1. The Board of Directors has to exercise strategic oversight over business operations while directly measuring and rewarding management’s performance. Simultaneously the Board has to ensure compliance with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures. Show 2. Board’s responsibilities inherently demand the exercise of judgment. Therefore the Board necessarily has to be vested with a reasonable level of discretion. While corporate governance may comprise of both legal and behavioral norms, no written set of rules or laws can contemplate every situation that a director or the board collectively may find itself in. Besides, existence of written norms in itself cannot prevent a director from abusing his position while going through the motions of proper deliberation prescribed by written norms. Therefore behavioural norms that include informed and deliberative decision making, division of authority, monitoring of management and even handed performance of duties owed to the company as well as the shareholders are equally important. 3. However in a situation where companies have grown in size and have large public interest potential, it is important to prescribe an appropriate basic framework that needs to be complied with by all companies without sacrificing the basic requirement of allowing exercise of discretion and business judgment in the interest of the company and the stakeholders. The liability of compliance has to be seen in context of the common law framework prevalent in the country along with a wide variety of ownership structures including family run or controlled or otherwise closely held companies. Board of Directors 4. Obligation to constitute a Board of Directors :- Minimum and Maximum Number of Directors 5.1 Law should provide for minimum number of directors necessary for various classes of companies. The present prescribed requirement is considered adequate. However new
kinds of companies will evolve to keep pace with emerging business requirements. Law should therefore include an enabling provision to prescribe specific categories of companies for which a different minimum number may be laid down Manner of appointment, removal and resignation of Directors 6.1 The ultimate responsibility to appoint/remove directors should be that of the Company (Shareholders). If the Directors themselves are legally disqualified to hold
directorships, they should have an equal responsibility for disclosing the fact and reasons for their disqualification. Age limit for Directors 7.1
No age limit need be prescribed as per law. There should be adequate disclosure of age in the company’s documents. It should be the duty of the Director to disclose his age correctly. Independent Directors The Concept and Numbers of Independent Directors 8.1 The Committee is of the view that given the responsibility of the Board to balance various interests, the presence of Independent directors on the Board of a Company would improve corporate governance. This is particularly important for public companies or companies with a significant public interest. While directors representing specific interests would be confined to the
perspective dictated by such interests, independent directors would be able to bring an element of objectivity to Board process in the general interests of the company and thereby to the benefit of minority interests and smaller shareholders. Independence, therefore, is not to be viewed merely as independence from Promoter Interests but from the point of view of vulnerable stakeholders who cannot otherwise get their voice heard. Law should, therefore, recognize the principle of independent
directors and spell out their role, qualifications and liability. However requirement of presence of Independent directors may vary depending on the size and type of company. There cannot be a single prescription to suit all companies. Therefore number of Independent directors may be prescribed through rules for different categories of companies. However a definition of independent director should be incorporated in the Company law. Director/ Attributes of Independent Directors 9.1 The Committee was of the view that definition of an Independent Director should be provided in law. Mode of Appointment of Independent Directors 10. The appointment of independent directors should be made by the company from amongst persons, who in the opinion of the company, are persons with integrity, possessing relevant expertise and experience and who satisfy the above criteria for independence. ‘Material’ Transactions 11.1 The term material pecuniary relationship should also be clearly defined for the purpose of determining whether the director is independent or not. The concept of “Materiality’ is relevant from the recipient’s point of view and not from that of the
company. Number Of Directorships and Alternate Directors 12.1 The total number of Directorships any one individual may hold should be limited to a maximum of 15. Directors’ Remuneration 13.
There is a need for comprehensive revision of provisions of the Companies Act 1956 relating to payment of managerial remuneration. Sitting Fees to Non-Executive Directors 14. There need not be any limit prescribed to sitting fees payable to non-executive directors. The company, with the approval of shareholders may decide the sitting fees payable to such category of directors and should disclose it in its Directors’ Remuneration Report forming part of the Annual Report of the company. Disclosure of Remuneration 15.1 All type of companies should be required to disclose the Directors’/Managerial remuneration in the Directors’ Remuneration Report as a part of the Directors’ Report. Remuneration of Non-Executive Directors 16. A company should also be able to decide on remuneration to non-executive directors including independent directors. This may be in the form of Sitting fees for Board and committee meetings attended physically or participated in electronically and / or Profit related commissions Board Committees 17. While recognizing the need for discretion of the Board to manage and govern the company through collective responsibility, the Committee
recognizes the need for focus on certain core areas relevant to investor / stakeholder interests. In such areas, law may mandate the requirement of constitution of specific Committees of the Board whose recommendations would be available to the Board while taking the final decisions. These Committees are as follows :- Duties And Responsibilities Of Directors 18.1 International practice (particularly in U.K.)
