27 Final Selections in RBI Grade B 2017

72 Final Selections in RBI Grade B 2018

Summary Sheet – Helpful for Retention

For

Corporate Governance

Important Points

1. This Summary Sheet shall only be used for Quick Revision after you
have read the Complete Notes

2. For Building Concepts along with examples/concept checks you should

rely only on Complete Notes

3. It would be useful to go through this Summary sheet just before the

exam or before any Mock Test

4. Questions in the exam are concept based and reading only summary
sheets shall not be sufficient to answer all the questions

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 1 Summary Points

➢ Corporate Governance: Refers to mechanisms, processes and relations by which corporations are
controlled and directed

➢ SEBI Definition of Corporate Governance: Management needs to accept,

1. Right of shareholders as the true owners
2. Managers are trustees on behalf of shareholders
3. Commitment towards company values, ethical conduct and distinction between personal
and company’s interest

➢ Major difference between Corporate Governance and Management is that governance is external
to the object being governed whereas management has personal control and involved in the
operations of the object

➢ Internal Stakeholders: Refers to people who are involved into day to day operations of the firm like
board of directors, employees and management

➢ External Stakeholders: Refers to people who are not involved in handling operations of firms but
are impacted by its activities or hold limited liability like shareholders, debt holders, creditors,
customers, communities, government, environment, suppliers, etc.
➢ Importance of Corporate Governance: Equal distribution of rights and responsibilities among
various stakeholders

➢ Principal Agent Problem

1. Arises when there is separation of ownership and management
2. Principal denotes owner or promoter of the company and Agent denotes management that
runs the company operations

➢ Corporate governance helps to tack principal agent problem through policies, rules, procedures,
processes and code of conduct

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 ➢ Principles of Corporate Governance
1. Rights and equitable treatment of shareholders: Done through helping shareholders to
exercise their rights, delivering effective company communication and general meetings
2. Interests of other stakeholders: Fulfill obligations to non-shareholders including external
stakeholders
3. Role and responsibilities of the board: Board should have relevant skills, understanding,
independence, commitment and oversee management performance
4. Integrity and ethical behavior: Developing code of conduct for directors and executives
5. Disclosure and transparency: Addressing accountability to shareholders by making
responsibilities publicly of board and management, financial reporting and timely disclosure
of information

➢ Members of Board of Directors

1. Insider/Internal Members involved in managing company operations or having personal or
business relations with management, also called Executive Directors
2. Outsider/External Members has no direct relationship with company management, also
called Non-Executive Directors. The two types in this:
✓ Non-Independent Directors: Are involved through financial interest like
holding of shares or profits in the company
✓ Independent Directors: Are not impacted through company profits or losses
but get their regular salary

➢ Models of Corporate Governance

1. Anglo-US Model (Unitary System/ Single Tier/ Corporate Governance Triangle)
✓ Majorly seen in US and UK where equity financing is commonly seen as a
way to raise capital
✓ Emphasizes interests of shareholders
✓ Has Single-tiered Board of Directors dominated by Non-executive directors
elected by shareholders
✓ Non-executive directors outnumber executive directors
✓ Management, Directors and Shareholders are key entities

✓ Developed in context of free market

✓ Separate ownership and management in most of the companies
✓ Agency Costs: This refers to the costs that investors entail by giving up their
control over the management of the company(while retaining ownership)
and paying managers for acting as agent to handle company affairs
✓ Board of directors are elected by the shareholders to avoid any conflict and
act in the best interests of them

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 2. Japanese Model
✓ Mostly Banks and an Industrial group (also called as KEIRESTU) invests in
the company who are also inside shareholders( invests heavily, involved in
day-to day company activities)

✓ Four key players: Bank, Government, Management and KEIRETSU

✓ Outside shareholders and Independent directors play insignificant role
✓ Board of directors of mostly contain insiders, i.e. Executive managers
✓ Bank and Keiretsu can remove executive directors and appoint their own if
they are not happy with the performance of executive directors

3. Continental European Model

✓ Mostly includes Continental European counties including Germany,
Austria and Netherlands
✓ Consists of two-tiered Board system → Executive Board and Supervisory
Board
✓ Executive board has company executives to handle day to day company
operations
✓ Supervisory Board has non-executive directors representing shareholders
and employees
✓ Supervisory directors can remove board of directors in case they do not
perform well

➢ Role of Board of Directors

1. Review corporate strategy, risk policy and annual budgets
2. Oversee major acquisitions
3. Select and decide on compensation of key executives
4. Nomination and Remuneration of Board Members
5. Integrity in financial reporting and independence of audit

