Corporate Project Sem V

8/11/2019 Corporate Project Sem V

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CORPORATE GOVERNANCE AND THE

COMPANIES ACT ACT,2013

SUBMITTED TO : SHYAMTANU PAL

SUBMITTED BY SARA PARVEEN

SEMESTER V

ROLL NO 130

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR


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TABLE OF CONTENTS

1.Acknowledgement..03

2.

Research Methodology

3.Corporate governance.

4.The principles of Corporate Governance.07

5.Objectives..07

6. Importance of corporate governance.08

7.Evolution of Corporate Governance in India.08

8.

Companies Act, 2013.14

9.Key chances in Companies Act, 201314

10. Corporate governance provisions in Companies Act,2013.23

11. Conclusion ..25

12. Bibliography.26


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ACKNOWLEDGEMENT

At the outset, I would like to express my heartfelt gratitude and thank my teacher,

Mr. Shyamtanu Paul for putting his trust in me and giving me a project topic likethis and for having the faith in me to deliver it to the best. Sir, thank you for an

opportunity to help me grow.

My gratitude also goes out to the staff and administration of HNLU for the

infrastructure in the form of our library and IT Lab that was a source of great help

for the completion of this project.

Sara Parveen

(Semester Five)


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RESEARCH METHODOLOGY

This Doctrinal research is descriptive and analytical in nature. Secondary and

Electronic resources have been largely used to gather information and data aboutthe topic.

Books and other reference as guided by Faculty have been primarily helpful in

giving this project a firm structure. Websites, dictionaries and articles have also

been referred.

Footnotes have been provided wherever needed, to acknowledge the source.


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CORPORATE GOVERNANCE

Corporate governance refers to the set of systems, principles and processes by which a company

is governed. They provide the guidelines as to how the company can be directed or controlled

such that it can fulfil its goals and objectives in a manner that adds to the value of the company

and is also beneficial for all stakeholders in the long term. Stakeholders in this case would

include everyone ranging from the board of directors, management, shareholders to customers,

employees and society. The management of the company hence assumes the role of a trustee for

all the others.1

PRINCIPLES OF CORPORATE GOVERNANCE

Contemporary discussions of corporate governance tend to refer to principles raised in three

documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate

Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury

and OECD reports present general principles around which businesses are expected to operate to

assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is

an attempt by the federal government in the United States to legislate several of the principles

recommended in the Cadbury and OECD reports.Rights and equitable treatment of

shareholders.Organizations should respect the rights of shareholders and help shareholders to

exercise those rights. They can help shareholders exercise their rights by openly and effectively

communicating information and by encouraging shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal, contractual,

social, and market driven obligations to non-shareholder stakeholders, including employees,

investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board:The board needs sufficient relevant skills and

understanding to review and challenge management performance. It also needs adequate size and

appropriate levels of independence and commitment.

1http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-

books-fraud-by-satyam-founder
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Integrity and ethical behavior:Integrity should be a fundamental requirement in choosing

corporate officers and board members. Organizations should develop a code of conduct for their

directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:Organizations should clarify and make publicly known the roles and

responsibilities of board and management to provide stakeholders with a level of accountability.

They should also implement procedures to independently verify and safeguard the integrity of

the company's financial reporting. Disclosure of material matters concerning the organization

should be timely and balanced to ensure that all investors have access to clear, factual

information.2

Corporate governance is based on principles such as conducting the business with all integrity

and fairness, being transparent with regard to all transactions, making all the necessary

disclosures and decisions, complying with all the laws of the land, accountability and

responsibility towards the stakeholders and commitment to conducting business in an ethical

manner. Another point which is highlighted in the SEBI report on corporate governance is the

need for those in control to be able to distinguish between what are personal and corporate funds

while managing a company.

2http://en.wikipedia.org/wiki/Corporate_governance
http://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Corporate_governance


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OBJECTIVES

To study briefly about corporate governance.

To study briefly about the companies act,2013

To study about the provisions of corporate governance in companies act,2013.


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IMPORTANCE OF CORPORATE GOVERNANCE

Fundamentally, there is a level of confidence that is associated with a company that is known to

have good corporate governance. The presence of an active group of independent directors on

the board contributes a great deal towards ensuring confidence in the market. Corporategovernance is known to be one of the criteria that foreign institutional investors are increasingly

depending on when deciding on which companies to invest in. It is also known to have a positive

influence on the share price of the company. Having a clean image on the corporate governance

front could also make it easier for companies to source capital at more reasonable costs.

