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I gave a lecture at ICSI on GOVERNANCE - Initiative and Accountability. I believe that Corporates are expected to use their Capacity, Knowledge and Resources towards Maximization of stakeholders' value and well-being and progress of humankind. There are four parts of this presentation- 1. Strengthening Board Framework 2. Stakeholder Interest Protection 3. Transparency and Disclosure 4. Impact of Change
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12/28/2013
“Governance
Initiatives
&
Accountability”
“NOWHERE”
Satyam Vada Dharmam Chara
- Taittariya Upanishad
12/28/2013
“Forever speak the truth and follow the dharma”
12/28/2013
Truth : Disclosure of Actual State of Affairs
(Transparency in operations and transactions)
12/28/2013
12/28/2013
Dharma: “ Dharma is for the stability of
society, the maintenance of social order
and the general well being and progress of
humankind.”
-Karan Parva of the Mahabharata. Verse -58 in Chapter 69
12/28/2013
Corporates are also expected to use their
Capacity, Knowledge and Resources
TOWARDS
Dharma
Maximization of stakeholders’ value and well-being and progress of humankind
THROUGH Truth
Transparency, accountability and truthful disclosure of state of affairs
12/28/2013
Part - A
Strengthening Broad Framework
Part - B
Stakeholder Interest Protection
Part - C
Transparency and Disclosure
Part - D
Impact of Change
Outline
12/28/2013
Novelties
Auditing standards
Related party
KMP
Fraud
Special courts &
Conciliation panel
SecretarialAudit
Code for ID’s
Corporate Social Responsibility
Listed Company
Securities
Secretarial Standards
Strengthening Board Framework
12/28/2013
Part - A
12/28/2013
Board of Directors and its Meeting
Audit and Auditors - Sec 143
12/28/2013
Audit and Auditors Sec 141Board Composition
Woman Director
Independent Director (ID)
Resident Director
Small Shareholder
Director
Audit and Auditors - Sec 143Audit and Auditors Sec 141Bird’s eye view to Provisions
Concept of Independent directorintroduced for the first time in Companies Act, 2013
Nomination of Director by memberhas been made Costlier
Candidate failed to be appointedas director by member shall not beappointed as Additional Director
Alternate Director shall be appointedonly if the original director is outof India for not less than 3 months
Resigning Director shall be liablefor the acts done by him duringhis tenure
Rubber Stamp Directors: Absence in meeting for a consecutivePeriod of 12 months shall made his Office vacant.
12/28/2013
Directorship of directors –Section 165
Director in maximum 20 companies including Alternate Directorship
Public Companies or Subsidiaries of Public Companies
Maximum 10
No. of Directorships can be reduced by passing special resolution by members
12/28/2013
12/28/2013
Notice to be sent to all the directors,
through electronic means or others
Board of Directors may participate
through video conferencing
Presence of at least 1 ID required in the
meeting called at shorter notice.
Else decision to be circulated to all the
directors and to be valid only after
ratification by at least one ID
Meeting of Board –Section 173
12/28/2013
Participation in meeting through video
conferencing allowed
Confirmation of accuracy of draft minutes
by every directors who attended meeting
within 7 days of receipt of draft minutes
Matters not to be dealt in meeting through
video conferencing
To approve the annual financial
statements; and
To approve the board’s report
Meeting through Video Conferencing
12/28/2013
Insufficient quorum shall now be not
allowed as a defense for non
compliance with frequency of
Board meeting
Quorum for Board Meeting –Section 174
12/28/2013
Board Meeting where “Interested
Director” ≥ 2/3 of the total strength of
the Board of Directors
Quorum = non interested Directors
present at the meeting, being not less
than 2
Quorum for Board Meeting in case of Interested Director
12/28/2013
New and Mandatory Committees
12/28/2013
In Every Listed Company
Public Company
Paid up capital of INR 100 Crores or
more or;
Deposits / Loans / Debentures
exceeding INR 200 Crores or more
Composition:- Min 3 directors with
majority of ID
Provision of establishment of vigil
mechanism
Audit Committee –Section 177
1 year transition period for constitution /
reconstitution of Audit committee
12/28/2013
In Every Listed Company
Public Company
Paid up capital of INR 100 Crores
or more or;
Deposits / Loans / Debentures
exceeding INR 200 Crores or more Composition:- Min 3 Non executive
directors. ≥ ½ comprising IDs.
