst industrial
disaster of the country has raised complex legal
questions about the liability corporations
engaged in hazardous activity

Union Carbide Corporation, (UCC) an American Corporation, with subsidiaries operating

throughout the World had a chemical plant in Bhopal under the name Union Carbide India
Ltd., (UCIL).

The chemical plant manufactured pesticides called Seven and Temik. Methyl Isocyanate
(MIC), a highly toxic gas is an ingredient in the production of both Seven and Temik.
On the night of tragedy, MIC leaked from the plant in substantial quantities and the
prevailing winds blew the deadly gas into the overpopulated hutments adjacent to the
plants and into the most densely occupied parts of the city.

It was estimated that 2660 persons-lost their lives and more than 2 lakh persons suffered
injuries, some serious and permanent, some mild and temporary.

On Dec 7th, 1984, the first law suit was filed by a group of American lawyers in the United
States on behalf of thousands of Indians affected by the gas leak.

16. 30

All these actions were consolidated in the Federal Court of United States. On 29th Mar.
1985 the Government of India enacted legislation, called The Bhopal Gas Disaster
(Processing of Claims) Act providing the Government of India to have the exclusive right
to represent Indian plaintiffs as in India and also elsewhere in connection with the
tragedy.

Judge John F. Keenan of the US District Court after hearing both the parties dismissed the
Indian consolidated case and declared that Indian Courts are the appropriate and
convenient forum for hearing the plea of those affected.

The case moved to the Indian Courts, starting in the Bhopal High Court, till it finally
reached the Supreme Court, Finally in, 1989, the Supreme Court of India came out with a
overall settlement of claims and awarded U.S. $470 million to the Government of India on
behalf of all Bhopal victims in full and final settlement of all the past, present and future
claims arising from the disaster.

WATER POLLUTION
Water Pollution refers to the contamination of
water bodies and resources making water
unsuitable for both humans and other living
things.

Humans can be affected by water pollution as

water pollution make water unsuitable for
drinking, cooking, washing, bathing and also recreational activities (domestic use)Marine
Animals living in these water bodies will also be affected as they will be poisoned when
consuming the water, or when they consume the pollutants in the water which are
normally very poisonous.
16. 31

Pollution in the Ganges River The settlements built along the river, as well as the dumping
of waste water have resulted in the serious pollution in the Ganges. Some people even
cremate and dump the bodies of the deceased into the river during holy rituals.

Leather industry is one of the three major industries besides paper and textiles,
consuming large quantities of water for processing of hides and skins into leather.

Naturally most of the water used is discharged as waste water containing organic and
toxic inorganic materials which when discharged as such will deplete dissolved oxygen
content of the receiving water courses resulting in the death of all aquatic life and
emanating foul odour.

The MC. Mehta v. Union of India also known as the Kanpur Tanneries or Ganga Pollution
case is among the most significant water pollution case. Detailed scientific investigations
and the reports were produced before the Court as evidence.

The alarming details given by M.C. Mehta about the extent of pollution in the river Ganga
due to the inflow of sewage from Kanpur only, the Court came down heavily on the Nagar
Mahapalika (Municipality) and emphasised that it is the Nagar Mahapalika of Kanpur that
has to bear the major responsibility for the pollution of the river near Kanpur city.

WATER POLLUTION & SOME IMPORTANT CASE LAWS:

IN VINEET KUMAR MATHURV. UNION OF INDIA
16. 32

The Court took note of the continued violation of

the State, as well as industries by continuing to
pollute water by discharging effluents and also in
not setting up of common effluent treatment
plants. The Court initially directed the officers of
the State Pollution Board to visit the polluting
industrial establishments and make a fresh inspection of the Effluent Treatment Plants
installed in the said establishments and of their working.

After inspection, if it was found that the treatment plants are deficient in any respect or
the deficiency pointed out earlier still continues, the Board will give reasonable time for
the industries to cure the deficiencies. However, the time so given should not extend
beyond the deadline set up by the Court. The Board was directed to file its report within
fifteen days. The Court further held that if the industries do not obtain the consent of the
State Pollution Board for running their units, before the fixed time limit the industries
will stop functioning there after.

AMBUJA PETROCHEMICALS V. A.P. POLLUTION CONTROL BOARD
One of the industries covered by the Patencheru belt of treatment plants was served with
a notice for violating the Water (Prevention and Control of Pollution) Act.

The industry replied to the notice. The Board however, not satisfied with the reply of the
industry, directed its closure. The same was challenged in the High Court.

The High Court dismissed the petition of the industry observing that under the Act, the
Board had a mandate to take action against an erring industry. The High Court could not
sit in appeal against the action of the Board considering the expertise of the Board in these
aspects.

16. 33

The High Court observed that it was open to the industry to comply with the direction of
the Board and make a representation which the Board would consider and if satisfied
allow the industry to operate. One of the aspects to be observed here is that the industry
had raised all sorts of pleas including that it was a sick industry etc. which was not
appreciated by the High Court.

BHAVANI RIVER - SHAKTI SUGAR MILLS LTD
The issue was pertaining to pollution of river Bhavani from the effluents discharged by
the industry. The Board under Section 33-A of the Act had issued directions, which were
aimed at ensuring proper storage of the effluent in lagoons and for proper treatment and
disposal of the treated effluent. The Supreme Court held that the violations of pollution
law by the industry were serious, and the same was posing a health hazard. The Court
directed that the industry be closed and also directed the Board to submit a compliance
report within ten days.

Corporate Manslaughter and Corporate Homicide Act 2007, United
Kingdom
In the United Kingdom, the Corporate
Manslaughter and Corporate Homicide
Act introduced a new offence, across the
UK, for prosecuting companies and other
organisations where there has been a
gross failing, throughout the
organisation, in the management of
health and safety with fatal
consequences.

The Corporate Manslaughter and Corporate Homicide Act 2007 is a landmark in law. For
the first time, companies and organisations can be found guilty of corporate
16. 34

manslaughter as a result of serious management failures resulting in a gross breach of a

duty of care

The Act, which came into force on 6 April 2008, clarifies the criminal liabilities of
companies including large organisations where serious failures in the management of
health and safety result in a fatality.

Prosecutions will be of the corporate body and not individuals, but the liability of
directors, board members or other individuals under health and safety law or general
criminal law, will be unaffected. And the corporate body itself and individuals can still be
prosecuted for separate health and safety offences.

Companies and organisations should keep their health and safety management systems
under review, in particular, the way in which their activities are managed and organised
by senior management.
16. 35

CS Praveen Choudhary CSR
SUSTAINABILITY AND CORPORATE SOCIAL

RESPONSIBILITY

INTRODUCTION
CONCEPT OF CSR
CSR has many interpretations but can be understood to be a concept imposing a liability
on the Company to contribute to the society (whether towards environmental causes,
educational promotion, social causes etc.) along with the reinforced duty to conduct
the business in an ethical manner.
It is also known as corporate conscience, corporate citizenship, social performance or
sustainable business/responsible business.
BENEFITS OF CSR
1. Strengthened brand positioning
2. Enhanced corporate image and reputation
3. Satisfaction of economic and social contribution to society
4. Contribution to the surrounding society
5. Increased ability to attract, motivate and retain employees
6. Enhanced sales and market share
7. Increased appeals to investors and financial analysts

CORPORATE SOCIAL RESPONSIBILITY - DEFINED

Corporate Social Responsibility is also called Corporate Citizenship or Corporate
Responsibility.
Generally, CSR is understood to be the way firms integrate social, environmental and
economic concerns into their values, culture, decision making, strategy and operations in
a transparent and accountable manner and thereby establish better practices within the
firm, create wealth and improve society.
17. 1


Corporate Social Responsibility can be explained as:
ü Corporate - means organized business
ü Social - means everything dealing with the people
ü Responsibility - means accountability between the two

Corporate social responsibility is operating a business in a manner which meets or excels
the ethical, legal, commercial and public expectations that a society has from the business.
CSR is generally understood to be the wav a company achieves a

balance or integration of
ü Economic,
ü Environmental, and
ü Social imperatives
While at the same time addressing shareholder and stakeholder expectations.

