Deputy General Manager
Market Regulation Department
Email: sundaresanvs@sebi.gov.in
Tel: 2284 5355 Fax: 2284 5761
SEBI/MRD/SE/31/2003/26/08
August 26, 2003
The Executive Directors/Managing Director/Administrators
Of All the Stock Exchanges
Dear Sir/Madam,
Sub: Corporate Governance in listed Companies – Clause 49 of the Listing
Agreement
1. SEBI, vide its circular dated February 21, 2000, specified principles of corporate governance
and introduced a new clause 49 in the Listing agreement of the Stock Exchanges. These
principles of corporate governance were made applicable in a phased manner and all the listed
companies with the paid up capital of Rs 3 crores and above or net worth of Rs 25 crores or
more at any time in the history of the company, were covered as of March 31, 2003. SEBI has
issued six circulars on the subject of corporate governance inter-alia detailing provisions of
corporate governance, its applicability, reporting requirements etc. which are as follows–
Sr.
no.
Reference no.
Subject
Date
1
SMDRP/POLICY/CIR10/2000
Clause 49
February 21,2000
2
SMDRP/POLICY/CIR13/2000
Applicability of Clause
49
March 09, 2000
3
SMDRP/POLICY/CIR42/2000
Amendments to Clause
49
September12, 2000
4.
SMDRP/POLICY/
CIR- 03/01
Enforcement of
Corporate Governance
January 22, 2001
1
5.
SMDRP/POLICY/
CIR- 19/01
Applicability of Clause
49
March 16,2001
6.
SMDRP/POLICY/
CIR- 53/01
Amendments to Clause
49
December 31,2001
2. In its constant endeavor to improve the standards of corporate governance in India in line with
needs of a dynamic market, SEBI constituted a Committee on Corporate Governance under the
Chairmanship of Shri N. R. Narayana Murthy. SEBI, based on the recommendations of the
Committee and public comments received on the report, has approved certain amendments in
the clause 49 of the Listing Agreement.
3. Accordingly, in exercise of powers conferred by section 11 (1) of the Securities and Exchange
Board of India Act, 1992 read with section 10 of the Securities Contracts (Regulation) Act 1956,
SEBI has revised the clause 49 of the Listing agreement. The revised clause 49 contains both,
the sub clauses of existing clause 49 as well as new sub-clauses. All Stock Exchanges are
hereby directed to immediately replace the existing Clause 49 of the listing agreement (
issued vide circular dated February 21, 2000, September 12, 2000, March 16, 2001 and 31
December 2001) by the revised Clause 49 given in Annexure I. The revised clause 49 also
specifies the reporting requirements for the company.
4. Please note that some of the sub-clauses of the revised clause 49 (given in Annexure I) shall be
suitably modified or new clauses shall be added following the amendments to the Companies
Act 1956 by the Companies (Amendment) Bill/Act 2003, so that the relevant provisions of the
clauses on Corporate governance in the Listing Agreement and the Companies Act remain
harmonious with one another.
5. The provisions of the revised clause 49 shall be implemented as per the schedule of
implementation given below:
a. By all entities seeking listing for the first time, at the time of listing.
b) By all companies which were required to comply with the requirement of the
clause 49 which is proposed to be revised i.e. all listed entities having a paid up
share capital of Rs 3 crores and above or net worth of Rs 25 crores or more at
any time in the history of the company. The companies shall be required to
comply with the requirement of the clause on or before March 31, 2004.
6. The revised clause 49 shall apply to all the listed companies, in accordance with the schedule of
implementation given in the revised clause 49. However for other listed entities, which are not
companies, but body corporates (e.g. private and public sector banks, financial institutions,
insurance companies etc.) incorporated under other statutes, the revised clause will apply to the
extent that it does not violate their respective statutes, and guidelines or directives issued by the
relevant regulatory authorities. The revised clause is not applicable to the Mutual Fund
Schemes.
7. The companies which are required to comply with the requirements of the revised clause 49
shall submit a quarterly compliance report to the stock exchanges as per sub clause (IX) (ii), of
the revised clause 49, within 15 days from the quarter ending 31st March 2004. The report
shall be submitted either by the Compliance Officer or the Chief Executive Officer of the
company after obtaining due approvals.
8. The Stock Exchanges shall ensure that all provisions of corporate governance have been
complied with by the company seeking listing for the first time, before granting any new listing.