Mandate of the Committee:-• Identification of qualified Directors
and senior management personnel
• Performance evaluation of directors
• Recommend to the Board policy for remuneration of Directors, KMPs and other employees
Nomination and Remuneration Committee –Section 178
12/28/2013
In Every Company having more that 1,000 debenture / deposit / security holders.
Composition:- to be decided by BoD. Chairperson to be an NED.
Mandate of the Committee:-• Consider and resolve the
grievances of Securities holders.
Stakeholders Relationship Committee –Section 178
12/28/2013
Appointment and Qualification of Directors
Audit and Auditors - Sec 143
12/28/2013
Audit and Auditors Sec 141Independent Director Sec 149 & 150
Applicability• Every Listed
Company to have at least 1/3 of board consisting of independent directors
• Prescribed classes of unlisted Companies also to have independent directors on its board
Criteria• Criteria for
independence similar to existing clause 49 of LA
• Nominee director not considered as independent
• Independent director to furnish declaration of independence on yearly basis
Term• Can be Appointed for
a term of 5 years in 1st Instance
• Can be re-Appointed for another term of 5 years
• Cooling off period of 3 years for after 2 consecutive terms
Others• No Stock Option • Separate meeting of
ID• Appointment to be
approved at a general meeting with explanatory statement justifying appointment
• Liability only in respect of omission & commission with the knowledge of ID
For the first
time code of
conduct
prescribed for
Independent
Directors
(Schedule IV)
12/28/2013
Enhanced Duties, Responsibilities
To act in accordance with the company’s Articles
To act in good faith in order to promote the objects of the company
Exercise his duties with due and reasonable care, skill and diligence.
Not to have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
Director shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates.
Shall not assign his office and any assignment so made shall be void
Duties of Director –Section 166
12/28/2013
12/28/2013
Powers of Board
12/28/2013
Following powers shall be exercised by
the Board only at their meeting:-
• Issue of Securities – Equity,
Preference, Debentures
• Give guarantee or provide security in
respect of loans
• Approve financial statements and
Director’s report
• To make political contribution
• To fill a casual vacancy in the board
• To commence a new business
• To appoint internal auditor
Matters to be considered only at meeting of the Board
12/28/2013
Restrictions on powers of Board
12/28/2013
Restrictions on powers of Board –Section 180 (Notified)
Restriction for sale of undertaking
applicable to all classes of companies
Term “Undertaking” and “Substantial
Undertaking” has now been defined
Borrowing in excess of the paid –up
capital & free reserves
A special resolution is required to be
passed instead of Ordinary
resolution
12/28/2013
Restrictions on Non-Cash Transactions - Section 192 (Notified)
Director of a company or of its holding/
subsidiary/Associate company or any
connected person can not acquire
assets for consideration other than cash
from the company & vice versa.
Approval at a general meeting is
required
If the Director or connected person is
director of holding company then
approval of holding company in general
meeting is also required
Valuation of the assets by registered
valuer
12/28/2013
Forward dealing in the shares and
debentures of a company, its holding,
subsidiary or associate by Directors
and KMPs is prohibited
Banned contracts include both forward
contracts and option contracts
Securities acquired in violation to be
surrendered to company
Restriction on Directors, KMP and any
order person for indulging in Insider
trading
Communication required in ordinary
course of business or under law
exempted
Prohibition on Forward Dealing / Insider Trading - Section 194 (Notified)
12/28/2013
Appointment and Removal of Managerial Personnel
12/28/2013
Definitions
Key Managerial Personnel -2(51) (Notified)
CEO OR Managing Director
Company Secretary
Whole time Director
CFO
+
+
OR ManagerOR
12/28/2013
Appointment of MD/WTD/Manager - Section 196 & 203
• Now applicable to Private Company also
• Minimum age 21 years (25 years) and maximum
70 years
• Notice of BM/GM – T&C of appointment,
remuneration and other matters to be included
• Consent for appointment to be filed by directors
of private company to the ROC
12/28/2013
• KMP not to hold office in > 1 Company
except in Subsidiary Company at the
same time
KMP can be director with
permission of BOD
• KMP vacancy to be filled up by BOD
within 6 months at BM
• To appoint or remove any key
managerial personnel
Appointment of KMP
When Director fails to attend all Board Meetings for
consecutive period of 12 months. This even when
the leave of absence has been granted
When Director is disqualified by an order of court or
Tribunal under any Act not only the Companies Act.