CORPORATE SOCIAL RESPONSIBILITY REQUIRES THE FOLLOWING

1) Social, economic, ethical and moral responsibility of companies and managers
2) Compliance with legal and voluntary requirements for business and professional
practice
3) Challenges posed by needs of the economy and socially disadvantaged groups, and
4) Management of corporate responsibility activities

17. 2

DIFFERENCE BETWEEN CSR AND PHILANTHROPY/CHARITY

Philanthropy means the act of donating money, goods, time or effort to support a
charitable cause in regard to a defined objective. Philanthropy can be equated with
benevolence and charity for the poor and needy.
Philanthropy can be any selfless giving towards any kind of social need that is not served,
underserved, or perceived as unserved or underserved. Philanthropy can be by an
individual or by a corporate.

Corporate Social Responsibility on the other hand is about how a company aligns their
values to social causes by including and collaborating with their investors, suppliers,
employees, regulators and the society as a whole. The investment in CSR may be on
people centric issues and/or planet issues. A CSR initiative of a corporate is not a selfless
act of giving; companies derive long-term benefits from the CSR initiatives and it is this
enlightened self-interest which is driving the CSR initiatives in companies.
ADVANTAGES OF GOOD CORPORATE CITIZENSHIP

Business cannot exist in isolation; business cannot be oblivious to societal development.
The social responsibility of business can be integrated into the business purpose so as to
build a positive synergy between the two.
1) CSR creates a favourable public image, which attracts customers. Reputation or brand
equity of the products of a company which understands and demonstrates its social
responsibilities is very high. CSR can build reputation, while those that perform
poorly can damage brand and company value when exposed. Brand equity, is founded
on values such as trust, credibility, reliability, quality and consistency.
2) Corporate Social Responsibility (CSR) activities have its advantages. It builds up a
positive image encouraging social involvement of employees, which in turn develops
17. 3

a sense of loyalty towards the organization, helping in creating a dedicated workforce

proud of its company.
3) Society gains through better neighbourhoods and employment opportunities, while
the organisation benefits from a better community, which is the main source of its
workforce and the consumer of its products.
4) Public needs have changed leading to changed expectations from consumers. The
industry/business owes its very existence society and has to respond to needs of the
society.
5) The company's social involvement discourages excessive regulation or intervention
from the Government or statutory bodies, and hence gives greater freedom and
flexibility in decision-making.
6) The internal activities of the organisation have an impact on the external
environment, since the society is an inter-dependent system.
7) A business organisation has a great deal of power and money, entrusted upon it by
the society and should be accompanied by an equal amount of responsibility. In other
words, there should be a balance between the authority and responsibility.

FACTORS AFFECTING CSR

1. Globalization - coupled with focus on cross-border trade, multinational enterprises
and global supply chains - is increasingly raising CSR concerns related to human
resource management practices, environmental protection, and health and safety,
among other things.
2. Governments and intergovernmental bodies, such as the United Nations Organisation
for Economic Cooperation and Development and the International Labour
Organization have developed compacts, declarations, guidelines, principles and other
instruments that outline social norms for acceptable conduct.

17. 4

3. Consumers and investors are showing increasing interest in supporting responsible

business practices and are demanding more information on how companies are
addressing risks and opportunities related to social and environmental issues.

CORPORATE CITIZENSHIP - BEYOND THE MANDATE OF LAW

Corporate citizenship is a commitment to improve community well-being through
voluntary business practices and contribution of corporate resources leading to
sustainable growth Corporate responsibility is achieved when a business adapts CSR well
aligned o its business goals and meets or exceeds, the ethical, legal, commercial and public
expectations that society has of business.

The term corporate citizenship implies the behaviour, which would maximize a
company's positive impact and minimize the negative impact on its social and physical
environment. It means moving from supply driven to more demand led strategies;
keeping in mind the welfare of all stakeholders; more participatory approaches to
working with communities; balancing the economic cost and ‘benefits with the social; and
finally dealing with processes rather than structures. The ultimate goal is to establish
dynamic relationship between the community, business and philanthropic activities so
as to complement and supplement each other.

The UN Global Compact

The Global Compact is a voluntary corporate citizenship initiative with two
objectives:
"Making the Global Compact and its principles part of business strategy and operations.
"Facilitating cooperation among key stakeholders and promoting partnerships in support

cf U.N. goals. The Global Compact's ten principles in the areas of human rights, labour, the
environment and anti-corruption are:
Human Rights
17. 5

Principle 1: Businesses should support and respect the protection of internationally

proclaimed human rights; and
Principle 2: Make sure that they are not complicit in human rights abuses.
Labour Standards
Principle 3: Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining;
Principle 4: The elimination of all forms of forced and compulsory labour;

Principle 5: The effective abolition of child labour; and
Principle 6: The elimination of discrimination in respect of employment and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to environmental
challenges;
Principle 8: Undertake initiatives to promote greater environmental responsibility; and
Principle 9: Encourage the development and diffusion of environmentally friendly

technologies.

Anti-Corruption
Principle 10: Businesses should work against corruption in all its forms, including
extortion and bribery.
NATIONAL VOLUNTARY GUIDELINES ON SOCIAL. ENVIRONMENTAL

AND ECONOMIC RESPONSIBILITIES OF BUSINESS. 2011
The Corporate Social Responsibility Voluntary Guidelines issued by the MCA in December
2009. Government AFTER feedback from stakeholder’s review of 2009 Guidelines was
undertaken by the Guidelines Drafting Committee (GDC) constituted by the Indian
Institute of Corporate Affairs, resulting into the formulation of 2011 Guidelines entitled
“National Voluntary Guidelines on Social, Environmental and Economic Responsibilities
of Business” that will mainstream the subject of business responsibilities.
17. 6


The Guidelines were released by MCA on July 8, 2011.
These guidelines have been formulated keeping in view the diverse sectors within which
businesses operate, as well as the wide variety of business organizations that exist in
India today - from the small and medium enterprises to large corporate organizations

THE PRINCIPLES RECOMMENDED BY THE NATIONAL VOLUNTARY

GUIDELINES ARE:
1 Principle 1: Businesses should conduct and govern themselves with

Ethics, Transparency and Accountability
2 Principle 2: Businesses should provide goods and services that are safe
and contribute to sustainability throughout their life cycle
3 Principle 3: Businesses should promote the well being of all employees
4 Principle 4: Businesses should respect the interests of, and be responsive

towards all stakeholders, especially those who are
disadvantaged, vulnerable and marginalized.
5 Principle 5: Businesses should respect and promote human rights
6 Principle 6: Business should respect, protect, and make efforts to restore

the environment
7 Principle 7: Businesses, when engaged in influencing public and

regulatory policy, should do so in a responsible manner
8 Principle 8: Businesses should support inclusive growth and equitable

development
9 Principle 9: Businesses should engage with and provide value to their

customers and consumers in a responsible manner

17. 7

17. 8

CORPORATE SOCIAL RESPONSIBILITY UNDER THE COMPANIES ACT.

2013
SECTION 135: CORPORATE SOCIAL RESPONSIBILITY (CSR)
Application of Provision
ü Companies having new worth of Rs. 500 Cr or more
ü Companies having Turn over of Rs. 1000 Cr. Or More
ü Companies having Net Profit of Rs. 5 Cr. Or more

EXAMPLE:
In case of a company which meets the criteria in any of the preceding three financial years
(i.e. 2011-12, 12-13, 13-14) but which does not meet the criteria in financial year 2014-
15 will need to constitute CSR Committee and comply with provisions of 135 (2) to (5) in
the year 2014-15.
However, if the company has made profits in THE YEARS EARLIER to 2011-12 but not
in the years 2011-12,2012-13 or 201314, it need not comply with section 135.