Unfortunately, corporate governance often becomes the centre of discussion only after the

exposure of a large scam.3

EVOLUTION OF CORPORATE GOVERNANCE IN INDIA

Liberalization and its associated developments, i.e. deregulation, privatization and extensive

financial liberalization, have made effective Corporate Governance very crucial. Cases of frauds,

malpractices can render capital market reforms desultory. Independent and effective corporate

governance reforms are, therefore, necessary in order to restore the credibility of capital market

and to facilitate the flow of investment finance of firms. There are various reforms which were

channelled through a number of different paths with the Securities and Exchange Board of

India(SEBI) playing important roles in it.4

Since the late 1990s, Indian regulators as well as industry representatives and companies have

undertaken significant efforts to overhaul the countrys corporate governance. Thesereform

initiatives have been revived or accelerated following the Satyam scandal of 2009. The current

corporate governance regime in India straddles both voluntary and mandatory requirements: for

listed companies, the vast majority of Clause 49 requirements are mandatory; it remains to be

seen whether some of the more recent voluntary corporate governance measures will become

mandatory for all companies through a comprehensive revision of the Companies Act.

3http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-

books-fraud-by-satyam-founder4http://psrcentre.org/images/extraimages/312018.pdf
http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founderhttp://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founderhttp://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founderhttp://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founderhttp://psrcentre.org/images/extraimages/312018.pdfhttp://psrcentre.org/images/extraimages/312018.pdfhttp://psrcentre.org/images/extraimages/312018.pdfhttp://psrcentre.org/images/extraimages/312018.pdfhttp://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founderhttp://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founder


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Over the past 15 years there has been a sea change in Indian corporate governance. The needs of

Indias expanding economy, including access to foreign direct investment, the increased

presence of institutional investors (both domestic and foreign), and the growing desire of Indian

companies to access global capital markets by being listed on stock exchanges outside of India,

have spurred corporate governance laws.Indias corporate governance reforms were initially

spearheaded by corporate India and quickly became an important component of the work of the

countrys primary capital markets regulatory authority, the Securities Exchange Board of India

(SEBI), and the Beginning in the late 1990s, the Indian government began to undertake a

significant overhaul of the countrys corporate governance system.After lobbying by large firms

and leading industry groups, SEBI in 2000 introduced unprecedented corporate governance

reforms via Clause 49 of the Listing

AGREEMENT OF STOCK EXCHANGES

Indias corporate governance reform efforts did not cease after adoption of Clause 49. In January

2009, the Indian corporate community was rocked by a massive accounting scandal involving

Satyam Computer Services (Satyam), one of Indias largest information technology companies.

The Satyam scandal prompted quick action by the Indian government, including the arrest of

several Satyam insiders and auditors, investigations by the MCA and SEBI, and substitution of

the companys directors with government nominees.As a result of the scandal, Indian regulators

and industry groups have advocated for a number of corporate governance reforms to address

some of the concerns raised by the Satyam scandal. Some of these responses have moved

forward, primarily through introduction of voluntary guidelines by both public and private

institutions. However, corporate governance measures through comprehensive revision of the

Companies Act (1956) have yet to be enacted.This report briefly outlines the process undertaken

to reform Indias corporate governance laws. It also provides an overview of Clause 49, the

pending corporate governance-related provisions in the Companies Bill (2009), and the MCAs

Corporate Governance Voluntary Guidelines(2009)

.


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THE FIRST PHASE OF INDIAS CORPORATE GOVERNANCE

REFORMS: 1996-2008

Indias corporate governance reform efforts were initiated by corporate industry groups, many of

which were instrumental in advocating for and drafting corporate governance guidelines.

Following vigorous advocacy by industry groups, SEBI proceeded to adopt considerable

corporate governance reforms. The first phase of Indias corporategovernance reforms were

aimed at making boards and audit committees more independent, powerful and focused

monitors of management as well as aiding shareholders, including institutional and foreign

investors, in monitoring management. These reform efforts were channeled through a number of

different paths with both SEBI and the MCA playing important roles.