When all directors have vacated the office:
the promoter shall appoint minimum number of
members
Central Government may appoint Directors till
company makes appointment in General
Meeting
12/28/2013
Vacation of office of directors –Section 167
Stakeholder Interest Protection
12/28/2013
Part - B
12/28/2013
Prospectus & Allotment of Securities
12/28/2013
Public Issues
Liability for Mis-statements
Mis-statement
Untrue Statement
Misleading Statement
Liability
Civil - Sec 34 Criminal -Sec 35
Min 6 mthsMax 10 Yrs
Min Amt InvolvedMax 3x Amt Involved
Compensate those who have suffered loss or damage
Withdrawal of consent after issue but before allotment now not a defense
In case of a fraud every person involved personally liable without limitation of liability
Civil Liability for Mis-statements
12/28/2013
Public Issues
Impersonation – Sec 38 (Notified)
Impersonation
Fictitious Name Multiple Applications
Different Names Different Combination
Consequences:-
• For the first time, provisions introduced for disgorgement of gains made by convicted
• Amount received from disgorgement of gains to be credited to IEPF
12/28/2013
Public Issues
Allotment of Securities – Sec 39 (Partially Notified)
• Return of allotment to be filed for issue of any kind of security
• Power given to SEBI to modify the minimum amount to be paid
on application which shall not be less that 5% of the nominal
amount
• Minimum subscription to be received in 30 days as against
earlier 120 days. Power to SEBI to modify the same
Fraudulent Inducement for Investing money -Sec 36 (N)
• Scope of section extended to obtaining credit facilities
from banks or financial institutions
• The offence made non compoundable
• Stringent punishment prescribed under section 447
12/28/2013
Public Issues
Variation in terms of Contracts or Objects – Sec 27
I want to change the terms of contracts referred to in prospectus
or objects of the Issue ?
Its easy pass a ordinary resolution in
general meeting
Its no longer easy
Approval of
members by Special Resolution
Notice of GM to be
published in newspapers
giving justification for variation
Dissenting Shareholders to be given an exit offer by promoters/ controlling
shareholders
Amount raised in IPO cannot be used for
buying, trading or dealing in equity shares
of another listed Company
Revised Process
12/28/2013
Acceptance of deposits
12/28/2013
Public Deposits – Tougher… Section 73
• All companies can accept deposits only
from members (Directors & their relatives
excluded)
• Prior approval of members required for
accepting deposits
• Deposit to be invited by issue of circular to
members
• Where deposits are unsecured it has to be
specifically quoted in every document
inviting deposit
• All the outstanding deposits on commencement of the Act have to be repaid within 1 year from date of maturity or 1 year from commencement if already matured
Accepting Deposits Repayment
Accepting deposit from public no longer easy. Strict requirements to ensure protection of depositor’s interests
• Only prescribed classes of companies having
net worth of INR100 crore or turnover of INR
500 crore are allowed to raise deposits from
public
• Credit rating of deposits compulsory
• Compulsory creation of charge on the assets
of the company within 30 days of acceptance,
if deposits are secured
Conditions
12/28/2013
Management & Administration
12/28/2013
Quorum of General Meeting – Sec 103 (Notified)
Quorum (Members to be personally
present) in pub co
No. of members on the day of meeting
5 ≤ 1000
15> 1000 ≤ 5000
30 > 5000
3 days notice (either individually or in newspaper), in case of adjournment of GM due to lack of quorum or change in day, time or place of adjourned meeting
Single person not to be proxy for more than 50 members
Proxy cannot vote by show of hands
Member of Private Limited company cannot appoint more than 1 proxy
to attend on same occasion
12/28/2013
Unpaid Dividend & Shares - IEPF
12/28/2013
Unpaid Dividends - Sec 124
Information relating to unclaimed dividends to be uploaded on the website of the company
and CG within 90 days of transfer to unpaid dividend account
Along with the unclaimed amounts, the shares in respect to which they relate are to
transferred to IEPF
The claimants can now apply to IEPF for claiming unpaid amounts/share due/belonging to