For this purpose, it will be satisfactory compliance if these companies have set up the Boards
and constituted committees such as Audit Committee, shareholders/ investors grievances
committee etc before seeking listing. A reasonable time to comply with these conditions may be
granted only where the Stock Exchange is satisfied that genuine legal issues exists which will
delay such compliance. In such cases while granting listing, the stock exchanges shall obtain a
suitable undertaking from the company. In case of the company failing to comply with this
requirement without any genuine reason, the application money shall be kept in an escrow
account till the conditions are complied with.
9. The Stock Exchanges shall set up a separate monitoring cell with identified personnel to monitor
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the compliance with the provisions of the corporate governance. This cell shall obtain the
quarterly compliance report from the companies which are required to comply with the
requirements of corporate governance and shall submit a consolidated compliance report to
SEBI within 30 days of the end of each quarter.
10. Please note that this is a master circular which contains the revised clause 49 as well as other
circulars issued by SEBI on the subject, suitably modified. The companies are required to
comply with the provisions of revised clause 49, on or before March 31, 2004. The companies
shall continue to comply with all the provisions of clause 49(issued vide circulars dated, 21st
February, 2000, 12th September 2000, 16th March 2001 and 31st December 2001) as well as
other circulars dated, 9th March 2000 and 22nd January, 2001, till the revised clause 49 of the
Listing Agreement is complied with or March 31st 2004, whichever is earlier.
Yours faithfully
Sd/V S SUNDARESAN
Encl: Annexure I 1A 1B IC
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ANNEXURE - I
Clause 49 - Corporate Governance
The company agrees to comply with the following provisions:
I. Board of Directors
A. Composition of Board
(i) The board of directors of the company shall have an optimum combination
of executive and non-executive directors with not less than fifty percent of
the board of directors comprising of non-executive directors. The number of
independent directors would depend on whether the Chairman is executive
or non-executive. In case of a non-executive chairman, at least one-third of
board should comprise of independent directors and in case of an executive
chairman, at least half of board should comprise of independent directors.
Explanation (i): For the purpose of this clause, the expression ‘independent
director’ shall mean non-executive director of the company who
a. apart from receiving director’s remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its senior
management or its holding company, its subsidiaries and associated companies;
b. is not related to promoters or management at the board level or at one level below
the board;
c. has not been an executive of the company in the immediately preceding three
financial years;
d. is not a partner or an executive of the statutory audit firm or the internal audit firm
that is associated with the company, and has not been a partner or an executive of
any such firm for the last three years. This will also apply to legal firm(s) and
consulting firm(s) that have a material association with the entity.
e. is not a supplier, service provider or customer of the company. This should include
lessor-lessee type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or more of
the block of voting shares.
Explanation (ii): Institutional directors on the boards of companies shall be
considered as independent directors whether the institution is an investing
institution or a lending institution.
(B) Non executive directors’ compensation and disclosures
(i) All compensation paid to non-executive directors shall be fixed by the Board of
Directors and shall be approved by shareholders in general meeting. Limits shall be
set for the maximum number of stock options that can be granted to non-executive
directors in any financial year and in aggregate. The stock options granted to the
non-executive directors shall vest after a period of at least one year from the date
such non-executive directors have retired from the Board of the Company.
(ii)The considerations as regards compensation paid to an independent
director shall be the same as those applied to a non-executive director.
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(iii)The company shall publish its compensation philosophy and statement of
entitled compensation in respect of non-executive directors in its annual
report. Alternatively, this may be put up on the company’s website and
reference drawn thereto in the annual report. Company shall disclose on an
annual basis, details of shares held by non-executive directors, including on
an "if-converted" basis.
(iv)Non-executive directors shall be required to disclose their stock holding
(both own or held by / for other persons on a beneficial basis) in the listed
company in which they are proposed to be appointed as directors, prior to
their appointment. These details should accompany their notice of
appointment
(C) Independent Director
i.
ii.
Independent Director shall however periodically review legal compliance reports
prepared by the company as well as steps taken by the company to cure any taint.
In the event of any proceedings against an independent director in connection with
the affairs of the company, defence shall not be permitted on the ground that the
independent director was unaware of this responsibility.
The considerations as regards remuneration paid to an independent director shall be
the same as those applied to a non executive director
(D) Board Procedure
i.
ii.
