CORPORATE GOVERNANCE

It seems corporate governance and God have something in

common. Both are remembered in times of crisis.

Ministry of Corporate Affairs http://www.mca.gov.in/ has recently notified Section 135

and Schedule VII of the Companies Act as well as the provisions of (CRS Rules) which
has come into effect from 1 April 2014.

Applicability

Section 135 of the Companies Act provides the threshold limit for applicability of the
CSR to a Company:

1. Net worth of the company to be Rs 500 crore or more;

2. Turnover of the company to be Rs 1000 crore or more;
3. Net profit of the company to be Rs 5 crore or more.

Further, as per the CSR Rules, the provisions of CSR are not only applicable to Indian
companies but also applicable to branch offices of a foreign company in India.

CSR Committee and Policy

Every company as prescribed in Section

135 http://www.mca.gov.in/SearchableActs/Section135.htm of the Act and Company
(Corporate Responsibility) Rules,
2014 http://www.mca.gov.in/Ministry/pdf/CompaniesActNotification22014.pdf within the
threshold limit requires spending of at least 2% of its average net profit for the
immediately preceding 3 financial years on CSR activities.

Further, the company will be required to constitute a committee (CSR Committee) of the
Board of Directors (Board) consisting of 3 or more directors.

The CSR Committee shall formulate and recommend to the Board, a policy which shall
indicate the activities to be undertaken (CSR Policy); recommend the amount of
expenditure to be incurred on the activities referred and monitor the CSR Policy of the
company. The Board shall take into account the recommendations made by the CSR
Committee and approve the CSR Policy of the company.
The new CSR regime is based on “Comply or explain” approach to stringently push big
corporate giants to take initiative towards their duty to contribute towards their CSR
activities. Companies failing to do so would be required to explain why they have not
included such information, in the annual report as under Section 92 of the Companies
Act, 2013 as part of “comply or explain” approach for large companies.

 Related Party Transactions

A business transaction with relatives of Directors or KMP is considered as Related Party

Transactions. It is very important to scrutinize transactions with related parties. Related
party transactions are not banned in India and it can be entered by a company. There
are certain conditions which need to be fulfilled before entering into a related party
transaction as per Section 188 of Companies Act, 2013.

 Class Action Suits

Class action suits allow a group of aggrieved people with the same grievance to file a
collective suit against the company. It allows the minority shareholders to file a suit
against the company and its management in the National Company Law tribunal
(NCLT). Section 245 of Companies Act, 2013 allows suit to be initiated against its
directors, management, auditors and any other person who is responsible for
fraudulent, unlawful or wrongful act.

Various Committees to examined and gave recommendations on corporate governance

over period of time. They are discussed below:

Committee # 1. CII Code of Desirable Corporate Governance (1998):

For the first time in the history of corporate governance in India, the Confederation of
Indian Industry (CII) framed a voluntary code of corporate governance for the listed
companies, which is known as CII Code of desirable corporate governance.

The main recommendations of the Code are summarised below:

(a) Any listed company with a turnover of Rs. 1000 million and above should have
professionally competent and acclaimed non-executive directors,

who should constitute:

(i) at least 30% of the board, if the chairman of the company is a non-executive
director, or
(ii) at least 50% of the board if the chairman and managing director is the same person.
(b) For the non-executive directors to play an important role in corporate decision-
making and maximising long-term shareholder value,

They need to:

(i) become active participants in boards, not passive advisors,

(ii) have clearly defined responsibilities within the board, and

(iii) 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.

(c) No single person should hold directorships in more than 10 listed companies. This
ceiling excludes directorship 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).

(d) The full board should meet a minimum of six times a year, preferably at an interval of
two months, and each meeting should have agenda items that require at least half-a-
days discussion.

(e) As a general rule, one should not re-appoint any non-executive director who has not
had the time to attend even one-half of the meetings.

(f) Various key information must be reported to, and placed before the board, viz.,
annual budgets, quarterly results, internal audit reports, show cause, demand and
prosecution notices received, fatal accidents and pollution problem, default in payment
of principal and interest to the creditors, inter corporate deposits, joint venture foreign
exchange exposures.

(g) Listed companies with either a turnover of over Rs. 1000 million or a paid up capital
of Rs. 200 million, whichever is less, should set up audit committees within 2 years. The
committee should consist of a least three members, who should have adequate
knowledge of finance, accounts, and basic elements of company law. The committees
should provide effective supervision of the financial reporting process. The audit
committees should periodically interact with statutory auditors and internal auditors to
ascertain the quality and veracity of the company’s accounts as well as the capability of
the auditors themselves.

(h) Consolidation of group accounts should be optional.

(i) Major Indian stock exchanges should generally insist on a compliance certificate,
signed by the CEO and the CFO