The role of industry Indias first major corporate governance reform proposal was launched by

the Confederation of Indian Industry (CII), Indias largest industry and business association. In

1996, the CII formed a task force to develop a corporate governance code for Indian companies.

Desirable Corporate Governance: A Code (CII Code) for listed companies was proposed by the

CII in April 1998.

The CII Code contained detailed governance provisions related to listed companies, although it

was voluntarily adopted by only a few companies and did not result in a broad overhaul ofgovernance norms and practices by Indian companies.SEBI-appointed committees and the

adoption of Clause 49 Shortly after introduction of the CII Code, SEBI appointed the Committee

on Corporate Governance (the Birla Committee). In 1999, the Birla Committee submitted a

report to SEBI to promote and raise the standard of Corporate Governance for listed

companies.

The Birla Committees recommendations were primarily focused on two fundamental goals

improving the function and structure of company boards and increasing disclosure to

shareholders. With respect to company boards, the committee made specific recommendations

regarding board representation and independence that have persisted to date in Clause 49. The

committee also recognized the importance of audit committees and made many specific

recommendations regarding the function and constitution of board audit committees.


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The Birla Committee also made several recommendations regarding disclosure and transparency

issues, in particular with respect to information provided to shareholders. Among other

recommendations, the Birla Committee stated that a companys annual report to shareholders

should contain a Management Discussion and Analysis (MD&A) section, and that companies

should transmit certain information, such as quarterly reports and analyst presentations, to

shareholders. SEBI implemented the Birla Committees proposals less than five months later, in

February 2000. At that time, SEBI revised its Listing Agreement to incorporate the

recommendations of the countrys new code on corporate governance. These rulescontained in

Clause 49, a new section of the Listing Agreementtook effect in phases between 2000 and

2003. The reforms applied first to newlylisted and large companies, then to smaller companies,

and eventually to the vast majority of listed companies.In the wake of the Enron scandal and the

adoption of the Sarbanes-Oxley Act in the United States, SEBI formed the Narayana Murthy

Committee in order to evaluate the adequacy of the then-existing Clause 49, to further enhance

the transparency and integrity of Indias stock markets and to ensure compliance with corporate

governance codes, in substance and not merely in form.The Murthy Committee stated that

recent corporate governance failures, particularly in the United States, combined with the

observations of Indias stock exchanges that compliance with Clause 49 up to that point had been

uneven, compelled the Committee to recommend further reform.Like the Birla Committee, the

Murthy Committee examined a range of corporate governance issues relating to boards and audit

committees, as well as disclosure to shareholders. The committee focused heavily on the role and

structure of corporate boards and strengthened the director independence definition in the then-

existing Clause 49,particularly to address the role of insiders. For example, while the new

definition actually encompassed the old, it also indicated, among other things, that the director

cannot be related to promoters or management at the board level, or one below the board; an

executive of the company in the preceding three years; a supplier, service provider, or customer

of the company; or a shareholder owning 2 percent or more of the company. The Murthy

Committee also recommended that nominee directors (i.e., directors nominated by institutions,

particularly financial institutions, with relationships with the company) be excluded from the

definition of independent director, and be subject to the same responsibilities and liabilities

applicable to any other director. In order to improve the function of boards, the Murthy


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Committee recommended that board members should also receive training in the companys

business model and quarterly reports on business risk and risk management strategies.

The Murthy Committee paid particular attention to the role and responsibilities of audit

committees. It recommended that audit committees be composed of financially literate

members,provided a greater role for the audit committee,and stated that whistleblowers should

have access to the audit committee without first having to inform their supervisors. Further, the

committee required that companies should annually affirm that they have not denied access to

the audit committee or unfairly treated whistleblowers generally.In 2004, SEBI further amended

Clause 49 in response to the Murthy Committees recommendations.

However, implementation of these changes was delayed until January 1, 2006 due primarily to

industry resistance and lack of preparedness to accept such wide-ranging reforms. While there

were many changes to Clause 49 as a result of the Murthy Report, governance requirements with

respect to corporate boards, audit committees, shareholder disclosure, and CEO/CFO

certification of internal controls constituted the largest transformation of the governance and

disclosure standards of Indian companies.