recognizes a very wide spectrum of duties to be discharged by directors of a company. There is an obligation of obedience to the constitution and decisions of the company lawfully taken under it, or under rules of law permitting such decisions to be taken, the duty of loyalty towards the company and, in good faith, to promote its success to the benefit of members as a whole, to exercise independence of judgment along with care, skill and diligence in exercise of duties, to disclose transactions
involving conflict of interest and seek shareholders approval as relevant, not to exploit company assets or benefits from third parties for personal purposes, the duty of special care if a company is unable to pay its debts or is facing a likely prospect of an insolvent situation. The question is whether all such duties, and more, can be recognized in law. Disqualification of Directors 19.1 The conditions for disqualification of a director should be prescribed in the Act itself as they relate to the substantive law and may not require much change once the law is framed. Vacation of office by the Directors 20. Failure to attend Board Meetings for a continuous period of one year should be made a ground for vacation of office by the concerned director regardless of leave of absence being given by the Board for the meetings held during the year. Resignation Of Directors 21.1 Resignation should be treated as a choice to be exercised by a director. In case of resignation, it should be sufficient for the director to establish proof of delivery of such information with the company to discharge him of any liability in this regard, or of events taking place subsequent to his having intimated his decision to resign. A
copy of the resignation letter should also be forwarded to the ROC within a prescribed period by the Director along with proof of delivery to the company. This is necessary to avoid misuse of this choice through retroactive communications. Liabilities Of Independent And Non-Executive Directors 22. A non-executive/independent director should be held liable only in respect of any contravention of any provisions of the Act which had taken place with his knowledge (attributable through Board processes) and where he has not acted diligently, or with his consent or connivance. Knowledge Test 22.1 If the independent director does not initiate any action upon knowledge of any wrong, such director should be held liable. 22.2 Knowledge should flow from the processes of the Board. Additionally, upon knowledge of any wrong, follow up action / dissent of such independent directors from the commission of the wrong should be recorded in the minutes of the board meeting. Directors and Officers (D&O) Insurance 23. Insurance for key-man and for key directors and officers of companies by means of general insurance policies may be taken by companies. Directors and Officers (D&O) insurance is a means by which companies and their directors/ officers may seek to mitigate potential personal liability. Insurance aids independence as the directors are not dependent on the company. Accordingly, S. 201 of the Companies Act should be modified to have the enabling provision for providing insurance / indemnification in case no wrongful act is established. The insurance premium paid by the company for such a policy need not be treated as a perquisite or income in the hands of director. However, if the wrongful act of the director is established, then the proportionate amount of premium attributable to such director should be considered as perquisite/income for the purpose of remuneration. Rights of Independent/Non-Executive Directors 24. Independent / Non-Executive directors should be able to :- - Call upon the Board for due diligence or obtaining of record for seeking professional opinion by the Board; - have the right to inspect records of the company; - review legal compliance reports prepared by the company; and - in cases of disagreement, record their dissent in the minutes. Meetings Of Directors- Related Matters 25.1 The requirement of the Companies Act, 1956, to hold a meeting every three months and at-least 4 meetings in a year should continue. The gap between two Board Meetings should not exceed four months. Quorum for emergency meetings 26. In the case of companies where Independent Directors are prescribed :- - Notice of every meeting of the Board of Directors should be given well in advance to ensure participation by maximum number of directors. In view of the Committee, a period of 7 days is sufficient for the purpose. - The presence of one independent director should be made mandatory for board meetings called at short notice. - Meetings at shorter notices should be held only to transact emergency business. In such meetings the mandatory presence of at least one Independent Director should be required since this would ensure that only well considered decisions are taken. - If even one Independent Director is not present in the emergency meeting, then decisions taken at such meetings should be subject to ratification by at least one Independent Director. Matters to be discussed at a Board Meeting 27. There is a need to ensure that the meetings of Board of Directors provide sufficient time for consideration of important matters. The Committee was of the view that there should be a clear recognition of vital issues for which Board discussion in the meeting of the Board should be mandatory. These matters should not be left to Resolution by circulation since this practice is open to abuse. The suggestions made in the Companies (Amendment) Bill, 2003 may be taken as the basis. Restrictions on Board’s Powers 28. Under Section 293 of the present Act certain restrictions have been placed on the Board of Directors of a public company or of a private company, which is a subsidiary of a public company from deciding on certain matters except with the consent of the shareholders of such company in a general meeting. This provision should be reviewed and it should be provided that the consent of the shareholders should be through a special resolution for certain items such as those presently mentioned in 293 (1) (a), (c) and (d) of the present Act. Shareholders’ approval should be required for sale of whole or substantially whole of the undertaking in that financial year. “whole or substantially whole” should mean 20% of the total assets of the company. Further, certain additional items that should require shareholders approval may include sale/transfer of investment in equity shares of other bodies corporate which constitute 20% or more of the total assets of the investing company. Meetings Of Members 29.1 Every company should be permitted to transact any item of business as it deems fit through postal ballot apart from items for which mandatory postal ballot is prescribed. However, the government should prescribe a negative list of items which should be transacted only at the AGM and not through postal ballot. These negative items could be the following items of Ordinary Business :- (i) consideration of annual accounts
