Noida Institute of Engineering and Technology, Greater Noida

Corporate Governance Framework in India

Unit: 2

Corporate Governance, Values &

Ethics SHRUTI SHARMA
MBA
MBA 2nd Year (3RD Sem) Department

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S. No Index

1. Content

2. Course Objective

3. Course Outcome

4. CO-PO & PSO Mapping

5. Objectives of Topic/Session & Mapping

6. Topics

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S. No Index

7. Video Links

8. Daily Quiz

9. Assignment Questions

10. MCQs

11. Old Questions Papers

12. Expected Questions

13. Summary

14. References

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 Course Outcome

CO1: Have insights into various concepts & cases related to Corporate Understand ( K 2)
Governance.

CO2: Gain a deeper understanding of the about the Corporate Governance Apply ( K 3)
framework.

CO3: Develop the ability to practice various aspects, factors related value in Analyzing ( K 4)
business.

CO4:Work and discharge responsibilities in an ethical way in the organization Applying ( K 3)

CO5: Understand modern practices of Corporate Governance in various areas Understand ( K 2)

of business

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 Course Objective

• To introduce the concept and importance of corporate governance in business

• To make students aware of corporate governance frame work in India.
• To help them in understanding of various aspects and dimensions of ethics in management
• To discuss the ethical values and that drive the modern businesses
• To develop the understanding of modern challenges and issues in corporate Governance.

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 Unit to CO Mapping

Topics of Session CO1 CO2 CO3 CO4 CO5

Unit 1 H M L

Unit 2 H

Unit 3 H L

Unit 4 H L H M

Unit 5 M L H

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Core Courses

Governance in various areas of business

CO5: Understand modern practices of Corporate
Apply knowledge of management theories and practice to solve business problem
CO-PO and PSO Mapping

SHRUTI SHARMA
Foster Analytical and critical thinking abilities for data-based decision making.
L

Ability to develop Value based Leadership ability.

CGV&E AMBA0302
L

Ability to understand, analyze and communicate global, economic, legal, and ethical aspects of business.
7
Unit 2
M

Team environment
H
 Unit content

• Corporate Boards and Its Powers, Responsibilities and Disqualifications;

• Board Committees and their Functions- Remuneration Committee, Nomination Committee,
Compliance Committee, Shareholders Grievance Committee, Investors Relation Committee,
Investment Committee, Risk Management Committee, and Audit Committee;
• Regulatory Framework of Corporate Governance in India;
• SEBI Guidelines and Clause 49; Reforms in The Companies Act, 2013;
• Challenges in Corporate Governance

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 Session Learning Objective with CO mapping

1. Understand the meaning of Corporate Boards and Its Powers, Responsibilities and Disqualifications

Topic Course Outcome

1. to make them understand the meaning of Corporate Boards and Its CO2
Powers, Responsibilities and Disqualifications

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 Introduction

Structure
India, like most countries which have common law traditions, has a one-tier, or unitary board structure

Management
The board is the governing body of the company which consists of executive (managing director) and non-
executive directors. The board delegates the day-to-day executive control to manage and operate the business of
the company to its managing director or full-time director. The board of a company can also delegate certain
duties and powers to a committee of directors.
The Companies Act 2013 also prescribes different classes of directors such as independent, female, resident and
nominee directors for specific companies.

Board members
Only individuals can be appointed to the board of a company.

Employees' representation
Employees do not have a right to be represented on the board. However, the Companies Act 2013 provides that
minority shareholders can appoint a representative to the board of a listed company.
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 Introduction

Number of directors or members

The Companies Act 2013 provides that at least three directors can be appointed to the board in a public
company. It also states that there must be at least two directors in the board of a private company and
one director in a one-person company board, and that there can be up to 15 directors. A company can
appoint more than 15 directors after passing a special resolution of the shareholders. As per LODR
(Listing Obligations and Disclosure Requirements) Regulations, by April 1, 2020, top 2000 listed
entities are required to have a minimum of six directors.
As mentioned above, a private company should have at least two members and can have up to 200
members. A public company requires at least seven members and can invite the public to subscribe to its
securities.