Clause 49, as currently in effect, includes the following key

requirements:

Board Independence Boards of directors of listed companies musthave a minimum number of

independent directors. Where the Chairman is an executive or a promoter or related to a

promoter or a senior official, then at least one-half the board should comprise independent

directors; in other cases, independent directors should constitute at least one-third of the board

size.

Audit Committees Listed companies must have audit committees of the board with a minimum

of three directors, two-thirds of whom must be independent; in addition, the roles and

responsibilities of the audit committee are specified in detail.

Disclosure Listed companies must periodically make various disclosures regarding financial

and other matters to ensure transparency.


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CEO/CFO certification of internal controls The CEO and CFO of listed companies must (a)

certify that the financial statements are fair and (b) accept responsibility for internal

controls.

Annual Reports Annual reports of listed companies must carry status reports about compliance

with corporate governance norms.

THE SECOND PHASE OF REFORM: AFTER 2008

Corporate Governance After Satyam Indias corporate community experienced a significant

shock in January 2009 with damaging revelations about board failure and colossal fraud in the

financials of Satyam. The Satyam scandal also served as a catalyst for the Indian government to

rethink the corporate governance, disclosure, accountability and enforcement mechanisms in

place.As described below, Indian regulators and industry groups have advocated for a number of

corporate governance reforms to address some of the concerns raised by the Satyam

scandal.Industry response Shortly after news of the scandal broke, the CII began examining the

corporate governance issues arising out of the Satyam scandal. Other industry groups also

formed corporate governance and ethics committees to study the impact and lessons of the

scandal. In late 2009, a CII task force put forth corporate governance reform recommendations.

In its report the CII emphasized the unique nature of the Satyam scandal, noting that Satyam isa one-off incident . . . The overwhelming majority of corporate India is well run, well regulated

and does business in a sound and legal manner.

In addition to the CII, the National Association of Software and Services Companies

(NASSCOM, selfdescribed as the premier trade body and the chamber of commerce of the IT-

BPO industries in India)also formed a Corporate Governance and Ethics Committee, chaired by

N. R. Narayana Murthy, one of the founders of Infosys and a leading figure in Indian corporate

governance reforms. The Committee issued its recommendations in mid-2010, focusing onstakeholders in the company. The report emphasizes recommendations related to the audit

committee and a whistleblower policy. The report also addresses improving shareholder rights.

The Institute of Company Secretaries of India (ICSI) has also put forth a series of corporate

governance recommendations.Government response Satyam prompted quick action by both

SEBI and the MCA.


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COMPANIES ACT,2013

Companies Act, 2013is an Act of theParliament of Indiawhich regulates incorporation of a

company, responsibilities of a company, directors, dissolution of a company. The 2013 Act is

divided into 29 chapters containing 470 clauses as against 658 Sections in the Companies Act,

1956 and has 7 schedu5les.

[1]The Act has replacedThe Companies Act, 1956(in a partial

manner) after receiving the assent of thePresident of Indiaon 29 August 2013. The Act came

into force on 12 September 2013 with few changes like earlier private companies maximum

number of member was 50 and now it will be 200.a new term of one person company is included

in this act that will be a private company and with only 98 provisions of the Act notified.[2][3]

On

27 February 2014, the MCA stated that Section 135 of the Act which deals with corporate social

responsibility will come into effect from 1 April 2014. On 26 March 2014, the MCA stated thatanother 183 sections will be notified from 1 April 2014.

KEY CHANGES INTRODUCED BY CA 2013

I. BOARD COMPOSITION

CA 2013 has introduced significant changes in the composition of the board of directors of a

company. The key changes introduced are set out below:

NUMBER OF DIRECTORS: The following key changes have been introduced regarding

composition of the board:

A one person company shall have a minimum of 1 (one) director;

CA 1956 permitted a company to determine the maximum number of directors on its board by

way of its articles of association. CA 2013, however, specifically provides that a company may

have a maximum of 15 (fifteen) directors.