CONTRIBUTION
The Companies on which section 135 applies are required to contribute 2% of average
profits of preceding three years towards CSR activities.

Constitution of CSR Committee

The CSR Committee shall consist of 3 or more directors.
Out of the 3 directors, at least 1 director shall be an independent director.
A private company having only 2 directors on its Board, shall constitute its CSR
Committee with 2 directors only.
In case of a foreign Company, the CSR Committee shall comprise of at 2 two persons of
which one person shall be a person resident in India authorized to accept on behalf of the
17. 9

foreign company service of notices and other documents, and the other person shall be
nominated by the foreign company.

Disclosures in Board’s report

The Board’s report shall contain
a) The composition of the CSR Committee;
b) The contents of CSR Policy; and
c) The reasons for not spending the amount of 2% in pursuance of its CSR Policy (in
case the company fails to spend such amount).
Activities not amounting to CSR

As per Rule 4 and Rule 6 of the Companies (Corporate Social Responsibility Policy) Rules,
2014, following shall not amount to CSR Activities for the purpose of Section 135
a) The CSR projects or programs or activities undertaken outside India.
b) The CSR projects or programs or activities that benefit only the employees of the
company and their families.
c) Contribution of any amount, directly or indirectly, to any political party under section
182 of the Companies Act, 2013.
d) Any activity undertaken in pursuance of normal course of business of a company.

Display of CSR policy on the website

As per Rule 9 of the Companies ( Corporate Social Responsibility Policy) Rules, 2014 and
Rule 6 of the Companies (Accounts) Rules, 2014, the CSR Policy and its contents shall be
displayed on the company’s website, if any, as per the particulars specified in the
Annexure to the Companies (Corporate Social Responsibility Policy) Rules, 2014.
PENAL PROVISION FOR NOT COMPLYING WITH SECTION 135
17. 10

1. The concept of CSR is based on the principle ‘comply or explain’. Section 135 of the
Act does not lay down any penal provisions in case a company fails to spend the
desired amount.
2. Second proviso to sub-section (5) of section 135 provides that if the company fails to
spend such amount, the Board shall in its report specify the reasons for not spending
the amount.
3. In case it does not disclose the reasons for not spending in the Board’s report, the
company shall be punishable with fine minimum fifty thousand rupees maximum
twenty- five lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years or with
fine minimum fifty thousand rupees maximum five lakh rupees, or with both. [Section
134(8)].
CSR Audit
A Corporate Social Responsibility audit aims at identifying environmental, social or
governance risks faced by the organization and evaluating managerial performance in
respect of those. Corporate Social Responsibility (“CSR”) is a broad term however, for the
purpose of addressing the scope of a CSR Audit, CSR is about managing and taking into
consideration organization’s operational, processes and behavioral impact on society and
stakeholders from a broad perspective. Contrary to common belief CSR is more than basic
legal compliance and is highly connected with and affects organization’s bottom line.

In order to ascertain an organizations effective CSR policy, practices and culture, the
notion of auditing CSR in organizations is becoming key. However, this requires a
substantial shift in the audit profession to include beyond the traditional lines of finance
and information technology to wider operational practices that respond to client and
professional pressures brought about by a growth in the practice of risk management.

Audits and the process of auditing as we commonly know it is focused on the
organizations achievement of its stated and communicated objective; its compliance with
17. 11

rules, regulations and legislation; the reliability of its records and information accessible
to the public or communicated to the public; the safeguard of its assets. This does not
address CSR or CSR related risks. The risks of not paying adequate attention to CSR are
clear – reputation damage, lawsuits, and government scrutiny. Internal audit should focus
on these risks and assist management to identify appropriate actions. This called for a
different approach to audit and in particular an audit that takes into consideration health,
safety, environmental, reputational and business probity not to mention CSR governance.

CSR audit has yet to gain momentum but the concept aims to give an independent opinion
by external auditor, on the extent of alignment of CSR objectives with the business goals
and level of managerial commitment and performance with regard to attainment of social
responsibility objectives defined by the company’s Board.

An internal audit that is intended to cover CSR should start by creating an understanding
of the social responsibility issues that affect the organization and its industry. Following
that, the audit should review how management reconciles these sometimes-contrary
needs. A CSR audit program can cover all or any of the following risks: - Effectiveness of
the operating framework for CSR implementation - Effectiveness of implementation of
specific, large CSR projects - Adequacy of internal control and review mechanisms -
Reliability of measures of performance - Management of risks associated with external
factors like regulatory compliance, management of potential adverse NGO attention, etc.
An Indicative CSR Audit Programme is given below:
Segments Assessment Tools Scope
Coverage The exhaustiveness of CSR objectives
Integration The extent to which the CSR objectives of

Objectives the company are aligned with its business
goals.
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Commitment The clarity of roles and powers assigned to

management for fulfilment of CSR
objectives. Integration of Social
responsibility throughout the
organisation.
Processes Identification of the implementation

procedures, time frames, risk and
performance management tools for

fulfilment of CSR objectives. Manner of
Implementation
delivering CSR activities either by way of
foundation/ Trust route or by imbibing
them into day to day activities.
Resources Allocation of funds, manpower,

infrastructure etc.
Monitoring/Reporting Internal control systems to monitor the

adequacy of mechanisms (including
periodic reviews) in relation to fulfilment
of CSR objectives.
Reporting: Communication of adequate
data in relation to CSR objectives to
various stakeholders.
Impact Analysis Analysing the impact of CSR activities

carried out by the company in various
Outcome areas and the quality maintained.
Feedback identification of control weaknesses and

make recommendations for improvement
to CSR programs of the company.
Identification of areas requiring changes.
17. 13

CS Praveen Choudhary Corporate Sustainability
Corporate Sustainability
MEANING OF SUSTAINABILITY
Sustainability is based on a simple principle: Everything that we need for our survival and
wellbeing depends, either directly or indirectly, on our natural environment.
Sustainability creates and maintains the conditions under which humans and nature can
exist in productive harmony, that permit fulfilling the social, economic and other
requirements of present and future generations.
SUSTAINABILITY TERMINOLOGIES
Life Cycle Assessment (LCA)
It tracks the environmental impacts of a product from its raw materials through disposal
at the end of its useful life. LCA is an important tool for developing an environmental self-
portrait and for finding ways to minimize harm. A good LCA can shed light on ways to
reduce the resources consumed and lower costs all along the value chain.

Ecological Footprint
The ecological footprint is a measure of human demand on the Earth's ecosystems. It
compares human demand with planet Earth's ecological capacity to regenerate it. It
represents the amount of biologically productive land and sea area needed to regenerate
the resources a human population consumes and to absorb and render harmless the
corresponding waste, given prevailing technology and resource management practice.

Environmental Performance Index

Environmental Performance Index (EPI) is a method of quantifying and numerically
benchmarking the environmental performance of a country's policies. This index was
developed from the Pilot Environmental Performance Index, first published in 2002, and
designed to supplement the environmental targets set forth in the U.N. Millennium
Development Goals.
17. 14

Carbon footprint
A carbon footprint is an estimate of how much carbon is produced to support your
lifestyle. Essentially, it measures your impact on the climate based on how much carbon
you produce. Factors that contribute to your carbon footprint include travel methods and
general home energy usage. Carbon footprints can also be applied on a larger scale, to
companies, businesses, even countries.
The word ‘carbon’ in the phrase ‘carbon footprint’ is often used as a short-cut to describe
the main greenhouse gases - carbon dioxide (C02), methane and nitrous oxide -in terms
of carbon dioxide equivalents.