The board meeting shall be held at least four times a year, with a maximum time gap
of four months between any two meetings. The minimum information to be made
available to the board is given in Annexure–IA.
A director shall not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director.
Furthermore it should be a mandatory annual requirement for every director to
inform the company about the committee positions he occupies in other companies
and notify changes as and when they take place.
Explanation: For the purpose of considering the limit of the committees on
which a director can serve, all public limited companies, whether listed or
not, shall be included and all other companies (i e private limited companies,
foreign companies and companies under Section 25 of the Companies Act,
etc) shall be excluded.
iii.
Further only the three committees viz. the Audit Committee, the Shareholders’
Grievance Committee and the Remuneration Committee shall be considered for this
purpose.
(E) Code of Conduct
i.
ii.
It shall be obligatory for the Board of a company to lay down the code of conduct for
all Board members and senior management of a company. This code of conduct
shall be posted on the website of the company.
All Board members and senior management personnel shall affirm compliance with
the code on an annual basis. The annual report of the company shall contain a
declaration to this effect signed by the CEO and COO.
Explanation: For this purpose, the term "senior management" shall mean
personnel of the company who are members of its management / operating
council (i.e. core management team excluding Board of Directors). Normally,
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this would comprise all members of management one level below the
executive directors
(F) Term of Office of Non–executive directors
i.
Person shall be eligible for the office of non-executive director so long as the term of
office did not exceed nine years in three terms of three years each, running
continuously.
II Audit Committee.
A. Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up and shall comply with
the following:
i.
ii.
The audit committee shall have minimum three members. All the members of audit
committee shall be non-executive directors, with the majority of them being
independent.
All members of audit committee shall be financially literate and at least one member
shall have accounting or related financial management expertise.
Explanation (i):The term "financially literate" means the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss account,
and statement of cash flows.
Explanation (ii): A member will be considered to have accounting or related
financial management expertise if he or she possesses experience in finance or
accounting, or requisite professional certification in accounting, or any other
comparable experience or background which results in the individual’s financial
sophistication, including being or having been a chief executive officer, chief
financial officer, or other senior officer with financial oversight responsibilities.
iii.
iv.
v.
vi.
The Chairman of the Committee shall be an independent director;
The Chairman shall be present at Annual General Meeting to answer shareholder
queries;
The audit committee should invite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of
the committee, but on occasions it may also meet without the presence of any
executives of the company. The finance director, head of internal audit and when
required, a representative of the external auditor shall be present as invitees for the
meetings of the audit committee;
The Company Secretary shall act as the secretary to the committee.
(B) Meeting of Audit Committee
The audit committee shall meet at least thrice a year. One meeting shall be held
before finalization of annual accounts and one every six months. The quorum shall
be either two members or one third of the members of the audit committee,
whichever is higher and minimum of two independent directors.
(C) Powers of Audit Committee
The audit committee shall have powers which should include the following:
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1.
2.
3.
4.
To investigate any activity within its terms of reference.
To seek information from any employee.
To obtain outside legal or other professional advice.
To secure attendance of outsiders with relevant expertise, if it considers necessary.
(D) Role of Audit Committee
(i) The role of the audit committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending the appointment and removal of external auditor, fixation of audit fee
and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to
the board, focusing primarily on;
a.
b.
c.
d.
e.
f.
g.
Any changes in accounting policies and practices.
Major accounting entries based on exercise of judgment by management.
Qualifications in draft audit report.
Significant adjustments arising out of audit.
The going concern assumption.
Compliance with accounting standards.
Compliance with stock exchange and legal requirements concerning financial
statements
h. Any related party transactions
4. Reviewing with the management, external and internal auditors, the adequacy of
internal control systems.
5. Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
6. Discussion with internal auditors any significant findings and follow up there on.
7. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
8. Discussion with external auditors before the audit commences about nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
9. Reviewing the company’s financial and risk management policies.
10. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
Explanation (i): The term "related party transactions" shall have the same
meaning as contained in the Accounting Standard 18, Related Party
Transactions, issued by The Institute of Chartered Accountants of India.
Explanation (ii): If the company has set up an audit committee pursuant to
provision of the Companies Act, the company agrees that the said audit
committee shall have such additional functions / features as is contained in
the Listing Agreement.