CA 1956 required public companies to obtain Central Government's approval for increasing the

number of its directors above the limit prescribed in its articles or if such increase would lead to

5http://en.wikipedia.org/wiki/Companies_Act_2013
http://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-1http://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-1http://en.wikipedia.org/wiki/The_Companies_Act,_1956http://en.wikipedia.org/wiki/The_Companies_Act,_1956http://en.wikipedia.org/wiki/The_Companies_Act,_1956http://en.wikipedia.org/wiki/President_of_Indiahttp://en.wikipedia.org/wiki/President_of_Indiahttp://en.wikipedia.org/wiki/President_of_Indiahttp://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-2http://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-2http://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-2http://en.wikipedia.org/wiki/Companies_Act_2013http://en.wikipedia.org/wiki/Companies_Act_2013http://en.wikipedia.org/wiki/Companies_Act_2013http://en.wikipedia.org/wiki/Companies_Act_2013http://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-2http://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-2http://en.wikipedia.org/wiki/President_of_Indiahttp://en.wikipedia.org/wiki/The_Companies_Act,_1956http://en.wikipedia.org/wiki/Companies_Act_2013#cite_note-1http://en.wikipedia.org/wiki/Parliament_of_India


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the total number of directors on the board exceeding 12 (twelve) directors. CA 2013 however,

permits every company to appoint directors above the prescribed limit of 15 (fifteen) by

authorizing such increase through a special resolution.

Key takeaway: Allowing companies to increase the maximum number of directors on their

boards by way of a special resolution would ensure greater flexibility to companies.

RESIDENT DIRECTOR: CA 2013 introduces the requirement of appointing a resident director,

i.e., a person who has stayed in India for a total period of not less than 182 (one hundred and

eighty two) days in the previous calendar year.

Key Takeaway: The requirement to have a resident director on the board of companies has been

viewed as a move to ensure that boards of Indian companies do not comprise entirely of non-

resident directors. This provision has caused significant difficulties to companies, since it has

been brought into force with immediate effect, requiring companies to restructure their boards

immediately to ensure compliance with CA 2013.

I NDEPENDENT DIRECTORS

CA 1956 did not require companies to appoint an independent director on its board. Provisions

related to independent directors were set out in Clause 49 of the Listing Agreement ("Listing

Agreement").

Number of independent directors: As per the Listing Agreement, only listed companies were

required to appoint independent directors. The number of independent directors on the board of a

listed company was required to be equal to (i) one third of the board, where the chairman of the

board is a non-executive director; or (ii) one half of the board, where the chairman is an

executive director. However, under CA 2013, the following companies are required to appoint

independent directors:

Publ ic l isted company: At least one third of the board to be comprised of independent directors;

andCertain specified companies that meet the criteria listed below are required to have at least 2

(two) independent directors:


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Public companies which have paid up share capital of INR 100,000,000 (Rupees one hundred

million only);

Public companies which have a turnover of 1,000,000,000 (Rupees one billion only); and

Public companies which have, in the aggregate, outstanding loans, debentures and deposits

exceeding INR 500,000,000 (Rupees five hundred million only)

Qualifi cation cri teri a:CA 2013 prescribes detailed qualifications for the appointment of an

independent director on the board of a company. Some important qualifications include:

he / she should be a person of integrity, relevant expertise and experience;

he / she is not or was not a promoter of, or related to the promoter or director of the company or

its holding, subsidiary or associate company;

he / she has or had no pecuniary relationship with the company, its holding, subsidiary or

associate company, or their promoters, or directors during the 2 (two) immediately preceding

financial years or during the current financial year;

a person, none of whose relatives have or had pecuniary relationship or transaction with the

company, its holding, subsidiary or associate company, or their promoters, or directors

amounting to 2 (two) percent or more of its gross turnover or total income or INR 5,000,000

(Rupees five million only), whichever is lower, during the 2 (two) immediately preceding

financial years or during the current financial year.

CA 2013 also sets forth stringent provisions with respect to the relatives of the independent

director.

Key Takeaways: It is evident from provisions of CA 2013 that much emphasis has been placed

on ensuring greater independence of independent directors. The overall intent behind these

provisions is to ensure that an independent director has no pecuniary relationship with, nor is he

provided any incentives (other than the sitting fee for board meetings) by it in any manner, which

may compromise his / her independence. In view of the additional criteria prescribed in CA


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2013, many listed companies may need to revisit the criteria used in appointing their independent

directors.