➢ Corporate Governance outside India

1. Cadbury Committee ( Set up in May 1991 by Financial Reporting Council, London Stock
Exchange)
✓ Under Chairmanship of Sir Adrian Cadbury
✓ Major Recommendations:
o Separate roles of Chairman and CEO: Chairman to see overall
functioning of the board and secure the rights of shareholders

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 and oversee the responsibilities or rights of directors. Whereas
CEO to look into the operational management of the company.
This helps to decrease concentration in one hand
o Minimum 3 Non-Executive Directors on the Board
o Audit Committee led by Independent Directors
o
2. OECD Principles ( Organization for Economic Co-operation and Development)
✓ The rights of shareholders are important
✓ Equitable treatment of shareholders whether majority or minority
✓ Important Role of stakeholders in corporate governance
✓ Disclosure and Transparency of Financial reports and other areas
✓ Responsibilities of the board ensuring and protecting rights of
Stakeholders
✓ Non-Biased Auditing of the Company

3. Sarbanes-Oxley Act,2002( also called as SOX Act)

✓ Formulated due to series of high-profile corporate scandals in US
✓ Gave Corporate Governance Guidelines needs to be followed by firms in
US
✓ Led to the establishment of Public Company Accounting Oversight
Board (PCAOB) responsible for inspection of firms, consisting of 5
members in which 2 would be certified public accountants
✓ Accounting firms needs to register with PCAOB
✓ Audit Committee needs to be set up at every firm that will be
responsible for appointing auditors, looking into their pay, etc.
✓ Rotation of Auditors every 5 years
✓ Considers manipulation of the Auditor by any Director or Executive as
illegal
✓ Non-audit services by Auditors is non-permissible
✓ CEO’s and CFO’s need to mandatorily certify Financial Statements with
Securities and Exchange Commission (SEC)

4. International Corporate Governance Network(ICGN)

✓ Set up in 1995 by World’s 10 largest Pension Funds
✓ To promote Corporate Governance standards globally
✓ Network has investors managing 18 trillion dollars and located in 50
member countries
✓ Gives global guidelines ranging from shareholder rights to business
ethics

5. World Business Council for Sustainable Development (WBCSD)

✓ Particularly focuses on Accounting and Reporting guidelines
✓ Origins dates back to Rio de Janeiro Earth Summit, 1992
✓ Deals with Business and Sustainable Development
✓ Mentions 10 messages incorporating business ethics and sustainable
development on the lines of welfare of society, eradication of poverty
and shows concern for environment and ecosystem

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 ➢ Committees established in India for Corporate Governance

1. CII (Confederation of Indian Industry) Code for Corporate Governance (1998)

✓ Headed by Rahul Bajaj
✓ Suggested desirable corporate governance guidelines focusing mostly
on transparency and full disclosure of company information to the
shareholders

2. Kumar Mangalam Committee ( By SEBI, 1999)

✓ Early 2000, the recommendations made by the committee were
incorporated into Clause 49 of the Listing Agreement of the Stock
Exchanges
✓Recommendations:
i. Role of Board of Directors: Board should direct and control the
management of the company and is accountable to the
shareholders
ii. Composition of Board of Directors: Optimum combination of
executive and non-executive directors. Non-executive directors
not less than 50%. Number of independent directors depends
whether Chairman is non-executive(1/3rd board independent
directors) and executive(1/2 board independent directors
iii. Audit Committee: Minimum 3 members, all non-executive
directors and majorly independent with at least 1 director
having finance and accounting knowledge. Chairman of
committee should be independent director and present in AGM.
Committee should meet thrice a year with gap no less than 6
months. Quorum → 2 members or 1/3rd of audit committee
whichever higher and minimum 2 independent directors
iv. Functions of Audit Committee: To check credibility and
righteousness of financial statements, appointment and
removal of external auditor and reviewing financial statements
with management before submitting to the board

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 v. Remuneration Committee: At least 3 directors, all non-
executive and majorly independent. Chairman of the committee
should be independent director and present in the AGM
vi. Board Meetings: At least 4 times a year with maximum gap of 4
months between any 2 meetings. Director shall not be member
in more than 10 committees and Chairman not more than 5
committees serving as director
vii. Corporate Governance: Annual report should contain separate
section on Corporate Governance with detailed compliance
report
viii. Shareholders: Under the chairmanship of non-executive
director committee to address shareholders and investors’
concerns. Delegation of power of share transfer to registrar or
agents