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(E) Review of information by Audit Committee
(i) The Audit Committee shall mandatorily review the following information:
1. Financial statements and draft audit report, including quarterly / half-yearly financial
information;
2. Management discussion and analysis of financial condition and results of operations;
3. Reports relating to compliance with laws and to risk management;
4. Management letters / letters of internal control weaknesses issued by statutory /
internal auditors; and
5. Records of related party transactions
6. The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee
III. Audit Reports and Audit Qualifications
A. Disclosure of Accounting Treatment
In case it has followed a treatment different from that prescribed in an Accounting
Standards, management shall justify why they believe such alternative treatment is more
representative of the underlined business transactions. Management shall also clearly
explain the alternative accounting treatment in the footnote of financial statements.
IV. Whistle Blower Policy
(A) Internal Policy on access to Audit Committees:
i.
ii.
iii.
iv.
v.
Personnel who observe an unethical or improper practice (not necessarily a violation
of law) shall be able to approach the audit committee without necessarily informing
their supervisors.
Companies shall take measures to ensure that this right of access is communicated
to all employees through means of internal circulars, etc. The employment and other
personnel policies of the company shall contain provisions protecting "whistle
blowers" from unfair termination and other unfair prejudicial employment practices.
Company shall annually affirm that it has not denied any personnel access to the
audit committee of the company (in respect of matters involving alleged misconduct)
and that it has provided protection to "whistle blowers" from unfair termination and
other unfair or prejudicial employment practices.
Such affirmation shall form a part of the Board report on Corporate Governance that
is required to be prepared and submitted together with the annual report.
The appointment, removal and terms of remuneration of the chief internal auditor
shall be subject to review by the Audit Committee.
V. Subsidiary Companies
i.
ii.
iii.
The company agrees that provisions relating to the composition of the Board of
Directors of the holding company shall be made applicable to the composition of the
Board of Directors of subsidiary companies
At least one independent director on the Board of Directors of the holding company
shall be a director on the Board of Directors of the subsidiary company.
The Audit Committee of the holding company shall also review the financial
statements, in particular the investments made by the subsidiary company.
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(iv) The minutes of the Board meetings of the subsidiary company shall be placed
for review at the Board meeting of the holding company.
(v) The Board report of the holding company should state that they have reviewed
the affairs of the subsidiary company also
VI. Disclosure of contingent liabilities
(i) The company agrees that management shall provide a clear description in
plain English of each material contingent liability and its risks, which shall be
accompanied by the auditor’s clearly worded comments on the
management’s view. This section shall be highlighted in the significant
accounting policies and notes on accounts, as well as, in the auditor’s report,
where necessary.
VII. Disclosures
(A) Basis of related party transactions
(i) A statement of all transactions with related parties including their basis
shall be placed before the Audit Committee for formal approval/ratification. If
any transaction is not on an arm’s length basis, management shall provide
an explanation to the Audit Committee justifying the same.
(B) Board Disclosures –Risk management
(i) It shall put in place procedures to inform Board members about the risk
assessment and minimization procedures. These procedures shall be
periodically reviewed to ensure that executive management controls risk
through means of a properly defined framework.
(ii) Management shall place a report certified by the compliance officer of the
company, before the entire Board of Directors every quarter documenting
the business risks faced by the company, measures to address and
minimize such risks, and any limitations to the risk taking capacity of the
corporation. This document shall be formally approved by the Board.
(C) Proceeds from Initial Public Offerings (IPOs)
(i) When money is raised through an Initial Public Offering (IPO) it shall
disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc), on
a quarterly basis as a part of their quarterly declaration of financial results.
Further, on an annual basis, the company shall prepare a statement of funds
utilized for purposes other than those stated in the offer
document/prospectus. This statement shall be certified by the independent
auditors of the company. The audit committee shall make appropriate
recommendations to the Board to take up steps in this matter.
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(D) Remuneration of Directors
a. All pecuniary relationship or transactions of the non-executive director’s vis-à-vis the
company shall be disclosed in the Annual Report.
(ii) Further the following disclosures on the remuneration of directors shall be
made in the section on the corporate governance of the annual report.
a. All elements of remuneration package of all the directors i.e. salary, benefits,
bonuses, stock options, pension etc.
b. Details of fixed component and performance linked incentives, along with the
performance criteria.
c. Service contracts, notice period, severance fees.
d. Stock option details, if any – and whether issued at a discount as well as the period
over which accrued and over which exercisable.
(E) Management
i.
a.
b.
c.
d.
e.
f.
g.
h.