Observations:CA 2013 proposes to significantly escalate the independence requirements of

independent directors, when compared to the Listing Agreement:

The CA 2013 requires an independent director to be a person of integrity, relevant expertise and

experience; it fails to elaborate on the requisite standards for determining whether a person meets

such criteria. Companies (acting through their respective nomination and remuneration

committees) would be able to exercise their own judgment in the appointment of independent

directors, diluting the "independence" criteria.

Duties of independent dir ectors: Neither the Listing Agreement nor the CA 1956 prescribed the

scope of duties of independent directors. CA 2013 includes a guide to professional conduct for

independent directors, which crystallizes the role of independent directors by prescribing

facilitative roles, such as offering independent judgment on issues of strategy, performance and

key appointments, and taking an objective view on performance evaluation of the board.

Independent directors are additionally required to satisfy themselves on the integrity of financial

information, to balance the conflicting interests of all stakeholders and, in particular, to protect

the rights of the minority shareholders. The SEBI Circular however, states that the board isrequired to lay down a code of conduct which would incorporate the duties of independent

directors as set out in CA 2013.

Key Takeaways: CA 2013 imposes significantly onerous duties on independent directors, with a

view to ensuring enhanced management and administration. While a list of specific duties has

been introduced under CA 2013, it should by no means be considered to be exhaustive.

Independent directors are unlikely to be exempt from liability merely because they have fulfilled

the duties specified in CA 2013, and should be prudent and carry out all duties required for

effective functioning of the company.

L iabi li ty of independent dir ectors


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Under CA 1956, independent directors were not considered to be "officers in default" and

consequently were not liable for the actions of the board. CA 2013 however, provides that the

liability of independent directors would be limited to acts of omission or commission by a

company which occurred with their knowledge, attributable through board processes, and with

their consent and connivance or where they have not acted diligently.

Key Takeaways: CA 2013 proposes to empower independent directors with a view to increase

accountability and transparency. Further, it seeks to hold independent directors liable for acts or

omissions or commission by a company that occurred with their knowledge and attributable

through board processes. While CA 2013 introduces these provisions with a view of increase

accountability in the board this may discourage a lot of persons who could potentially have been

appointed as independent directors from accepting such a position as they would be exposed togreater liabilities while having very limited control over the board.

Positi on of Nominee Di rectors

While the Listing Agreement stated that the nominee directors appointed by an institution that

has invested in or lent to the company are deemed to be independent directors, CA 2013 states

that a nominee director cannot be an independent director. However, the SEBI Circular in line

with the provisions of CA 2013 has excluded nominee directors from being considered asindependent directors.

CA 2013 defines nominee director as a director nominated by any financial institution in

pursuance of the provisions of any law for the time being in force, or of any agreement, or

appointed by the Government or any other person to represent its interests.

Key Takeaways:The concept of independent director was introduced as part of the CA 2013

with a view to bring in independent judgement on the board. A director, once appointed, has to

serve the interest of the shareholders as a whole. Directors appointed by private equity investors

shall also be covered under the definition of nominee directors, and would no longer be eligible

for appointment as independent directors.

Woman Di rector


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Listed companies and certain other public companies shall be required to appoint atleast 1 (one)

woman director on its board.

Companies incorporated under CA 2013 shall be required to comply with this provision within 6

(six) months from date of incorporation. In case of companies incorporated under CA 1956,

companies are required to comply with the provision within a period of 1 (one) year from the

commencement of the act.

Key Takeaway: While the mandatory requirement for appointment of women directors is

expected to bring diversity on to the boards, companies may find it difficult to be in compliance

with CA 2013 unless they have already identified or internally groomed women candidates that

are qualified to be appointed to the board.

DUTIES OF DIRECTORS

CA 1956 did not contain any provisions that specifically identified the duties of directors. CA

2013 has set out the following duties of directors:

To act in accordance with company's articles;

To act in good faith to promote the objects of the company for benefit of the members as awhole, and the best interest of the company, its employees, shareholders, community and for

protection of the environment;

Exercise duties with reasonable care, skill and diligence, and exercise of independent judgment;

The director is not permitted to: Be involved in a situation in which he may have direct or

indirect interest that conflicts, or may conflict, with the interest of the company and achieve or

attempt to achieve any undue gain or advantage, either to himself or his relatives, partners orassociates.