them
Shares transferred to IEPF shall not have voting rights- Draft Rules
12/28/2013
Introduction to CSR
Networth ≥ 500 Crs or
Turnover ≥ 1000 Crs or
Net Profits ≥ 5 Crs
CSR Committee to be constituted (3+ Dir incl. at least 1 ID)
Committee shall formulate and recommend CSR policy and amount of expenditure as well as monitor CSR activities (CSR policy on web)
Preference to local areas in which the company operates
Areas specified in Schedule VII
CSR spend of at least 2% of avg. net
profits made during 3 immediately
preceding FYs
COMPLY OR
EXPLAIN
To promote welfare Initiatives
CSR – Sec 135
12/28/2013
• Applicable to all types of companies including private
companies
• Net profits before tax to be considered
• Applicable from F/Y 14-15
• Income tax Act does not provide any deduction so far
• Surplus Income generated out of CSR activities not part of
business profits of company
• No penalty for noncompliance of the provision
CSR – Promoting Welfare Initiatives
12/28/2013
• CSR Activities to be undertaken as projects or programmes
• Excluding activities undertaken in pursuance of the normal
course of business of a company
• In the area nearby the operations of the company
• May implement the same through trust/society set up by
company or otherwise having track record of three years
• Activities to be undertaken within India
• Activities not exclusively for the benefit of employees or their
family members
• Nature of projects/programmes to be covered for eradicating
extreme hunger and Poverty, for promotion of
education…..etc as given in schedule VII
CSR – Promoting Welfare Initiatives
12/28/2013
12/28/2013
Prevention of Oppression and Mismanagement
12/28/2013
Class Action Suit –Section 245
• 100 Members or 10% of the total number of members or depositors
(whichever is less)
Who Can File
• To protect the interest of minority shareholders
Why to File
• Company or its Auditors, Experts, Advisors or Consultants
Against Whom
• NCLT
Where to File
Transparency and Disclosures
12/28/2013
Part - C
12/28/2013
Transparency and Disclosures
12/28/2013
Annual Return – Section 92
Additional information required to be provided in Annual Return
Principal business activity with
particulars of holding, subsidiary and
associate company
Details about other securities issued by
company
Details of Promoters/KMP along
with changes since closure of last FY
Details of meetings of members/class
thereof/BOD/various committee along with
attendance details
Remuneration of Directors and KMP
Details of penalties/punishment
on Co/ directors/ officers/
compounding of offence/ appeals
Details related to certification of
compliance, disclosures, etc
Details of Foreign Institutional Investors if shares held by them
or on their behalf
Such other matters as may be prescribed
Info up to FY closure only
12/28/2013
Return to be filed with Registrar in case Promoter’s stake changes – Sec 93
Listed company to file Return in prescribed form with RoC within 15 days in case of change
in number of shares held by the Promoters or top 10 shareholders
12/28/2013
General Meeting – Sec 100 (Notified)
OPC not required to hold AGM
First AGM to be held within 9 months from
closure of first FY
AGM to be held on between business
hours i.e. 9 AM to 6 PM
Notice of GM may be sent through electronic mode
To be sent to all Directors
21 clear days notice to be given
In case of AGM Shorter notice can be given by consent of 95% of members who are entitled to vote (like for EGM)
Secretarial Standards mandated
Report of AGM, prepared in prescribed manner, to be filed with RoC
12/28/2013
Statement to be annexed with Notice – Sec 102 (Notified)
Explanatory Statement in case of special business to specify
Nature of interest/ concern
RelativesKMPDirector
and Manager
Other Interest
Financial Interest
Liability in case of non-disclosure or insufficient disclosure in Explanatory Statement
Non-disclosure /insufficient disclosure
Promoter KMPDirector
and Manager
ProfitBenefit
Liable to compensate to Company to the extent of such profit/benefit
Explanatory statement to specify shareholding % of Promoters/directors/manager/KMP whose shareholding is not less than 2% of paid up capital, incase the special business transacted is to affect other Company