3. Naresh Chandra Committee (August 2002)

✓Set up by the Department of Company Affairs(DCA) under the Ministry
of Finance and Company Affairs
✓Recommendations:
i. Auditors: Audit firm should not have financial interest, received
loans/guarantees form the company, not dependent for more
than 25% of revenues and key officers of the firm cannot join
the audited company before 2 years of last audit. Audit firm
must not be involved in non-audit services and at least 50 % of
personnel auditing the company rotated every 5 years
ii. Audit Committee: Directors of the committee must be
independent and certify financial statements by CEO & CFO and
oversee the auditor appointment process
iii. Composition of Board of Directors: Minimum 50 % of
independent directors and minimum board size = 7.
Independent directors must be given training and not held
criminally liable for any mismanagement by any employee
iv. Remuneration: Limit on the salary of non-executive directors
and decided by board and shareholders together

4. Narayan Murthy Committee (By SEBI, 2003)

✓ Recommendations made by this committee also incorporated into
Clause 49 of the Listing agreement of the Stock Exchanges
✓Recommendations:
i. Audit Committee: Members of the committee should be
financially literate and at least one member should have
accounting or financial management expertise
ii. Related Party Transactions: Denotes any transactions between
two parties having financial interest in the company. Statement
regarding this should be submitted to audit committee for
approval

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 iii. Risk Management: Management should form and place the
report on risk assessment and minimization procedures to the
Board every quarter and get it approved from the board
iv. Training of Board Members: Board members must be trained in
business model and risk profile of business parameters of the
company to know their responsibilities
v. Disclosure on money raised through IPO: Application of funds
raised through IPO should be submitted to the Audit Committee
every quarter
vi. Nominee Directors: Denotes the ones who have been
appointed by a party which is the largest shareholder of
the company or has interest in the working of the
company. No nominee directors on board and if required then
through shareholder’s decision
vii. Remuneration: Compensation paid to the non-executive
directors must be decided by board and shareholder in the
general meeting
viii. Whistle Blower Policy: Any wrong doing observed by anyone
should be informed to the audit committee and protection of
harassment given to the informant
ix. Evaluation of Board Performance: This to be done by peer
groups of the board of directors of non-executive director’s
performance

5. JJ Irani Committee (2004)

Formulated by Ministry of Corporate Affairs (MCA) to offer advice on new company bill
to overhaul Company bill 1956. Later, incorporated into Company’s bill 2012 which got
passed as Companies Act, 2013.

6. Uday Kotak Committee (By SEBI, June 2017)

✓ 21-Member committee consisting of individuals from other companies,
stock exchanges, investor groups, academicians, researchers, etc
✓Committee has been asked to deliver recommendations regarding role
clarity and active participation of independent directors, incentivizing
techniques for financial disclosure by firms, improving disclosures
regarding third-party transactions and issues related to participation of
investor in general meetings
✓Have also been asked to address PSU’s demand of reducing
independent directors participation of 50% and exemption from
director evaluation

➢ Factors affecting Corporate Governance

1. Ownership Structure: Concentrated ownership in few hands leads to dominant
shareholders taking decisions at their will
2. Financial Structure: Financing in company is majorly equity than debt then major
decisions taken by shareholders but in opposite scenario board might take decision at
their will which might not be in interests of debtors

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 3. Policies and Law of the Country: Legal environment in which company operates,
shareholders rights mentioned in company law of the country, bankruptcy laws, land
acquisition laws, etc impact governance
4. Competency of Board of Directors: For making decisions in the shareholders’ interests,
board should have required skills and mindful of its responsibilities
5. Independent directors on Board: Act as watchdog for company’s policies, decisions and
performance
6. Directors Remuneration: Remuneration of directors should be in a way to incentivize
them enough to work diligently
7. Effective Audit Committee: Helps in effective financial reporting and also reducing the
opportunity for fraud and also creating link with the external auditor and strengthen
internal audit function
8. Addressing Grievances of Shareholders: SEBI’s code for CG stipulates creation of
Shareholder’s committee and similarly, Companies Act, 2013 mandates constitution of
Shareholders Relationship Committee to address such issues
9. Transparency: Company should ensure timely and complete distribution of information
to the shareholders
10. Effective implementation of whistle blower policy as per Clause 49 of the Listing
Agreement

➢ Mechanisms of ensuring Corporate Governance

1. Internal Mechanisms
✓ Ownership Concentration: Large number of shares owned by
institutional investors as well as individual investors gives them power
to question decisions taken by the board
✓ Board of Directors: Board with right mix of independent and non-
independent directors helps to monitor and act as watchdog for
external stakeholders
✓ Internal control procedures and internal auditors: Internal auditors
within the organization test the design and implementation of the
entity’s internal control procedures and reliability of its financial
reporting
✓ Balance of power: Separate company divisions handling different
activities of the company like administrative changes, peer group
review, interests of other stakeholders etc checks and balances each
other’s actions
✓ Remuneration of Executives: Performance based remuneration and
remuneration in such a way that it does not incentivize to go against the
interests of the company and shareholders