Carbon off setting
Carbon offsets are used to reduce the amount of carbon that an individual or institution
emits into the atmosphere. Carbon offsets work a financial system where, instead of
reducing its own carbon use, a company can comply with emissions caps by purchasing
an offset from an independent organization. The organization will then use that money
to fund a project that reduces carbon in the atmosphere. An individual can also engage
with this system and similarly pay to offset his or her own personal carbon usage instead
of, or in addition to, taking direct measures such as driving less or recycling.

Global Warming
Global warming is an average increase in the temperature of the atmosphere near the
Earth’s surface and in the troposphere, which can contribute to changes in global climate
patterns. Global warming can occur from a variety of causes, both natural and human
induced. In common usage, “global warming” often refers to the warming| that can occur
as a result of increased emissions of greenhouse gases from human activities. See climate
change, greenhouse effect, enhanced greenhouse effect, radiative forcing, troposphere.
17. 15


Green washing
Green washing is a form of corporate misrepresentation where a company will present a
green public image and publicize green initiatives that are false or misleading. A company
might release misleading claims or even true green initiatives while privately engaging in
environmentally damaging practices. Companies are trying to take advantage of the
growing public concern and awareness for environmental issues by promoting an
environmentally responsible image.

CONCEPT OF SUSTAINABLE DEVELOPMENT

It is a process of change in which the exploitation of resources, the direction of
investments, the orientation of technological development, and institutional change are
all in harmony and enhance both current and future potential to meet human needs and
aspirations.

In 1987, a report of the World Commission on Environment and Development (WCED) of
the United Nations (popularly known as Brundtland Report) 1st introduced the
concept
SUSTAINABLE DEVELOPMENT
MEANING: it means balances the need for economic growth with environmental
protection and social equity.
For example; natural energy resources like Coal, Petroleum etc., should be prudently used
and wastage should be avoided so that future generation can have these energy resources
for their survival also.

FUNDAMENTAL PRINCIPLE OF SUSTAINABLE DEVELOPMENT
17. 16

1. Need to preserve natural resources for future generation.

2. Use of natural resources in a prudent manner without or with minimum tolerable
impact on nature.
3. Use of natural resources by any state / country must take into account its impact on
other states.
4. Environmental aspects and impacts of socio-economic activities should be integrated
so that prudent use of natural resources is ensured.

ROLE OF BUSINESS IN SUSTAINABLE DEVELOPMENT

Trade and industry being an integral part human society has a pivotal role to play in this
direction. United Nations has already initiated UN global compact, a strategic policy
initiative for businesses that are committed to aligning their operations and strategies
with ten universally accepted principles in the areas of human rights, labour,
environment and anti-corruption. With such commitment a business can ensure that
markets, commerce, technology and finance can advance together in ways that would
benefit economies and societies universally.

The UN global compact has two objectives:

1. Ten principles in business activities around the world.
2. Catalyse actions in support of broader UN goals, including the millennium
development goals

The initiative is voluntary in nature. The benefits of engagement

include the following:
ü Adopting an established and globally recognized policy framework for the
development, implementation, and disclosing environmental, social, and governance
policies and practices.
ü Sharing best and emerging practices to advance practical solutions and strategies to
common challenges.
17. 17

ü Advancing sustainability solutions in partnership with a range of stakeholders,

including un agencies, governments, civil society, labour, and other non-business
interests.
ü Linking business units and subsidiaries across the value chain with the global
compact's local networks around the world - many of these are operating in
developing and emerging markets.
ü Accessing the united nations' extensive knowledge of and experience with
sustainability and development issues.
ü Utilizing un global compact management tools and resources, and the opportunity to
engage in specialized work streams in the environmental, social and governance
realms.

CORPORATE SUSTAINABILITY
Corporate sustainability indicates new philosophy as an alternative to the traditional
growth and profit-maximization model under which sustainable development
comprising environmental protection, social justice and equity, and economic
development are given more significant focus while recognizing simultaneous corporate
growth and profitability.
It is a business approach that creates long-term shareholder value by embracing

opportunities and managing risks deriving from economic, environmental and social
developments. Corporate sustainability describes business practices built around social
and environmental considerations.
CORPORATE SUSTAINABILITY AND CORPORATE SOCIAL

RESPONSIBILITY
Although scholars and practitioners often interpret Corporate Sustainability and
Corporate Social Responsibility as being nearly synonymous, pointing to similarities and
17. 18

the common domain. The two concepts have different backgrounds and different
theoretical paths.

Corporate Sustainability can be considered as the attempt to adapt the concept of

Sustainable Development to the corporate setting, matching the goal of value creation
with environmental and social considerations.

CSR has many interpretations but can be understood to be a concept imposing a liability
on the Company to contribute to the society (whether towards environmental causes,
educational promotion, social causes etc.) along with the reinforced duty to conduct
the business in an ethical manner.
It is also known as corporate conscience, corporate citizenship, social performance or

sustainable business/responsible business.

AS A GOOD CORPORATE CITIZEN, THE COMPANIES ARE REQUIRED TO

FOCUS ON THE FOLLOWING KEY ASPECTS
Absolute Value Creation for the Society
Organizations should set its goal towards creation of absolute value to the society. Once
it is ensured, a corporate never looks back and its sustainability in long run is built up.
Ethical Corporate Practices

ü In the short run, enterprise can gain through non-ethical practices.
ü However those gains cannot be sustained in long run.
ü Society denies accepting such products or services.
ü For example, in Drug and Pharmaceutical industry, many products are today
obsolete due their side effects which such companies never disclosed to protect their
sales volume. When they were banned by the WHO or other authorities, they had to
stop their production.
Worth of Earth through Environmental Protection

17. 19

ü Resources which are not present everywhere and have economic and social value
should be preserved for long term use and be priced properly after considering
environmental and social costs.
ü For example, a power plant should build up its cost model efficiently after taking into
account cost of its future raw material sourcing, R&D cost for alternate energy source,
cost for proper pollution control measures and so on.

Equitable Business Practices

Corporates should not divulge themselves in unfair means and it should create candid
business practices, ensure healthy competition and fair trade practices
Creating Market for All

Monopoly, unjustified subsidies, price not reflecting real economic, social environmental
cost, etc. are hindrances to sustainability of a business. Simultaneously, a corporate is to
build up its products and services in such a way so as to cater all segments of
customers/consumers.
Customer confidence is essence to corporate success.

GOVERNMENT’S ROLE IN IMPROVING SUSTAINABILITY REPORTING

SEBI mandated Business Responsibility Reporting in India for top listed companies
besides the voluntary reporting for others.
In 2011, MCA, Govt., of India issued the first voluntary reporting framework for reporting
on Business Responsibility in the form of ‘National Voluntary Guidelines (NVG) on
Social, Environmental and Economic Responsibilities of Business’.
The similar regulators initiatives are required in other jurisdiction also to encourage the
companies to adopt the Reporting on Sustainability aspects.
KYOSEI
17. 20

Kyosei is a Japanese technique meaning “a spirit of cooperation”. Kyosei establishes

harmonious relations between the company and - Customers - Suppliers – Competitors.

A concise definition of this word would be “living and working together for the common
good,” but for some, the definition is broader:

All people, regardless of race, religion or culture, harmoniously living and working
together into the future.” Governments - Natural Environment Kyosei philosophy reflects
a confluence of social, environmental, technological and political solutions. It believes
that peace, prosperity and social and environmental improvement come through positive
action.

IT WORKS IN FIVE STAGES
ü 1st is economic survival of the company
ü 2nd is cooperating with labour
ü 3rd is cooperating outside the company
ü 4th is global activism, and
ü 5th is making the government/s a Kyosei partner

CONCEPT OF ‘TRIPLE BOTTOM LINE’ (TBL)

In 1999 Elkington developed the concept of the Triple Bottom Line which proposed that
business goals were inseparable from the societies and environments within which they
operate.
Whilst short-term economic gain could be chased, a failure to account for social and
environmental impacts would make those business practices unsustainable.
While each of the three pillars of sustainability i.e., economic, social and environment is
independently crucial and urgent in the short-run, but in order to reach the goal of
17. 21

sustainability in the long-run, the three pillars must be satisfied simultaneously. These
three dimensions are deeply inter-connected and they influence and support each other.