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 General restrictions

A person cannot be appointed as a director if:

• The person is of unsound mind declared by a competent court, is an undischarged insolvent; or is adjudicated as an
insolvent.
• Five years have not elapsed since expiry of sentence of imprisonment of six months (or less) granted by a court;
• The person has been found guilty of any offence and sentenced for imprisonment for a period of seven years or
more, or an order has been passed by a court or tribunal, disqualifying him from being appointed as a director.
• The person has not paid any calls related to any shares of the company held by him/her, alone or jointly with other
officers, and six months have passed from the last day decided for the payment of the call.
• The person has been accused of the offence dealing with related party transactions in the last five years.
• The person has not complied with the provisions of director appointment (section 152 and 165, Companies Act
2013).
• The person has failed to comply with section 165(1).
• The person was not a director of a company which has either not filed annual returns or financial statements for
continuously for any three financial years, or has failed to repay deposit, pay declared dividend or redeem
debentures or pay interest thereon for a period of one year (section 164(2), Companies Act 2013).

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 Appointment of directors

Appointment of directors
All directors (except the first director, additional director, nominee director, alternate director and a director
appointed in a casual vacancy) must be appointed by the company in a general meeting (section 152, Companies
Act 2013). A person intending to become a director must obtain an identification number from the central
government, without which he or she cannot be appointed. The person must also give his or her consent for the
appointment, and this consent must also be filed with the ROC. The director must not be subject to a
disqualification order (section 164, Companies Act 2013).
Listed companies must appoint at least one-third of the total number of directors as independent directors
(section 149, Companies Act 2013). An independent director is also eligible for re-appointment by passing a
special resolution.

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 Removal of directors

Removal of directors
A director (including a managing director) of a company can be removed by an ordinary resolution (unless
he/she is a director appointed by the NCLT (National Company Law Tribunal) and if he or she has been given a
reasonable opportunity to be heard) (section 169, Companies Act 2013). A special notice (approved by the
board) for removing a director must be given. After the board meeting, an EGM (extraordinary general
meeting) must be convened for the removal of the director and appointment of a new director.
A director may also choose to resign by sending a resignation letter to the company, which the company must
subsequently notify to the ROC (Registrar of Companies). A board meeting and shareholders’ meeting must
then be convened to approve the removal of the director, and the appointment of a new director.
The articles of association of a company may provide for additional procedures for the removal of a director.
Under the Companies Act 2013, such powers conferred by the articles will not be affected by section 169.

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 Directors' powers

Directors' powers
The board is entitled to exercise all the powers that the company authorises them to.

Some of the powers include being able to:

•Make calls on shareholders in respect of unpaid money.
•Authorise buy back of securities.
•Issue securities including debentures.
•Borrow monies.
•Invest funds of the company.

Restrictions
For certain specified activities, the board cannot exercise its powers without the consent of the company by
way of a shareholders’ resolution (section 180, Companies Act 2013). The powers of the board can be
further restricted by the provisions of the articles of association of the company.

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 Director's duties and liabilities

Duties

The directors of a company have a fiduciary duty to the company, the shareholders and the employees as
a whole. Directors have inter alia the following statutory duties:
•The duty to act in accordance with the articles of association of the company.
•The duty to act in good faith to promote the objects of the company.
•The duty of care, skill and diligence and to exercise independent judgment.
(Section 166, Companies Act 2013.)
Independent directors also have additional duties which are codified in Schedule IV of the Companies Act
2013. Тhe LODR Regulations also set out the duties and liabilities of the directors and board of listed
companies (regulations 17 and 25).

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 Director's duties and liabilities

Liability

If a director breaches the Companies Act 2013 or the LODR Regulations, he/she is subject to a
fine and/or imprisonment depending on the nature of contravention. Some of the instances in
which a director can be criminally held liable include the following:
•Failure to file annual returns.
•The company failing to fulfil its corporate social responsibility obligations under the Companies
Act 2013.
•The issue of prospectus with a misleading statement.
•Breaching provisions in relation to related party transactions.

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 Disqualification of Directors – Definition, Meaning & Effects

A company has no physical existence, it is merely a legal entity. It can only act through natural persons.
The person acting on the company’s behalf is called a Director. They are professional people, hired by the
company to direct its affairs. They can also be called – the officers of a company.

Any person can hold the position of Director. Company law in India does not prescribe any qualifications
for Directors. Therefore, the Indian companies may, in its Articles, lay down qualifications for Directors.

Effects of Disqualification
Once disqualified, a person is not eligible for being appointed as Director of that company or any other
company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017,
the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act.
It has recently published the names of the disqualified Directors on the government website.