and reports of Directors and Auditors; (ii) declaration of dividends; (iii) appointment of directors; and (iv) appointment of and fixing the remuneration of the auditors. AGM in Small Companies 30.1 Small Companies may be given an option to dispense with the requirement of holding an AGM. Such companies may be permitted to pass Resolutions by circulation. Demand For Poll 31.1 The demand for poll can be made by shareholder(s) holding 1/10th of the total voting power or shares of paid up value of Rs.5 lakhs, whichever is less. Other Recommendations Higher deposit amount for notice regarding nominating/appointing a director. 32. Presently, any person can give nomination for appointment as a director with a deposit of Rs. 500/- Such nomination should be allowed to be made only by shareholders constituting 1% of paid up capital and with a deposit of Rs. 10000/- which should be forfeited if the Director does not get elected. Option of buy-back for shareholders of de-listed companies 33. To protect the shareholders of a listed company that opts to de-list, one buy-back offer by the company should be mandated within a period of 3 years of its de-listing from all the stock exchanges in India. Appropriate valuation Rules for this purpose should be prescribed. Corporate Structure 34.1 Stakeholders / Board look towards certain Key Managerial Personnel for formulation and execution of policies and to outside independent professionals for independent assurances on various compliances. The Committee feels it desirable to dwell on such managerial personnel who have a significant role to play in the conduct of affairs of the company and determine the quality of its Governance. The Committee is of the view that such key Managerial Personnel may be recognized by the law, along with their liability in appropriate aspects of company operation. Key Managerial Personnel 34.2 The Committee identifies the following key Managerial Personnel for all companies:- Chief Executive Officer (CEO)/Managing Director Company Secretary (CS) Chief Finance Officer (CFO] RECOMMENDATIONS – Ø The appointment and removal of the key managerial personnel should be by the Board of Directors. Ø The key managerial personnel including managing / (whole time) Executive Directors should be in the whole-time employment of only one company at any given time. Ø Both the managing director as also the whole time directors should not be appointed for more than 5 years at a time. Ø As provided currently, the option to a company to appoint director by proportional representation may be retained. Ø The present requirement of having managing director/whole time director in a pubic company with a paid up capital of Rs.5 crores may be revised to Rs.10 crores by appropriate amendment of the Rules. The said limit could be reviewed from time to time. Ø Special exemptions may be provided for small companies from appointing such personnel on whole-time basis. Such companies may obtain services that may be considered mandatory under law from qualified professionals in practice. Interested Shareholders 35. The Committee considered the concept of exclusion of interested shareholders from participation in the General Meeting in events of conflict of interest. The Committee felt that this was an aspect of good Corporate Governance which may be adopted by companies on voluntary basis by making a provision in the Article of Association of the company. In view of the issues related with enforcing compliance of such requirements, there need not be any specific legal provision for the purpose. General 36.1 Sometimes, board appointees include persons who clearly lack the experience or the capacity to function as directors. Low-level employees or un-experienced relatives of shareholders also sometimes find their way into
the boards, with ‘shadow’ directors pulling strings and acting as real decision makers. The law should provide for a framework that allows attribution by recognizing the presence of any person in accordance with whose directions or instructions, the directors of the company are accustomed to act. There should also be a requirement of disclosure of directors background, education, training and qualifications, as well as relationships with managers and shareholders. What is the primary role and responsibility of independent external auditors?External auditors are responsible for auditing the company's financial statements and providing reasonable assurance that they are presented fairly and in conformity with GAAP and that they reflect true representation of the company's financial position and results of operations.
When an independent registrar and stock transfer agent is used?9. When an independent registrar and stock transfer agent is used, it is likely that the auditor will confirm the number of shares outstanding with those parties rather than the shareholders.
What is the primary objective of the independent auditor's report on financial statements?. 01 The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles.
Which function would be performed by the registrar?A registrar's function is to maintain the register of the issuer for each issue of securities. The registrar records the name, address and tax identification or social security number of each individual and entity that owns the securities of a company.
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