Key Takeaways: CA 2013 seeks to bring about greater standards of corporate governance, by

imposing higher duties and liabilities for directors. While the act sets out specific duties, it does

not clarify whether the duties of directors listed therein are exhaustive. Therefore, it would be


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prudent for directors to comply with all duties required for the effective functioning of the

company and not be merely be directed by the specified duties which are at best very broadly

phrased principles that should guide their behavior.

Further, every director should take care to ensure that it acts in the best interested of all the

shareholders as a whole. These provisions become particularly significant in case of nominee

directors appointed by private equity investors, who have been known to represent the interests

of the investors appointing them in direct contravention of their duties to the shareholders as a

whole.

II. COMMITTEES OF THE BOARD

CA 2013 envisages 4 (four) types of committees to be constituted by the board:

AUDIT COMM ITTEE: Under CA 1956, public companies with a paid up capital in excess of

INR 50,000,000 (Rupees fifty million only) were required to set up an audit committee

comprising of not less than 3 (three) directors. Atleast one third had to be comprised of directors

other than Managing Directors or Whole Time Directors. CA 2013 however, requires the board

of every listed company and certain other public companies to constitute the audit committee

consisting of a minimum of 3 (three) directors, with the independent directors forming a

majority. It prescribes that a majority of members, including its Chairman, have to be persons

with the ability to read and understand financial statements. The audit committee has been

entrusted with the task of providing recommendations for appointment and remuneration of

auditors, review of independence of auditors, providing approval of related party transactions

and scrutiny over other financial mechanisms of the company.

NOMINATION AND REMUNERATION COMM ITTEE: While CA 1956 did not require

companies to set up nomination and remuneration committee, the Listing Agreement provided

companies with the option to constitute a remuneration committee. However, CA 2013 requires

the board of every listed company to constitute the Nomination and Remuneration Committee

consisting of 3 (three) or more non-executive directors out of which not less than one half are

required to be independent directors. The committee has the task of identifying persons who are


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qualified to become directors and provide recommendations to the board regarding their

appointment and removal, as well as carry out their performance evaluation.

STAKEHOLDERS RELATI ONSHIP COMMITTEE: CA 1956 did not require a company to

set up a stakeholder's relationship committee. The Listing Agreement required listed companies

to set up a shareholders / investors grievance committee to examine complaints and issues of

shareholders. CA 2013 requires every company having more than 1000 (one thousand)

shareholders, debenture holders, deposit holders and any other security holders at any time

during a financial year to constitute a stakeholders relationship committee to resolve the

grievances of security holders of the company.CORPORATE SOCIAL RESPONSIBILITY

COMMITTEE ("CSR Committee"): CA 1956 did not impose any requirement on companies

relating to corporate social responsibility ("CSR"). CA 2013 however, requires certaincompanies to constitute a CSR Committee, which would be responsible to devise, recommend

and monitor CSR initiatives of the company. The committee is also required to prepare a report

detailing the CSR activities undertaken and if not, the reasons for failure to comply.

Key Takeaways: CA 2013 sets out an advanced framework for board functioning by division of

core board functions and their delegation to committees of the board. While the audit committee

and the nomination and remuneration committee provide the back end infrastructure for boards,

the stakeholder's relationship committee and CSR Committee have been entrusted with the task

of interaction with key stakeholders. Irrespective of their function, each of the committees would

act as a "check and balance" on the powers of the board, by ensuring greater transparency and

accountability in its functioning.

III. BOARD MEETINGS AND PROCESSES

The key changes introduced by CA 2013 with respect to board meetings and processes are as

under:

First board meeting of a company to be held within 30 (thirty) days of incorporation;

Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board

meetings may be given by electronic means. However, board meetings may be called at shorter


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notice to transact "urgent business" provided such meetings are either attended by at least 1 (one)

independent director or decisions taken at such meetings on subsequent circulation are ratified by

at least 1 (one) independent director.

CA 2013 has permitted directors to participate in board meetings through video conferencing or

other audio visual means which are capable of recording and recognising the participation of

directors. Participation of directors by audio visual means would also be counted towards

quorum.

Requirement for holding board meeting every quarter has been discontinued. Now at least 4

(four) meetings have to be held each year, with a gap of not more than 120 (one hundred and

twenty) days between 2 (two) board meetings.

Certain new actions have been identified, that require approval by directors in a board meeting.