Default in sending or providing disclosure in explanatory statement shall attract fine extending up to Rs. 50000 or 5 times of profit or benefit, whichever is more
12/28/2013
Accounts of Company
12/28/2013
Consolidation of Accounts – Sec 129
Subsidiary to include associates and joint ventures
Mandatory consolidation of accounts in case of subsidiary, Associate and Joint Venture
Every company to place separate audited accounts for each subsidiary on its website, if any
12/28/2013
Audit and Auditors
12/28/2013
Definitions
Financial Statement – Section 2(40) (Notified)
Balance Sheet
Includes
explanatory notes
Profit & Loss Account
CashflowStatement
Statement of changes in Equity
12/28/2013
Definitions
Financial Year – Section 2(41)
Incorporated before 1st Jan
31st March of Current Year 31st March of next Year
Yes No
• Transition period of 2 years for existing Cos• Cos having foreign holding or subsidiary cos can follow different year with prior approval of
tribunal
12/28/2013
Audit and Auditors
Every Company to appoint auditor for a term of 5 years provided the same shall be ratified by members at every AGM
Listed company shall not appoint or re-appoint individual or firm as a auditor for more than 5 or 10 consecutive years respectively
Rotation of audit partner & team at such intervals as may be prescribed
Cooling period for re-appointment as auditor is 5 years
Transition period of 3 years provided from commencement of the Act
Special resolution required for appointing auditor other than the retiring auditor or not re-appointing auditor
Company to intimate RoC and Auditor within 15 days of the appointment
Appointment of Auditor – Sec 139
Rotation of auditors including audit firms is being considered for introduction in EU, US, UK and Malaysia.
Actuarial services
Investment advisory services
Management services
Internal Audit
Design and implementation of any financial
information system
Rendering of outsourced
financial services
Accounting and book keeping services
Investment banking services
Restriction for the auditors to undertake following specialized services by himself or his
subsidiary or associate company or any other form of entity
Whether following services may be undertaken ?o Tax consultancy and representationo Project financing assignmento Restructuring assignment
Restrictions for the Auditors – Section 144
12/28/2013
12/28/2013
Every Listed
Company
Every public company
having paid-share capital
of Rs. 10 crores or more
Any other public company
having borrowings from
banks/financial institutions/
deposits of Rs. 25 crores
or more
Mandatory Internal Audit – Section 138
12/28/2013
Inter Group Financing
12/28/2013
Loan to Directors & persons in whom director is interested – Section 185 (Notified)
No Company can give loan/ security/
guarantee in favour of
• Directors
• Any person in whom director is
interested
Now also applicable to private
Companies
There is no facility of seeking
approval of Central Government
12/28/2013
Related Party Transactions
12/28/2013
Definitions
Related Party – Section 2 (76) (Notified)Company
Director or his Relative
KMP or his Relative
Partnership Firm in which
partner
Private Company in
which member or
director
Public Company in
which member or
director
Holding Company
Subsidiary & Associate
Fellow Subsidiaries
Body Corporate Advised
Directed or instructed
Person who Advises
Directs or instructs
Director, manager or his Relative
Related Parties under various legislations
12/28/2013
Related Party Transactions – Section 188
Prior approval of CG for any RPT or appointment to
any office or place or profit NOT required
Transaction related to any kind of property are also
covered
Exemption granted to transactions in ordinary
course of business made at arm’s length price
Member who is a related party shall not vote on the
resolution
12/28/2013
Related Party Transactions
Transactions to be Approval by Special Resolution :
RPTs for companies having paid up capital of
1crore rupees; or
If Transaction exceeds 5% of annual turnover
or 20% of net worth of company which ever is
higher; or
Transaction relates to appointment to any office
or place of profit at a monthly remuneration
exceeding 1 lakh rupees; or
Remuneration of underwriting of subscription
exceeding 10 lakh rupees.