The Triple Bottom Line is made up of ’’Social, Economic and

Environmental” aspect and indicated by the phrase ’’People, Planet,
Profit” phrase.
PEOPLE
mean Human Capital. It implies fair and beneficial business practices toward Labour and
the community and region in which a corporation conducts its business would create long
term value.
PLANET
The Natural Capital. It refers to sustainable environmental practices. A company which
decides to follow TBL always keeps in mind that it does no harm nature or creates
negative environmental impact.
PROFIT
The concept of profit for TBL Company is somehow wider in all
perspective. It is
the reflection of economic impact the organization has on its business activities and that
too after meeting all social and environmental cost. It somehow indicates real value
addition a corporate made through its various activities.
17. 22

CS Praveen Choudhary Reporting Framework
Corporate Sustainability Reporting Framework

CONCEPT OF SUSTAINABILITY REPORTING
Companies are the main contributors to economic, social and environmental well-being.
Corporate activities are vital in the present and will have serious bearing on the future.

Therefore, corporate sustainability is imperative for the long-term sustainable

development of the economy and society.
Sustainability Reporting is a broad term considered synonymous with others used to
describe reporting on economic, environmental, and social impacts (e.g. triple bottom
line, corporate responsibility reporting, etc.).

WHAT IS THE PURPOSE OF SUSTAINABILITY REPORTING?

Sustainability reporting is the practice of measuring, disclosing, and being accountable to
internal and external stakeholders for organizational performance towards the goal of
sustainable development.
A sustainability report should provide a balanced and reasonable representation of the
sustainability performance of a reporting organization - including both positive and
negative contributions.

BENEFITS OF SUSTAINABILITY REPORTING

ü Legitimation of corporate activities, products and services which create
environmental and social impacts.
ü Increase in corporate reputation and brand value.
ü Gaining a competitive advantage.
ü Comparison and benchmarking against competitors.
ü Increasing transparency and accountability within the company.
17. 23

ü Establishing and supporting employee motivation as well as internal information and

control processes.

SUSTAINABILITY REPORTING IN EMERGING ECONOMIES

Investors increasingly recognize the value of robust sustainability reporting and
expectations for such reporting have spread to companies in emerging markets.

Increasingly global companies understand that a commitment to sustainability reporting

can contribute to financial success. Such transparency allows companies to reach a
broader range of investors and customers, enhance operational efficiency, improve brand
positioning, and develop leadership in the marketplace.

Recently, in India, corporate environment reporting as a useful adjunct to the concept
sustainable development, has been recognized in various policy documents like the
approach paper to the 11th plan and the national environment policy 2006.

Some of the key drivers of sustainability reporting are
1 Regulations: Governments, at most levels have stepped up the pressure on

corporations to measure the impact of their operations on the
environment. Legislation is becoming more innovative and is
covering an ever wider range of activities. The most notable
shift has been from voluntary to mandatory sustainability,
monitoring and reporting.
2 Customers: Public opinion and consumer preferences are a more abstract

but powerful factor that exerts considerable influence on
companies, particularly those that are consumer oriented.
17. 24

Customers significantly influence a company’s reputation

through their purchasing choices and brand.
3 Loyalty: This factor has led the firms to provide much more
information about the products they produce, the suppliers
who produce them, and the product’s environmental impact
starting from creation to disposal.
4 Ngo’s and the Public reaction comes not just from customers but from
media: advocates and the media, who shape public opinion. Advocacy
organisations, if ignored or slighted, can damage brand value.
5 Employees: those who work for a company bring particular pressure to

bear on how their employers behave; they, too, are concerned
citizens beyond their corporate roles.
6 Investors: Increasingly, investors want to know that companies they

have targeted have responsible, sustainable, long-term
business approaches. Institutional investors and stock
exchange CEO, for example, have moved to request increased
sustainability reporting from listed companies, and
environmental, social and corporate governance indices have
been established such as the dow jones sustainability index
GLOBAL REPORTING INITIATIVE (GRI)

The Sustainability Reporting Guidelines developed by the Global Reporting Initiative
(GRI), the Netherlands, is a significant system that integrates sustainability issues in to a
frame of reporting.

17. 25

What is GRI Network?

The Global Reporting Initiative (GRI) is a large multi-stakeholder network of thousands
of experts, in dozens of countries worldwide, who participate in GRI’s working groups
and governance bodies, use the GRI Guidelines to report, access information in GRI-based
reports, or contribute to develop the Reporting Framework in other ways - both formally
and informally.

WHAT IS GRI REPORTING?

The GRI Reporting Framework is intended to serve as a generally accepted framework
for reporting on an organization’s economic, environmental, and social performance. It is
designed for use by organizations of any size, sector, or location.

It takes into account the practical considerations faced by a diverse range of
organizations - from small enterprises to those with extensive and geographically
dispersed operations. The GRI Sustainability Reporting Guidelines offer Reporting
Principles, Standard Disclosures and an Implementation Manual for the preparation of
sustainability reports by organizations, regardless of their size, sector or location.
GLOBAL REPORTING INITIATIVE - SUSTAINABILITY REPORTING

GUIDELINES
In this context, the Global Reporting Initiative (GRI) launched the fourth generation of its
sustainability reporting guidelines: the GRI G4 Sustainability Guidelines (the Guidelines)
in 2013. The aim of G4, is to help reporters prepare sustainability reports that matter,
contain valuable information about the organization’s most critical sustainability-related
issues, and make such sustainability reporting standard practice.

G4 is applicable to all organizations, large and small, across the world. The Guidelines are
now presented in two parts to facilitate the identification of reporting requirements and
related guidance. It consist of following two parts
17. 26


Part 1 - Reporting Principles and Standard Disclosures: It contains the reporting
principles and standard disclosures and also sets out the criteria to be applied by an
organization to prepare its sustainability report in accordance with the Guidelines.

Part 2 - Implementation Manual: It contains reporting and interpretative guidance that
an organization should consult when preparing its sustainability report.

The Guidelines are designed to align and harmonize as much as possible with other
internationally recognized standards. The Guidelines provide links with the United
Nations Global Compact’s Ten Principles, 2000; the OECD’s Guidelines for Multinational
Enterprises, 2011; and the UN’s Guiding Principles on Business and Human Rights, 2011.

Reporting Principles
The Reporting Principles are fundamental to achieving transparency in sustainability
reporting and therefore should be applied by all organizations when preparing a
sustainability report. The Implementation Manual outlines the required process to be
followed by an organization in making decisions consistent with the Reporting Principles.
The Principles are divided into two groups:

1. Principles for defining report content: The Principles for Defining Report Content
describe the process to be applied to identify what content the report should cover by
considering the organization’s activities, impacts, and the substantive expectations
and interests of its stakeholders. These Principles are designed to be used in
combination to define the report content.