2. External Mechanisms
✓ Financial Markets: Acts as fair court where bad corporate governance
gets overtaken by better companies and can also result into depressed
share price reflecting investors subdued interests in the stock of the
company making it an attractive takeover target
✓ Media Pressure: Media highlights any wrong doing in the company
hence incentivizes company personals for rightful governance

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 ✓ Debt Covenants: Such covenants from debtors prevents firms from
engaging in activities which might lead to over-leveraging by the firm
✓ Annual Financial Statements helps to ensure corporate governance
✓ Proxy Firms: Such as institutional investors providing services
shareholders help in high turnout in voting and balance of opinions
expressed in company decisions
✓ External Audits: Checks any wrong doing and rotation of auditors
ensures no bias or fudging of accounts by auditors due to improved
relations
✓ Competition: Industrial peer pressure to perform better incentivizes to
follow best practices
✓ Acts and Regulations: Clause 49 of the listing agreement by SEBI and
Companies Act, 2013 by MCA forces companies to comply with
corporate governance rules

➢ Regulatory Framework in India

Some differences exists between Clause 49 by SEBI and Companies Act, 2013 requirement for Corporate
Governance compliance in such a case the stricter requirement needs to be followed.

➢ Clause 49 of Listing Agreement by SEBI

✓ Contains Recommendations made by Kumar Mangalam and Narayan
Murthy Committee for Corporate governance
✓ Mandatory Requirements:
i. General Principles
a. Rights of Shareholders: Equal opportunity in decisions,
voting facility in Shareholder’s meetings, timely
information and equitable treatment to all shareholders
b. Role of Stakeholders: Recognize the role of internal as
well as external stakeholders
c. Disclosure and Transparency: Follow accounting
standards, disclosure of financial & non-financial
information, dissemination of information in timely
manner and complete
d. Responsibilities of Board: Members of board should
not have material interest, review and guide corporate
strategy and select, compensate key executives, risk
policy, budgeting, etc
ii. Clause 49 (II): Board of Directors
a. Composition of Board: Optimum combination of
executive and non-executive directors. Non-executive
directors not less than 50%. Number of independent
directors depends whether Chairman is non-
executive(1/3rd board independent directors) and
executive(1/2 board independent directors
b. Independent Director
• Limit in number of Directorship: If person not
Chairman of any board, can serve as

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 independent director in not more than 7 listed
firms. Similarly, if chairman of any board, can
serve as independent director in not more than
3 listed firms
• Maximum Tenure of Directorship: Any
independent director has tenure of 5 years and
is eligible for re-appointment for another 5
years only by passing special resolution
• Formal letter of appointment to directors:
Letter of appointment to independent director
is given as well as detailed profile of the
director is displayed on website and intimated
to Stock exchanges no late then 1 day of
appointment
• Performance and Evaluation of Independent
Directors: Evaluation of performance of
independent directors needs to be disclosed in
Annual Report and done by board of directors
• Separate Meetings of Independent Directors:
Need to hold meeting at least once a year
without non-independent directors and shall
also review performance of non-independent
directors
• Training of Independent Directors: Need to be
given to familiarize role, responsibilities,
industry, risks, business model
c. Compensation to Non-Executive Directors:
Fees/Compensation given to non-executive directors
needs to be approved by board of directors and
shareholders in the general meeting
d. Other Provisions to the Board: Shall meet at least 4
times a year with maximum gap of 4 month between 2
meetings. Director shall not be member in more than 10
committees or act as Chairman in more than 5
committees. Independent director resigned or removed
by board needs to be replaced within 180 days
e. Code of Conduct: Need to be posted on Company
website and self-declaration of its compliance signed by
CEO in the Annual Report

iii. Clause 49(III): Audit Committee

a. Qualified and Independent Audit Committee:
Minimum 3 members, all non-executive directors,
majorly independent, all members financially literate
with at least 1 director having finance and accounting