As part of the directors’ report or as an addition there to, a Management Discussion
and Analysis report should form part of the annual report to the shareholders. This
Management Discussion & Analysis should include discussion on the following
matters within the limits set by the company’s competitive position:
Industry structure and developments.
Opportunities and Threats.
Segment–wise or product-wise performance.
Outlook
Risks and concerns.
Internal control systems and their adequacy.
Discussion on financial performance with respect to operational performance.
Material developments in Human Resources / Industrial Relations front, including
number of people employed.
Management shall make disclosures to the board relating to all material financial and
commercial transactions, where they have personal interest, that may have a potential
conflict with the interest of the company at large (for e.g. dealing in company shares,
commercial dealings with bodies, which have shareholding of management and their
relatives etc.)
(F) Shareholders
(i) In case of the appointment of a new director or re-appointment of a director the
shareholders must be provided with the following information:
a. A brief resume of the director;
b. Nature of his expertise in specific functional areas ; and
c. Names of companies in which the person also holds the directorship and the
membership of Committees of the board.
(ii) Information like quarterly results, presentation made by companies to analysts
shall be put on company’s web-site, or shall be sent in such a form so as to enable
the stock exchange on which the company is listed to put it on its own web-site.
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(iii) A board committee under the chairmanship of a non-executive director shall be
formed to specifically look into the redressal of shareholder and investors complaints
like transfer of shares, non-receipt of balance sheet, non-receipt of declared
dividends etc. This Committee shall be designated as ‘Shareholders/Investors
Grievance Committee’.
(iv)To expedite the process of share transfers the board of the company
shall delegate the power of share transfer to an officer or a committee or to
the registrar and share transfer agents. The delegated authority shall attend
to share transfer formalities at least once in a fortnight.
VIII. CEO/CFO certification
i.
CEO (either the Executive Chairman or the Managing Director) and the CFO (wholetime Finance Director or other person discharging this function) of the company shall
certify that, to the best of their knowledge and belief:
a. They have reviewed the balance sheet and profit and loss account and all its
schedules and notes on accounts, as well as the cash flow statements and the
Directors’ Report;
b. These statements do not contain any materially untrue statement or omit any
material fact nor do they contain statements that might be misleading;
c. These statements together present a true and fair view of the company, and are in
compliance with the existing accounting standards and / or applicable laws /
regulations;
d. They are responsible for establishing and maintaining internal controls and have
evaluated the effectiveness of internal control systems of the company; and they
have also disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of internal controls, if any, and what they have done or propose
to do to rectify these;
e. They have also disclosed to the auditors as well as the Audit Committee, instances
of significant fraud, if any, that involves management or employees having a
significant role in the company’s internal control systems; and
f. They have indicated to the auditors, the Audit Committee and in the notes on
accounts, whether or not there were significant changes in internal control and / or of
accounting policies during the year.
IX. Report on Corporate Governance
(i) There shall be a separate section on Corporate Governance in the annual
reports of company, with a detailed compliance report on Corporate
Governance. Non-compliance of any mandatory requirement i.e. which is
part of the listing agreement with reasons thereof and the extent to which the
non-mandatory requirements have been adopted should be specifically
highlighted. The suggested list of items to be included in this report is given
in Annexure-1B and list of non-mandatory requirements is given in Annexure
–1C.
(ii) The companies shall submit a quarterly compliance report to the stock
exchanges within 15 days from the close of quarter as per the format given
below. The report shall be submitted either by the Compliance Officer or the
Chief Executive Officer of the company after obtaining due approvals.
Format of Quarterly Compliance Report on Corporate Governance
Name of the Company:
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Quarter ending on:
Particulars
1
Clause of
Listing
Agreement
2
I. Board of Directors
49 I
(A)Composition of Board
49(IA)
(B)Non-executive Directors’
compensation & disclosures
(IB)
(C)Independent Director
(IC)
(D)Board Procedure
9 (ID)
(E)Code of Conduct
49
(IF)
II. Audit Committee
9 (II)
(A)Qualified & Independent Audit
Committee
9 (IIA)
(B)Meeting of Audit
Committee
9 (IIB)
(C)Powers of Audit
Committee
9
(IIC)
(D)Role of Audit
Committee
II(D)
III. Audit Reports
3
Remarks
4
9 (IE)
(F)Term of office of nonexecutive directors
(E)Review of Information by
Audit Committee
Compliance status
(Yes/No/N.A.)