S.NO. Heading Principle Description
17. 27

1 Stakeholder The organization Stakeholders can include those who

Inclusiveness should identify its are invested in the organization as
stakeholders, and well as those who have other
explain how it has relationships to the organization.
responded to their The reasonable expectations and
reasonable interests of stakeholders are a key
expectations and reference point for many decisions in
interests. the preparation of the report.
2 Sustainability The report should Information on performance should
Context present the be placed in context. The underlying

organization’s question of sustainability reporting
performance in the is how an organization contributes,
wider context of or aims to contribute in the future, to
sustainability. the improvement or deterioration of
economic, environmental and social
conditions, developments, and
trends at the local, regional or global
level. Reporting only on trends in
individual performance (or the
efficiency of the organization) fails to
respond to this underlying question.
Reports should therefore seek to
present performance in relation to
broader concepts of sustainability.
This involves discussing the
performance of the organization in
the context of the limits and demands
placed on environmental or social
resources at the sector, local,
regional, or global level.
17. 28

3 Materiality The report should Organizations are faced with a wide

Principle cover Aspects range of topics on which they could
that: Y Reflect the report. Relevant topics are those that
organization’s may reasonably be considered
significant important for reflecting the
economic, organization’s economic,
environmental and environmental and social impacts, or
social impacts; or Y influencing the decisions of
Substantively stakeholders, and, therefore,

influence the potentially merit inclusion in the
assessments and report. Materiality is the threshold at
decisions of which Aspects become sufficiently
stakeholders important that they should be
reported.
4 Completeness The report should Completeness primarily

include coverage of encompasses the dimensions of
material Aspects scope, boundary, and time. The
and their concept of completeness may also be
Boundaries, used to refer to practices in
sufficient to reflect information collection and whether
significant the presentation of information is
economic, reasonable and appropriate.
environmental and
social impacts, and
to enable
stakeholders to
assess the
organization’s
performance in the
reporting period.

17. 29

2. Principles for Defining Report Quality: The Principles for Defining Report Quality
guide on ensuring the quality of information in the sustainability report, including its
proper presentation. The quality of the information is important to enable
stakeholders to make sound and reasonable assessments of performance, and take
appropriate actions. Decisions related to the process of preparing information in a
report should be consistent with these Principles. All of these Principles are
fundamental to achieving transparency.

Standard Disclosures
There are 2 different types of Standard Disclosures:
General Standard Disclosures:

The General Standard Disclosures are applicable to all organizations preparing
sustainability reports. The General Standard Disclosures are divided into seven parts:
• Strategy and Analysis

• Organizational Profile
• Identified Material Aspects and Boundaries

• Stakeholder Engagement
• Report Profile
• Governance
• Ethics and Integrity
Specific Standard Disclosures:

The Guidelines organize Specific Standard Disclosures into three Categories - Economic,
Environmental and Social. The economic dimension of sustainability concerns the
organization’s impacts on the economic conditions of its stakeholders and on economic
systems at local, national, and global levels. The Social Category is further divided into
four sub-Categories, which are Labor Practices and Decent Work, Human Rights, Society
and Product Responsibility.
17. 30

UN GLOBAL COMPACT’ & OBJECTIVES OF THIS INITIATIVE

The UN Global Compact presents a unique and powerful platform for participants to
advance their commitments to sustainability and corporate citizenship.

The Global Compact is a voluntary corporate citizenship initiative with
two objectives:
ü Making the global compact and is principles part of business strategy and
operations.
ü Facilitating cooperation among key stakeholders and promoting partnership in
support of U.N. goals.
ROLE OF BUSINESS IN SUSTAINABLE DEVELOPMENT IN THE LIGHT OF

UN GLOBAL COMPACT INITIATIVE
United Nations has initiated UN Global Compact, a strategy policy initiative for businesses
that are committed to aligning their operations and strategies with ten universally
accepted principles in the areas of human rights, labour environment and anti-
corruption. Through the process a business can ensure that markets, commerce,
technology and finance advance in ways that benefit economies and societies
everywhere.

A company that signs on the Global Compact specifically commit itself
to:
ü Set in motion changes to business operations so that the global compact and its
principles become part of management, strategy, culture and day- to -day operations;
ü Publish in its annual report or similar public corporate report (i.e. sustainability
report) a description of the ways in which it is supporting the Global Compact and its
principles (Communication on progress);
17. 31

ü Publicly advocate the Global Compact and its principles via communications vehicles
such as press releases, speeches, etc.

UNITED NATIONS GLOBAL COMPACT’S TEN PRINCIPLES, 2000

The UN Global Compact is a strategic policy initiative for businesses that are committed
to aligning their operations and strategies with ten universally accepted principles in the
areas of human rights, labour, environment and anti-corruption. By incorporating the
Global Compact principles into strategies, policies and procedures, and establishing a
culture of integrity, companies are not only upholding their basic responsibilities to
people and planet, but also setting the stage for long-term success. The UN Global
Compact’s Ten Principles are derived from: the Universal Declaration of Human Rights,
the International Labour Organization’s Declaration on Fundamental Principles and
Rights at Work, the Rio Declaration on Environment and Development, and the United
Nations Convention against Corruption.
TEN PRINCIPLES
Principle 1: Businesses should support and respect the protection of internationally
proclaimed human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Principle 3: Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and

Principle 6: the elimination of discrimination in respect of employment and occupation.
Principle 7: Businesses should support a precautionary approach to environmental

challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility; and

Principle 9: encourage the development and diffusion of environmentally friendly
technologies.
17. 32

Principle 10: Businesses should work against corruption in all its forms, including
extortion and bribery

CHALLENGES IN MAINSTREAMING SUSTAINABILITY REPORTING
1. GOVERNMENT ENCOURAGEMENT
2. AWARENESS
3. EXPERTISE KNOWLEDGE
4. INVESTOR BEHAVIOUR

SUSTAINABILITY INDICES
WHAT IS DOW- JONES SUSTAINABILITY INDEX
The Dow Jones Sustainability Indices are the first global indices tracking the financial
performance of the leading sustainability- driven companies worldwide, it was launched
in 1999.
The Dow Jones Sustainability World Index comprises more than 300 companies that
represent the top 10% of the leading sustainability companies out of the biggest 2,500
companies in the Dow Jones world Index.
In addition to the composite DJSI World, there are six specialized subset indexes
excluding alcohol, gambling, tobacco, armaments & firearms and adult entertainment.
ENVIRONMENT. SOCIAL, GOVERNANCE (ESG)

INDEX ESG describes the environmental, social and corporate governance issues that
investors are considering in the context of corporate behaviour.
Integration of ESG refers to the active investment management processes that include an
analysis of environmental, social, and corporate governance risks and opportunities and
sustainability aspects of company performance evaluation.
17. 33

The ESG index employs a unique and innovative methodology that quantifies a company’s
ESG practices and translates them into a scoring system which is then used to rank each
company against its peers in the market.
Its quantitative scoring system offers investors complete transparency on
Environmental, Social & governance issues of a company.
KEY PERFORMANCE INDICATORS:

1. Environment
2. Energy use and efficiency
3. Greenhouse gas emissions
4. Water use, Use of ecosystem services
5. Employees, Poverty and community impact
6. Supply chain management

STANDARD & POOR’S ESG INDIA

Index Standard & Poor’s ESG India index provides investors with exposure to a liquid and
tradable index of 50 of the best performing stocks in the Indian market as measured by
environmental, social, and governance parameters.
The index employs a unique and innovative methodology that quantifies a company’s ESG
practices and translates them into a scoring system which is then used to rank each
company against their peers in the Indian market.
Its quantitative scoring system offers investors complete transparency.
THE CREATION OF THE INDEX INVOLVES A TWO STEP PROCESS

ü The first of which uses a multi-layered approach to determine an ‘ESG’ score for each
company.
ü The second step determines the weighting of the index by score.

SPECIAL NOTE:
17. 34

Index constituents are derived from the top 500 Indian companies by total market
capitalizations that are listed on National Stock Exchange of India Ltd. (NSE). These stocks
are then subjected to a screening process which yields a score based on a company’s ESG
disclosure practices in the public domain.

SUSTAINABILITY REPORTING FRAMEWORK IN INDIA

The Ministry of Corporate Affairs (MCA) recommends sustainability reporting in India.
Considering the importance of sustainability in businesses, MCA launched Corporate
Social Responsibility Voluntary Guidelines in 2009.