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 Disqualifications of Directors

Disqualifications of Directors
Under company law, a director can be disqualified for any of the following reasons:
•He is of an unsound mind and is declared so by the court.
• .•He is insolvent.
•He is in the process of declaring insolvency and his application is pending.
•He has been convicted by a court of any offence (whether or not involving moral turpitude) and has been
imprisoned for at least six months. However, if a person has been convicted of any offence and has served
a period of seven years or more, he shall not be eligible to be appointed as a director in any company.
•If an order has been passed disqualifying him from being appointed as a director by a court or Tribunal.
•He has not paid any calls with respect to any shares of the company held by him, whether alone or jointly
with others, and a period of six months has elapsed from the last day fixed for the payment of the call.
•He has been convicted of offences dealing with related party transactions at any time during the last
preceding five years.
•He has failed to acquire a Director Identification Number.

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 Remedies against Disqualification

Remedies against Disqualification

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT).
He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a Director
does not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the
disqualified person will still continue to be a director for the next seven days. Within this period, he can file
his annual returns to stay the order of disqualification. However, there exists no procedure to reappoint a
disqualified director. He can only be reappointed after a period of five years has elapsed from the date of
disqualification.

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 Board Committees

COMMITTEES MANDATORILY TO BE CONSTITUTED UNDER THE COMPANIES ACT, 2013

In addition to the Audit Committee, the New Act has also mandated the constitution of three
additional board committees for all listed companies and such other classes of companies
prescribed in the Rules.
• The Nomination and Remuneration Committee is expected to ensure among other things that
remuneration arrangements support the strategic goals of the business and more importantly to
conduct performance evaluation of every director.
• The Corporate Social Responsibility Committee would formulate the Corporate Social
Responsibility policy of the company, recommend the expenditure that can be incurred for this
purpose and monitor such policy of the company from time to time.
• The Stakeholders Relationship Committee would help resolve the grievances of the security
holders of the company.

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 AUDIT COMMITTEE BOARD COMMITTEES

AUDIT COMMITTEE BOARD COMMITTEES –

A HAND BOOK Audit Committee is one of the main pillars of the corporate governance mechanism in
any company. Charged with the principal oversight of financial reporting and disclosure, the Audit
Committee aims to enhance the confidence in the integrity of the company’s financial reporting, the
internal control processes and procedures and the risk management systems.
Under the Companies Act, 1956, every public company in India having paid-up capital of not less
than rupees five crores was required to constitute an Audit Committee under Section 292A The
Clause 49 of the Listing Agreement , applicable only to the listed companies, requires all listed
companies to duly constitute an Audit Committee with a prescribed set of responsibilities. Under
the Companies Act, 2013(hereinafter called the Act), the Audit Committee’s mandate is significantly
different from what was laid down under Section 292A of the Companies Act 1956, and its scope
and constitution have also been broadened. The Act mandates every listed company and certain
other class or classes of companies to constitute an Audit Committee

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 AUDIT COMMITTEE BOARD COMMITTEES

Functions of the Committee BOARD COMMITTEES –

A HAND BOOK Section 177(4) of the Act provides that every Audit Committee shall act in
accordance with the terms of reference specified in writing by the Board. Terms of reference
as prescribed by the board shall inter alia, include,
(a) the recommendation for appointment, remuneration and terms of appointment of auditors of
the company;
(b) review and monitor the auditor’s independence and performance, and effectiveness of
audit process;
(c) examination of the financial statement and the auditors’ report thereon;
(d) approval or any subsequent modification of transactions of the company with related
parties;
(e) scrutiny of inter-corporate loans and investments;
(f) valuation of undertakings or assets of the company, wherever it is necessary;
(g) evaluation of internal financial controls and risk management systems;
(h) monitoring the end use of funds raised through public offers and related matters.

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 Risk Management Committee

• In addition to the requirement of the Companies Act 2013 as well as the revised clause 49 that the audit committee
will evaluate of internal financial controls and risk management systems, the revised Clause 49 of the Listing Agreement
also requires that the company through its Board of Directors shall constitute a Risk Management Committee. The majority
of the Risk Management Committee shall consist of members of the Board of Directors. Senior executives of the company
may be members of the said committee but the chairman of the committee shall be a member of the Board of Directors.
The Board shall be responsible for farming, implementing and monitoring the risk management plan for the company.
Further, the Board shall define the roles and responsibilities 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.

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 NOMINATION AND REMUNERATION COMMITTEE

Applicability
As per section 178 of the Act read with rule 6 of the Companies (Meetings of the Board and its
Powers) Rules, 2014, the Board of directors of every listed company and the following classes
of companies are required to constitute a Nomination and Remuneration Committee of the
Board
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or BOARD COMMITTEES –
borrowings or debentures or deposits exceeding fifty crore rupees or more. The paid up
share capital or turnover or outstanding loans, or borrowings or debentures or deposits,
as the case may be, as existing on the last audited financial statement shall be taken
into account for the above purpose.