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 knowledge. Chairman of committee should be
independent director and present in AGM
b. Meeting of Audit Committee: Shall meet at least 4
times a year with maximum gap of 4 month between 2
meetings. Quorum → 2 members or 1/3rd of audit
committee whichever higher and minimum 2
independent directors
c. Review of information by Audit Committee: Statement
of related party transactions, management letters,
internal auditor report and review of internal auditor
iv. Clause 49(IV): Nomination and Remuneration Committee:
Comprise 3 directors, all non-executive and at least half shall be
independent, chairman shall be independent director and
present at the AGM. Need to disclose the remuneration and
performance evaluation policy in the Annual report
v. Clause 49(V): Subsidiary Companies: At least 1 independent
director of the holding company needs to be as director in the
board of directors of the non-listed subsidiary company. Audit
Committee of holding company needs to review financial
statement of the unlisted subsidiary and minutes of the board
of meetings of unlisted subsidiary needs to be place at the
board meeting of the holding company
vi. Clause 49(VI): Risk Management: Board needs to define role
and responsibilities of the Risk Management Committee
vii. Clause 49(VII): Related Party Transactions: Such things require
prior audit committee approval and in material transactions
special shareholders resolution where the party needs to
abstain from voting
viii. Disclosures: Related party transactions, accounting treatment,
managerial
ix. Shareholders: Quarterly results needs to be made available,
profile of appointed directors should be provided and formation
of Shareholder Grievance Committee
x. Disclosure in Annual Report: Training given to directors and
their remuneration or any transactions done by them interests
to company
xi. Proceeds from Public, Rights and Preferential Issues: Need to
disclose application of funds on quarterly basis
xii. CEO/CFO Certification: Need to be done to show that they
have complied with all standards of reporting
xiii. Report on Corporate Governance: Separate section with
detailed compliance report in the Annual report
xiv. Compliance: Need to be obtained through auditors or Company
secretaries regarding compliance of corporate governance rules

✓ Non- Mandatory Requirements:

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 i. The Board - A non-executive Chairman may be entitled to
maintain a Chairman's office at the company's expense and also
allowed reimbursement of expenses incurred in performance of
his duties
ii. Shareholder Rights - A half-yearly declaration of financial
performance including summary of the significant events in last
six-months, may be sent to each household of shareholders.
iii. Audit qualifications - Company may move towards a regime of
unqualified financial statements.
iv. Separate posts of Chairman and CEO - The Company may
appoint separate persons to the post of Chairman and
Managing Director/CEO.
v. Reporting of Internal Auditor-The Internal auditor may report
directly to the Audit Committee
vi. Whistle Blower Policy: Employee and director anyone can share
the wrong doing and should be safeguarded against any
harassment

➢ Companies Act, 2013

1. Independent Directors: Prescribes minimum requirement only in case of ID, other than
that company is free to choose between ED and NED. Under section 149(4), the
requirements for independent directors are,

2. Women Director: Under section 149(1), all listed and non-listed with paid up Rs100 Cr
or turnover of Rs300 Cr or more need to have at least 1 women director

3. Audit Committee:

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 Minimum 3 directors required in the committee with majorly being independent and
majority of members must have ability to read and understand financial statements

4. Directors Training: Independent directors need to update their skills and get familiar
with requirements of business of the company

5. Performance Evaluation: Responsibility for managing the evaluation of the directors has
been entrusted with nomination and remuneration committee

6. Nomination and Remuneration Committee (NRC): All listed companies need to

constitute and empowers Central Government to include other class of companies to
constitute NRC. Comprise of 3 or more non-executive directors and at least ½ should be
independent

7. Subsidiary Companies: No as such specification given about this in the Act

8. Internal Audit: Need to appoint internal audit by specific class of companies

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 9. Serious Fraud Investigations Office (SFIO): GOI set up the SFIO in MCA in July, 2003 to
undertake investigation in company frauds under the provisions of Companies Act,
1956. With the enactment of Companies Act,2013 the SFIO has empowered significantly
and has power to carry out raids, arrests and seizure in respect of punishable fraud.

10. Risk Management: Requires board of directors to formulate risk policy and identify risks
in the company but does not describe anything regarding separate constitution of risk
management committee

11. Compliance: Under section 205, Company secretary needs to provide a report to the
board regarding the compliance with the provisions of the Act

12. Audit and Auditors: Listed companies meeting the criteria for audit committee cannot
appoint or re-appoint auditor for
✓ More than 2 terms for 5 consecutive years, if auditor is firm
✓ More than 1 term of 5 consecutive years if auditor is individual
✓ Apart from that, auditor should not have any interest, business relationship or
indebted to the company

13. Corporate Social Responsibility: Section 135(1) of Act, prescribes that companies having
worth RS 500Cr or more, turnover of Rs 1000 Cr or more and net profit of Rs 5 Cr or
more during any financial year; needs to constitute CSR Committee

14. Stakeholder Relationship Committee needs to be constituted

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 15. Under section 245 of the Bill, Class Action in case 100 or more members, depositors,
investors feel any wrong doing in the part of the company then they can file an
application before the tribunal

16. Independent Directors have limited liability until and unless they have had prior
knowledge of any ill doing.

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