This voluntary CSR Policy addresses six core elements -

1. Care for all Stakeholders
2. Ethical functioning
3. Respect for Workers
4. Rights and Welfare

5. Respect for Human Rights
6. Respect for Environment and Activities for Social and Inclusive Development.
To take this further, in 2011 MCA issued National Voluntary Guidelines on Social,
Environmental and Economical Responsibilities of Business’ which encourages reporting
on environment, social and governance issues.

In line with the National Voluntary Guidelines on Social, Environmental and Economic
Responsibilities of Business and considering the larger interest of public disclosure
regarding steps taken by listed entities from a Environmental, Social and Governance
(“ESG”) perspective, SEBI decided to mandate inclusion of Business Responsibility
Reports (“BR reports”) as part of the Annual Reports for listed entities.

SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has
required that the annual report of a listed entity shall contain BRR describing initiative
17. 35

taken by them from an environmental, social and governance perspective in the

prescribed format [Regulation 34(2)(f)]. Business Responsibility Report is a disclosure of
adoption of responsible business practices by a listed company to all its stakeholders.
This is important considering the fact that these companies have accessed funds from the
public, have an element of public interest involved, and are obligated to make exhaustive
disclosures on a regular basis. SEBI has prescribed a format for 'Business Responsibility
Report’. It contains a standardized format for companies to report the actions undertaken
by them towards adoption of responsible business practices.
THE BRR FRAMEWORK IS DIVIDED INTO FIVE SECTIONS:

Section A: General Information about the Organisation - Industry Sector, Products &
Services, Markets, other general information
Section B: Financial Details of the Organisation - Paid up capital, Turnover, Profits, CSR
(Corporate Social Responsibility) spend.
Section C: Other Details - BR initiatives at Subsidiaries and Supply-chain Partners

Section D: BR Information - Structure, Governance & Policies for Business Responsibility
Section E: Principle-wise Performance - Indicators to assess performance on the 9

Business Responsibility principles as envisaged by the National Voluntary Guidelines
(NVGs
RELATION BETWEEN INTEGRATED REPORTING AND SUSTAINABILITY

REPORTING
Sustainability reporting is a process that assists organizations in setting goals, measuring
performance and managing change towards a sustainable global economy - one that
combines long term profitability with social responsibility and environmental care.

Sustainability reporting - mainly through but not limited to a sustainability report - is the
key platform for communicating the organization’s economic, environmental, social and
governance performance, reflecting positive and negative impacts.
17. 36

The Aspects that the organization deems to be material, in response to its stakeholders’
expectations and interests, drive sustainability reporting. Stakeholders can include those
who are invested in the organization as well as those who have other relationships with
the organization.

Integrated reporting is an emerging and evolving trend in corporate reporting, which in

general aims primarily to offer an organization’s providers of financial capital with an
integrated representation of the key factors that are material to its present and future
value creation.

Integrated reporters build on sustainability reporting foundations and disclosures in
preparing their integrated report. Through the integrated report, an organization
provides a concise communication about how its strategy, governance, performance and
prospects lead to the creation of value over time.

Therefore, the integrated report is not intended to be an extract of the traditional annual
report nor a combination of the annual financial statements and the sustainability report.
However, the integrated report interacts with other reports and communications by
making reference to additional detailed information that is provided separately.
17. 37

www.pcbaba.in CS PRAVEEN CHOUDHARY
AC & AB LAWS
Anti-Corruption and Anti-Bribery Laws in India

“Corruption is the enemy of development, and of good governance. It must be got rid of. Both the government and the
people at large must come together to achieve this national objective.”
- Pratibha Patel
Introduction
While Indian anti-corruption laws are fairly stringent, corruption is not uncommon in India, and until
recently the enforcement of anti-corruption laws left much to be desired. This has led to unfortunate notion
(Particularly outside India) that corruption is an accepted practice in India – however, this notion is
misplaced, and recent years have been marked with growing public dissatisfaction over corruption and its
cost to the Indian economy. Over the past five to six years, there has been a strong public sentiment against
corruption, and high-profile instances of corruption have become key political and election issues – for
example, the incumbent Indian government has also taken a hard line stance on corruption issues.

PREVENTION OF CORRUPTION ACT, 1988 (THE PCA)
1. criminalises the acceptance of gratification

2. Aiding and abetting the commission of bribery is also an offence under PCA
3. Any person, who bribes or attempts to bribe a public servant or acts as a middleman for such bribing
may also be held liable.
4. Creates an adverse presumption if a public servant’s assets are disproportionate in value to his or her
income and cannot be satisfactorily accounted for.
5. provisions of the PCA apply regardless of the location or jurisdiction of the commission of an offence
6. Is an Act of the Parliament of India enacted to combat corruption in government agencies and public
sector businesses in India.
7. This law defines public servant and punishes public servants involved in corruption or bribery
8. It extends to the whole of India except the State of
9. Jammu and Kashmir and it applies also to all citizens of India outside India
Public servants include any person who is
a) in the service or pay of the Government, local authority, Government corporation;

b) related to the administration of justice,
c) empowered to conduct elections,
d) appointed to perform public duty,
e) an office bearer of Government aided cooperative society,
f) an employee of any service commission, or
g) a member of any university.
18. 1

AC & AB LAWS
PCA only deals with bribery of public servants and does not extend to bribery or corruption in the private
sector. A private person/entity will be liable for inducing a public servant to commit an act that is
prohibited by the PCA, by corrupt or illegal means or by exercising personal influence.

Public servant taking gratification other than legal remuneration in respect of an official
act [Sec 7]
A person
ü Who is or expecting to be a public servant
ü accepts or obtains or agrees to accept or attempts to obtain
ü from any person
ü for himself or for any other person
ü any gratification beyond legal remuneration.
ü as a motive or reward for doing or forbearing to do any official act or for showing or forbearing to
show
ü in the exercise of his official functions, favour or disfavour to any person or for rendering or
attempting to render any service or disservice to any person
ü shall be punishable with imprisonment of at least 3 years but up to 7 years AND shall also be
liable to fine.

Here
1. Expecting to be a public servant à If a person not expecting to be in office obtains a gratification by
deceiving others into a belief that he is about to be in office, and that he will then serve them, be may
be guilty of cheating, but he is not guilty of the offence defined in this section.
2. Gratification à is not restricted to pecuniary gratifications or to gratifications estimable in money.
3. Legal remuneration à not restricted to remuneration which a public servant can lawfully demand,
but include all remuneration which he is permitted by the Government or the organisation, which he
serves, to accept.

Note: Where a public servant induces a person erroneously to believe that his influence with the
Government has obtained a title for that person and thus induces that person to give the public servant,
money or any other gratification as a reward for this service, the public servant has committed an offence.

Taking gratification, in order, by corrupt or illegal means, to influence public servant [Sec
8]
Whoever
ü accepts or obtains, or agrees to accept, or attempts to obtain
ü from any person
18. 2

AC & AB LAWS
ü any gratification whatever as a motive or reward for inducing, by corrupt or illegal means,
ü any public servant
ü to do or to forbear to do any official act, or in the exercise of the official functions of such public servant
ü to show favour or disfavour to any person, or to render or attempt to render any service or disservice
to any person
ü shall be punishable with imprisonment of at least 3 years but up to 7 years AND shall also be liable
to fine.

Taking gratification, for exercise of personal influence with public servant [Sec 9]
Whoever
ü from any person
ü any gratification
ü as a motive or reward for inducing
ü by the exercise of personal influence, any public servant whether named or otherwise to do or to
forbear to do any official act, or in the exercise of the official functions of such public servant
ü to show favour or disfavour to any person, or to render or attempt to render any service or disservice
to any person
ü shall be punishable with imprisonment of at least 3 years but up to 7 years AND shall also be
liable to fine.