49
(IIE)
49
(III)
and Audit
Qualifications
IV.Whistle Blower
Policy
49
(IV)
V. Subsidiary
Companies
49 (V)
VI. Disclosure of
contingent liabilities
49
(VI)
VII.Disclosures
49
(VII)
(A)Basis of related party
transactions
IIA)
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(B)Board Disclosures
(VIIB)
(C)Proceeds from Initial Public
offerings
49
(VIIC)
(D)Remuneration of
Directors
49
(VIID)
(E)Management
(VIIE)
(F)Shareholders
49
(VIIF)
VIII.CEO/CFO
Certification
IX. Report on
Corporate
Governance
49
(VIII)
49
(IX)
49 (X)
X. Compliance
Note:
1) The details under each head shall be provided to incorporate all the information
required as per the provisions of the clause 49 of the Listing Agreement.
2) In the column No.3, compliance or non-compliance may be indicated by
Yes/No/N.A.. For example, if the Board has been composed in accordance with the
clause 49 I of the Listing Agreement, "Yes" may be indicated. Similarly, in case the
company has not come out with an IPO, the words "N.A." may be indicated against
49 (VIIC).
3)In the remarks column, reasons for non-compliance may be indicated, for
example, in case of requirement related to circulation of information to the
shareholders, which would be done only in the AGM/EGM, it might be indicated in
the "Remarks" column as – "will be complied with at the AGM". Similarly, in respect
of matters which can be complied with only where the situation arises, for example,
"Report on Corporate Governance" is to be a part of Annual Report only, the words
"will be complied in the next Annual Report" may be indicated.
X. Compliance
The company shall obtain a certificate from either the auditors or practicing company
secretaries regarding compliance of conditions of corporate governance as
stipulated in this clause and annex the certificate with the directors’ report, which is
sent annually to all the shareholders of the company. The same certificate shall also
be sent to the Stock Exchanges along with the annual returns filed by the company.
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Schedule of implementation
(1) The provisions of the revised clause 49 shall be implemented as per the
schedule of implementation given below:
(i) By all entities seeking listing for the first time, at the time of listing.
(ii) By all companies which were required to comply with the requirement of the
erstwhile clause 49 i.e. all listed entities having a paid up share capital of Rs 3
crores and above or net worth of Rs 25 crores or more at any time in the history of
the entity . These entities shall be required to comply with the requirement of this
clause on or before March 31, 2004.
(2) The non-mandatory requirement given in Annexure – 1C shall be
implemented as per the discretion of the company. However, the disclosures
of the adoption/non-adoption of the non-mandatory requirements shall be
made in the section on corporate governance of the Annual Report.
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Annexure 1A
Information to be placed before Board of Directors
1. Annual operating plans and budgets and any updates.
2. Capital budgets and any updates.
3. Quarterly results for the company and its operating divisions or business segments.
4. Minutes of meetings of audit committee and other committees of the board.
5. The information on recruitment and remuneration of senior officers just below the board
level, including appointment or removal of Chief Financial Officer and the Company
Secretary.
6. Show cause, demand, prosecution notices and penalty notices which are materially
important
7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution
problems.
8. Any material default in financial obligations to and by the company, or substantial nonpayment for goods sold by the company.
9. Any issue, which involves possible public or product liability claims of substantial nature,
including any judgement or order which, may have passed strictures on the conduct of the
company or taken an adverse view regarding another enterprise that can have negative
implications on the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or
intellectual property.
12. Significant labour problems and their proposed solutions. Any significant development in
Human Resources/ Industrial Relations front like signing of wage agreement,
implementation of Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal
course of business.
14. Quarterly details of foreign exchange exposures and the steps taken by management to
limit the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory nature or listing requirements and
shareholders service such as non-payment of dividend, delay in share transfer etc.
15
Annexure 1B
Suggested List of Items to Be Included In the Report on Corporate Governance in the
Annual Report of Companies
1. A brief statement on company’s philosophy on code of governance.
2. Board of Directors:
(i) Composition and category of directors, for example, promoter, executive, nonexecutive, independent non-executive, nominee director, which institution
represented as lender or as equity investor.
(ii) Attendance of each director at the BoD meetings and the last AGM.
(iii) Number of other BoDs or Board Committees in which he/she is a
member or Chairperson
(iv) Number of BoD meetings held, dates on which held.