12/28/2013
Disclosure in explanatory statement to be
annexed to the notice
name of the related party ;
name of the director or key managerial
personnel who is related, if any;
nature of relationship;
nature, material terms, monetary value and
particulars of the contract or arrangement;
any other information relevant or important
for the members to take a decision on the
proposed resolution.
Every RPT shall be reported in the Board’s Report
along with justification for entering into the same
Disclosures of related party transaction
12/28/2013
Secretarial Audit
12/28/2013
Secretarial Audit – Sec 204
Secretarial Audit
Public Co. having paid-up capital of Rs. 100 Crore or
moreListed Company &
• Audit to be conducted by a Practising Company Secretary
• Audit of secretarial and related records• Secretarial Audit Report to form a part of Board
Report• BOD to explain in full any qualification or
observation or other remarks made in the report
Same Powers & Duties as of Statutory Auditor
12/28/2013
Fraud and Penal Provisions
12/28/2013
Fraud – Section 447 (Notified)
Act
Fraud
Omission Concealment of fact
With intent to
Abuse of position
Deceive Gain undue advantage from Injure
Interests of
Company Shareholders Creditors Any other person
Whether or not there is
Wrongful gain Wrongful loss
12/28/2013
Fraud
“wrongful gain” means the gain by unlawful means of property to which the person gaining is
not legally entitled
“wrongful loss” means the loss by unlawful means of property to which the person losing is
legally entitled.
All offenses covered u/s 447 cognizable and non bailable unless excepted
Punishment
Min 6 mthsMax 10 Yrs
Min Amt InvolvedMax 3x Amt Involved
12/28/2013
Investigation into the affairs of the Company by SFIO – Section 212
Receipt of Report from Registrar/
Inspector u/s 208
Special Resolution for
investigating the affairs of the
company
Public Interest
may order
Request from any department of Central Govt or State Govt
Central Govt
Serious Fraud Investigation
Office
Investigation Report
may direct SFIO to initiate
prosecution against the company &
officer
Investigation officer will
investigate the affairs of the
company
• SFIO commands authority over other Investigation Agencies of CG/State Govt• SIFO to provide copy of Investigation Report to other agencies who were carrying out
investigation
Search and Seizure
Power to Arrest
Powers
12/28/2013
Acts punishable as Frauds
Particulars Section
Furnishing any false or incorrect particulars of any information or suppression any material information in relation to incorporation
7(5),(6)
Fraudulent conduct of affairs of a charitable company 8(11)
Untrue or misleading statement in prospectus 34 (N)
Fraudulently inducing persons to invest money 36 (N)
Personation for acquisition, etc., of securities 38(1) (N)
Issue of duplicate certificate of shares with an intent to defraud 46(5)
Transfer of shares by depository or depository participant, with an intention to defraud
56(7)
Furnishing False statement, mutilation, destruction of documents statement during inspection, inquiry or investigation
229
Fraudulent application for removal of name 251(1)
Fraudulent conduct of business of Company being wound up 339(3)
False statement or omission in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of this Act
448 (N)
Impact of Change
12/28/2013
Part - D
12/28/2013
Quality of functioning of the company will increase
Beginning of new era of Board Governance
Enhanced responsibility w.r.t. disclosures and transparency
Increase in trust of investors and stakeholders
Impact of Change
12/28/2013
What we can do
Saam: Diplomacy of Corporation and Mutual Respect
Daam: Stay on budget
Paband: Time Commitment
Spasht Kaam: Transparency / Ethics in work, operations and process
Vigyaan: Using the Technology to serve Clients
These are not the weapons, but the intention of its handler that counts
Satarkata: Vigilance
12/28/2013
Governing as per Indian eSource
CORPORATES SHOULD ACT LIKE HONEYBEE WHICH SUCK
THE NECTAR OF THE FLOWERS WITHOUT AFFECTING ITS
FRAGRANCE AND PRODUCE HONEY FOR THE WELL –
BEING OF SOCIETY .
12/28/2013
Our Technological Move
12/28/2013
Corporate Professionals Group D-28, South Extension –I, New Delhi-110 049
Ph: +91.11.40622200; Fax: +91.11.40622201; E: [email protected]
Pavan Kumar Vijay
Thank You