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 NOMINATION AND REMUNERATION COMMITTEE

Functions:
Sub- sections (2), (3) and (4) of section 178 deal specifically with the functions of the Committee. The
Nomination and Remuneration Committee shall:
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. While formulating the policy, the Committee shall consider the
following:
(a) the level and composition of remuneration is reasonableand 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.
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 STAKEHOLDER RELATIONSHIP COMMITTEE

Applicability
Sub-Section(5) of section 178 provides that the Board of Directors of a company which consists of
more than one thousand shareholders, debenture-holders, deposit-holders and any other security
holders at any time during a financial year shall constitute a Stakeholders Relationship Committee.
Functions
The main function of the committee is to consider and resolve the grievances of security holders of
the company. On similar terms revised clause 49 of the listing agreement provides that a committee
under the Chairmanship of a non-executive director and such other members as may be decided by
the Board of the company shall be formed to specifically look into the redressal of grievances of
shareholders, debenture holders and other security holders. The grievances of the security holders of the
company may include complaints related to transfer of shares, non-receipt of balance sheet, non-receipt
of declared dividends, which shall be handled by this committee.

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 CORPORATE SOCIAL RESPONSIBILITY COMMITTEE

Applicability
Sec 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014,
mandates every company (which may include a holding company or a subsidiary company) having:
(a) net worth of rupees five hundred crore or more, or;
(b) turnover of rupees one thousand crore or more or;
(c) a net profit of rupees five crore or more

during any financial year to constitute a Corporate Social Responsibility (CSR) Committee of the
Board.
Any financial year has been clarified as to imply any of the three preceding financial years.
Further a foreign company defined under clause (42) of section 2 of the Act having its branch office
or project office in India which fulfills the criteria specified above is required to comply with the
provisions of section 135 of the Act and the rules made thereunder. The net worth, turnover or net
profit of a foreign Company for the purpose of this section, shall be computed in accordance with
balance sheet and profit and loss account of such company in respect of its Indian business
operations.

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 CORPORATE SOCIAL RESPONSIBILITY COMMITTEE

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

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 Corporate Governance Framework In India

The Organisation for Economic Cooperation and Development (OECD), which, in 1999,
published its Principles of Corporate Governance gives a very comprehensive definition of
corporate governance, as under:

"a set of relationships between a company's management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through which the objectives of
the company are set, and the means of attaining those objectives and monitoring performance
are determined. Good corporate governance should provide proper incentives for the board and
management to pursue objectives that are in the interests of the company and shareholders,
and should facilitate effective monitoring, thereby encouraging firms to use recourses more
efficiently."

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 Corporate Governance Framework In India

Generally, Corporate Governance refers to practices by which organisations are controlled, directed and
governed. The fundamental concern of Corporate Governance is to ensure the conditions whereby
organisation's directors and managers act in the interest of the organisation and its stakeholders and to
ensure the means by which managers are held accountable to capital providers for the use of assets. To
achieve the objectives of ensuring fair corporate governance, the Government of India has put in place a
statutory framework.

Regulatory framework on corporate governance

The Indian statutory framework has, by and large, been in consonance with the international best practices
of corporate governance. Broadly speaking, the corporate governance mechanism for companies in India is
enumerated in the following enactments/ regulations/ guidelines/ listing agreement:

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 Corporate Governance Framework In India

• 1. The Companies Act, 2013 inter alia contains provisions relating to board constitution, board meetings,
board processes, independent directors, general meetings, audit committees, related party transactions,
disclosure requirements in financial statements, etc.
• 2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory authority having jurisdiction
over listed companies and which issues regulations, rules and guidelines to companies to ensure protection
of investors.
• 3. Standard Listing Agreement of Stock Exchanges: For companies whose shares are listed on the stock
exchanges.
• 4. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): ICAI is an
autonomous body, which issues accounting standards providing guidelines for disclosures of financial
information. Section 129 of the New Companies Act inter alia provides that the financial statements shall
give a true and fair view of the state of affairs of the company or companies, comply with the accounting
standards notified under s 133 of the New Companies 

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 Corporate Governance Framework In India

5. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI): ICSI is an

autonomous body, which issues secretarial standards in terms of the provisions of the New Companies Act.
So far, the ICSI has issued Secretarial Standard on "Meetings of the Board of Directors" (SS-1) and
Secretarial Standards on "General Meetings" (SS-2). These Secretarial Standards have come into force w.e.f.
July 1, 2015. Section 118(10) of the New Companies Act provide that every company (other than one
person company) shall observe Secretarial Standards specified as such by the ICSI with respect to general
and board meetings.