These include issuance of securities, grant of loans, guarantee or security, approval of financial

statement and board's report, diversification of business etc.

Approval of circular resolution will be by a majority of directors or members who are entitled to

vote on the resolution, irrespective of whether they are present in India or otherwise.

Key Takeaways: In the backdrop of global corporate transactions, the changes relating to

participation of directors by audio visual and electronic means are a welcome step, aimed at

keeping pace with technological advancements.


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CORPORATE GOVERNANCE PROVISIONS IN THE

COMPANIES ACT, 2013

The enactment of the companies Act 2013 was major development in corporate governance in2013. The new Act replaces the Companies Act, 1956 and aims to improve corporate governance

standards, simplify regulations and enhance the interests of minority shareholders. The new Act

is a major milestone in the corporate governance sphere in India and is likely to have significant

impact on the governance of companies in the country. Following are the main provisions

related to corporate governance that have been incorporated in the Companies Act, 2013.

i. The Companies Act, 2013 introduces new definitions relating to accounting standards, auditing

standards, financial statement, independent director, interested director, key managerial

personnel, voting right etc. For example, the legislation introduces a new class of companies

called one person company (OPC) to the existing classes of companies, namely public and

private. OPC is a new vehicle for individuals for carrying on a business with limited liability.

ii. Board of Directors (Clause 166): The new Act provides that the company can have a

maximum of directors on the Board; appointing more than 15 directors, however, will require

shareholder approval. Further, the new Act prescribes both academic and professional

qualifications for directors. It states that the majority of members of Audit Committee including

its Chairperson should have the ability to read and understand the financial statements. In

addition, for the first time, duties of directors have been defined in the Act. The Act considerably

enhances the roles and responsibilities of the Board of Directors and makes them more

accountable. Infringement of these provisions has been made punishable with fine.

iii. Independent Director (Clause 149): The concept of independent directors (IDs) has been

introduced for the first time in the Company Law in India. It prescribes that all listed companies

must have at least onethird of the Board as IDs. IDs may be appointed for a term of up to five

consecutive years. While the introduction of the concept of IDs in the new Act is a welcome

move, it does not appear to sufficiently address the enduring challenges related to the

effectiveness of IDs in the context of concentrated shareholding pattern in most of the listed

companies in India.


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iv. Related Party Transactions (RPT) (Clause 188): The new Act requires that no company

should enter into RPT contracts pertaining to(a) sale, purchase or supply of any goods or

materials; (b) sale or dispose of or buying, property of any kind; (c) leasing of property of any

kind; (d) availing or rendering of any services; (e) appointment of any agent for purchase or sale

of goods, materials, services or property; (f) such related party's appointment to any office or

place of profit in the company, its subsidiary company or associate.6

6https://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-

analysis.pdf
https://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdfhttps://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdfhttps://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdfhttps://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdfhttps://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdfhttps://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdf


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CONCLUSION

Since the late 1990s, significant efforts have been taken by Indian regulators, as well as by

Indian industry representatives and companies, to overhaul Indian corporate governance. Not

only have reform measures been put into place prior to discovery of major corporate governance

scandals, but both industry groups and government actors have sprung into action following the

Satyam scandal. The current corporate governance regime in Indian straddles both voluntary and

mandatory requirements. For listed companies, the vast majority of Clause 49 requirements are

mandatory. It remains to be seen whether some of the more recent voluntary corporate

governance measures will become mandatory for all companies through a comprehensive

revision of the Companies Act7

CA 2013 has introduced significant changes regarding the board composition and has a renewed

focus on board processes. Whilst certain of these changes may seem overly prescriptive, a closer

analysis leads to a compelling conclusion that the emphasis is on board processes, which over a

period of time would institutionalize good corporate governance and not make governance over-

dependent on the presence of certain individuals on the board.

7https://www.conference-board.org/retrievefile.cfm?filename=DN-020-101.pdf&type=subsite
https://www.conference-board.org/retrievefile.cfm?filename=DN-020-101.pdf&type=subsitehttps://www.conference-board.org/retrievefile.cfm?filename=DN-020-101.pdf&type=subsitehttps://www.conference-board.org/retrievefile.cfm?filename=DN-020-101.pdf&type=subsitehttps://www.conference-board.org/retrievefile.cfm?filename=DN-020-101.pdf&type=subsite


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