Punishment for abetment by public servant of offences [sec 10]
Whoever,
ü being a public servant,
ü in respect of whom either of the offences defined in sec 8 or sec 9 is committed,
ü abets the offence, whether or not that offence is committed in consequence of that abetment,
ü shall be punishable with imprisonment of at least 6 months but up to 5 years AND shall also be
liable to fine.

Public servant obtaining valuable thing, without consideration from person concerned in
proceeding or business transacted by such public servant [ Section 11]
Whoever,
ü being a public servant,
ü for himself, or for any other person,
ü any valuable thing without consideration, or for a consideration which he knows to be inadequate,
ü from any person whom he knows to have been, or to be, or to be likely to be concerned in any
18. 3

AC & AB LAWS
ü proceeding or business transacted or about to be transacted by such public servant, or having any
ü connection with the official functions of himself or of any public servant to whom he is subordinate, or
from any person whom he knows to be interested in or related to the person so concerned,
ü shall be punishable with imprisonment of at least 6 months but up to 5 years AND shall also be
liable to fine.

Punishment for abetment of offences under section 7 or 11 [Sec 12]
Whoever
ü abets any offence punishable under section 7 or section 11
ü whether or not that offence is committed in consequence of that abetment
ü shall be punishable with imprisonment of at least 3 years but up to 7 years AND shall also be liable
to fine.

Criminal misconduct by a public servant [Sec 13]
1. A public servant is said to commit the offence of criminal misconduct,—
a) if he habitually accepts or obtains or agrees to accept or attempts to obtain from any person for
himself or for any other person any gratification other than legal remuneration as a motive or
reward such as is mentioned in section 7; OR
b) if he habitually accepts or obtains or agrees to accept or attempts to obtain for himself or for any
other person, any valuable thing without consideration or for a consideration which he knows to
be inadequate from any person whom he knows to have been, or to be, or to be likely to be
concerned in any proceeding or business transacted or about to be transacted by him, or having
any connection with the official functions of himself or of any public servant to whom he is
subordinate, or from any person whom he knows to be interested in or related to the person so
concerned; or
c) if he dishonestly or fraudulently misappropriates or otherwise converts for his own use any
property entrusted to him or under his control as a public servant or allows any other person so
to do; or
d) if he,—
i. by corrupt or illegal means, obtains for himself or for any other person any valuable thing or
pecuniary advantage; or
ii. by abusing his position as a public servant, obtains for himself or for any other person any
valuable thing or pecuniary advantage; or
iii. while holding office as a public servant, obtains for any person any valuable thing or
pecuniary advantage without any public interest; or
e) if he or any person on his behalf, is in possession or has, at any time during the period of his
office, been in possession for which the public servant cannot satisfactorily account, of pecuniary
resources or property disproportionate to his known sources of income.

18. 4

AC & AB LAWS
Explanation— For the purposes of this section, “known sources of income” means income received from
any lawful source and such receipt has been intimated in accordance with the provisions of any law, rules
or orders for the time being applicable to a public servant.

2. Any public servant who commits criminal misconduct shall be punishable with imprisonment for at
least 4 year but up to 10 years AND shall also be liable to fine.

Habitual committing of offence under sections 8, 9 and 12 [Sec ]
Whoever habitually commits
(a) an offence punishable u/s 8 or 9
(b) an offence punishable u/s 12,
shall be punishable with imprisonment for at least 5 year but up to 10 years AND shall also be liable to
fine.

Punishment for attempt [Sec 15]
Whoever
attempts to commit an offence referred in sec 13(1)(c) shall be punishable with imprisonment for at least
2 year but up to 5 years AND shall also be liable to fine.

Matters to be taken into consideration for fixing fine [Sec 16]
Where a sentence of fine is imposed u/s 13 (2) or sec 14,
ü the court in fixing the amount of the fine shall take into consideration the amount or the value of the
property,
ü which the accused person has obtained by committing the offence OR
ü where the conviction is for an offence 13(1)(e),
ü the pecuniary resources or property referred to in that clause for which the accused person is unable
to account satisfactorily

Persons authorised to investigate [sec 17]
Notwithstanding anything provided by CR PC 1973,
In delhi à Inspector of police
Other Metro cities à Assistant commissioner of Police (ACP)
Elsewhere à Dy. Superintendent of Police (DSP)
Without order of Magistrate
And without warrant they can arrest as well
Note: Offence u/s 13(1)(e) shall not be investigated without of SP or equivalent

18. 5

AC & AB LAWS
Power to inspect banker’s books
Generally by SP and by other PO, if specially authorised can inspect all the books and documents covered
under banker’s book evidence act 1891

Compliance defence and mitigation
PCA doesn’t provide for mitigation i.e. as per PCA Bribe means bribe not matter how much the amount of
it was. But court may decide category of bribe and may mitigate accordingly.

Liability of Individual directors and officers
PCA doesn’t provide anything specifically to punish any officer individually but generally we know that if
any director acted malafidely then he will also be liable for punishment. For example sec 447 under
companies act 2013.

18. 6

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Index

Sr. No. Chapter Name Pg. No.

2 Legislative Framework of Corporate Governance in 2.1 – 2.13

3 Board effectiveness 3.1 – 3.8

4 Board Process through SS 4.1 – 4.10

5 Board Committee 5.1 – 5.10

16 Ethics and Business 16.1 – 16.35

Conceptual Framework of Corporate Governance

3. Better Access to Global Market

1977 The Foreign Provides for specific provisions regarding establishment,

THE TURNBULL REPORT

KING I REPORT ON CORPORATE GOVERNANCE (1994)

Confederation of Indian Industry (CII) - Desirable Corporate

ü Management discussion and analysis of financial condition and results of

ü Prohibition of any business relationship with the audit client

scenario, enable adoption of internationally accepted best practices as well as provide

9 Key managerial Every company should be required to appoint, a Chief

Legislative Framework of Corporate Governance

4) Is a material supplier or customer of the company or other group member, or an

ü be chaired by an independent director

4. The Chairman is not an independent director.

The Sarbanes Oxley Act (SOX), 2002

Corporate Governance in Banks, Insurance and

RESERVE BANK OF Non —Schedule

S.NO. PARTICULARS PROVISIONS

ü Overseeing the risk profile of the bank,

Composition of the board:

CORPORATE GOVERNANCE IN INSURANCE COMPANIES

1) Composition of Insurance companies in India would be public companies &

4) Committees IRDA has advised insurers that it is mandatory to establish

that have a critical role in strengthening the control

CPSEs listed on Stock Exchanges Unlisted CPSEs

Board Effectiveness – Issues and challenges

d) It helps the company in building its goodwill.

Board Process through

Formulator of the Secretarial Standards

Composition of Secretarial Standards Board (SSB)

Scope and Functions of the Secretarial Standards Board

The main functions of SSB are

Scope of Secretarial Standards

Procedure for issuing Secretarial Standards

SECRETARIAL STANDARDS UNDER THE COMPANIES ACT, 2013

Introduction and Need

SECRETARIAL STANDARD -1 BOARD MEETING

DAY, TIME, PLACE, MODE AND SERIAL NUMBER OF MEETING:

NOTICE OF BOARD MEETING

TIME PERIOD FOR ISSUE OF NOTICE

CHAIRMAN OF BOARD MEETING

MEETINGS OF THE INDEPENDENT DIRECTORS:

PASSING OF RESOLUTIO BY CIRCULATION

Committees thus have an important role

RATIONAL BEHIND BOARD COMMITTEES:

1. Under Companies Act 2013

effectiveness of audit process; 2. recommendation for appointment,

3. examination of the financial statement remuneration and terms of appointment

and the auditors’ report thereon; of auditors of the listed entity;

through public offers and related statement to be included in the

matters board’s report in terms of Section

5. Reviewing, with the management, the

The requirement of minimum 2 independent directors in the meeting of Audit Committee is

ü Composition of an Audit Committee

Nomination and Remuneration committee

Under SEBI (LODR) Regulation 2015