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 The Companies Act, 2013

The Government of India has recently notified Companies Act, 2013 ("New Companies Act"), which replaces the erstwhile
Companies Act, 1956. The New Act has greater emphasis on corporate governance through the board and board
processes. The New Act covers corporate governance through its following provisions:
•New Companies Act introduces significant changes to the composition of the boards of directors.
•Every company is required to appoint 1 (one) resident director on its board.
•Nominee directors shall no longer be treated as independent directors.
•Listed companies and specified classes of public companies are required to appoint independent directors and women
directors on their boards.
•New Companies Act for the first time codifies the duties of directors.
•Listed companies and certain other public companies shall be required to appoint at least 1 (one) woman director on its
board.
•New Companies Act mandates following committees to be constituted by the board for prescribed class of companies:

• Audit committee
• Nomination and remuneration committee
• Stakeholders relationship committee
• Corporate social responsibility committee

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 Clause 49

SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it with New Companies Act.
Clause 49 of the Listing Agreement can be said to be a bold initiative towards strengthening corporate governance
amongst the listed companies. This Clause intends to put a check over the activities of companies in order to save the
interest of the shareholders. Broadly, cl 49 provides for the following:
1. Board of Directors
• The Board of Directors shall comprise of such number of minimum independent directors, as prescribed. In case
where the Chairman of the Board is a non-executive director, at least one-third of the Board shall comprise of
independent directors and where the Chairman of the Board is an executive director, at least half of the Board shall
comprise of independent directors. A relative of a promoter or an executive director shall not be regarded as an
independent director.
2. Audit Committee
• The Audit Committee to be set up shall comprise of minimum three directors as members, two-thirds of which
shall be independent.
3. Disclosure Requirements
• Periodical disclosures relating to the financial and commercial transactions, remuneration of directors, etc, to
ensure transparency.
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 Clause 49

4. CEO/ CFO Certification

• To certify to the Board that they have reviewed the financial statements and the same are fair and in
compliance with the laws/ regulations and accept responsibility for internal control systems.
5. Report and Compliance
• A separate section in the annual report on compliance with Corporate Governance, quarterly compliance
report to stock exchange signed by the compliance officer or CEO, company to disclose compliance with
non-mandatory requirements in annual reports.

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 challenges in corporate governance

ten issues affecting corporate governance practices in India.

•Getting the Board Right. ...
•Performance Evaluation of Directors. ...
•True Independence of Directors. ...
•Removal of Independent Directors. ...
•Accountability to Stakeholders. ...
•Executive Compensation. ...
•Founders' Control and Succession Planning. ...
•Risk Management.

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 MCQS

• External audit of the accounts of a limited company is required?

a) Because it is demanded by the company’s bankers
b) By the companies act 2006
c) At the discretion of the shareholders
d) To detect fraud

• Directors responsibilities are unlikely to include

a) a duty to keep proper accounting records
b) a fiduciary duty
c) a duty to propose high dividends for shareholders
d) a duty of care

• A company may become insolvent if it

a) makes a loss
b) has negative working capital
c) cannot meet its budgeted level of profit
d)cannot pay creditors in full after realisation of its assets
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 MCQS

• A director of a limited company may not be liable for wrongful trading if he or she
a) increased the valuation of its inventories to cover any potential shortfall
b) brought in some expected sales from next year in to the current year
c) took every step to minimise the potential loss to creditors
d) introduce into the balance sheet an asset based on a valuation of its brands sufficient to meet
any shortfall

• Disqualification of directors may result from breaches under the

a) Health and Safety Act
b) Financial Services Act
c) Sale of Goods Act
d)Companies Act

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 Expected questions

• List the points to be included while appointing the directors.

• Define the different types of committees and explain any one of them.
• What is a procedure for appointing a director?
• In what circumstances a director can get removed?
• What is a difference between director’s duties and his powers and responsibilities?
• What are the powers of a director of any organisation?
• Define companies act.

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 Course Objective

https://www.scu.edu/ethics/focus-areas/business-ethics/resources/the-role-of-the-corporate-board
-in-ethics/
https://www.youtube.com/watch?v=RV8_EXPtvLE&t=75s
https://www.youtube.com/watch?v=IMXPmVlB7jw
https://www.youtube.com/watch?v=AmwI0QrqQAE

SHRUTI SHARMA CGV&E AMBA0302 Unit 2

30/08/2021
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