3. Audit Committee.
(i) Brief description of terms of reference
(ii) Composition, name of members and Chairperson
(iii) Meetings and attendance during the year
4. Remuneration Committee.
(i) Brief description of terms of reference
(ii) Composition, name of members and Chairperson
(iii) Attendance during the year
(iv) Remuneration policy
(v) Details of remuneration to all the directors, as per format in main report.
5. Shareholders Committee.
(i) Name of non-executive director heading the committee
(ii) Name and designation of compliance officer
(iii) Number of shareholders’ complaints received so far
(iv) Number not solved to the satisfaction of shareholders
(v) Number of pending complaints
16
6. General Body meetings.
(i) Location and time, where last three AGMs held.
(ii) Whether any special resolutions passed in the previous 3 AGMs
(iii) Whether any special resolution passed last year through postal ballot –
details of voting pattern
(iv) Person who conducted the postal ballot exercise
(v) Whether any special resolution is proposed to be conducted through
postal ballot
(vi) Procedure for postal ballot
7. Disclosures.
(i) Disclosures on materially significant related party transactions that may have
potential conflict with the interests of company at large.
(ii) Disclosure of accounting treatment, if different, from that prescribed in Accounting
standards with explanation.
(iii) Details of non-compliance by the company, penalties, strictures imposed on the
company by Stock Exchange or SEBI or any statutory authority, on any matter
related to capital markets, during the last three years.
(iv) Whistle Blower policy and affirmation that no personnel has been denied access
to the audit committee.
8. Means of communication.
(i) Half-yearly report sent to each household of shareholders.
(ii) Quarterly results
(iii) Newspapers wherein results normally published
(iv) Any website, where displayed
(v) Whether it also displays official news releases; and
(vi) The presentations made to institutional investors or to the analysts.
(vii) Whether MD&A is a part of annual report or not.
9. General Shareholder information
(i) AGM : Date, time and venue
(ii) Financial Calendar
17
(iii) Date of Book closure
(iv) Dividend Payment Date
(v) Listing on Stock Exchanges
(vi) Stock Code
(vii) Market Price Data : High., Low during each month in last financial year
(viii) Performance in comparison to broad-based indices such as BSE
Sensex, CRISIL index etc.
(ix) Registrar and Transfer Agents
(x) Share Transfer System
(xi) Distribution of shareholding
(xii) Dematerialization of shares and liquidity
(xiii) Outstanding GDRs/ADRs/Warrants or any Convertible instruments,
conversion date and likely impact on equity
(xiv) Plant Locations
(xv) Address for correspondence
18
Annexure 1C
Non-Mandatory Requirements
(1) Chairman of the Board
A non-executive Chairman should be entitled to maintain a Chairman’s office at the
company’s expense and also allowed reimbursement of expenses incurred in
performance of his duties.
(2) Remuneration Committee
(i)The board should set up a remuneration committee to determine on their behalf
and on behalf of the shareholders with agreed terms of reference, the company’s
policy on specific remuneration packages for executive directors including pension
rights and any compensation payment.
(ii)To avoid conflicts of interest, the remuneration committee, which would
determine the remuneration packages of the executive directors should comprise of
at least three directors, all of whom should be non-executive directors, the
chairman of committee being an independent director.
(iii)All the members of the remuneration committee should be present at the
meeting.
(iv)The Chairman of the remuneration committee should be present at the Annual
General Meeting, to answer the shareholder queries. However, it would be up to
the Chairman to decide who should answer the queries.
3. Shareholder Rights
The half-yearly declaration of financial performance including summary of the significant
events in last six-months, should be sent to each household of shareholders.
4. Postal Ballot
Currently, though there is requirement for holding the general meeting of
shareholders, in actual practice only a small fraction of the shareholders of that
company do or can really participate therein. This virtually makes the concept of
corporate democracy illusory. It is imperative that this situation which has lasted too
long needs an early correction. In this context, for shareholders who are unable to
attend the meetings, there should be a requirement which will enable them to vote
by postal ballot for key decisions. Some of the critical matters which should be
decided by postal ballot are given below:
(i)Matters relating to alteration in the memorandum of association of the company
like changes in name, objects, address of registered office etc;
(ii)Sale of whole or substantially the whole of the undertaking;
a. Sale of investments in the companies, where the shareholding or the voting rights
of the company exceeds 25%;
b. Making a further issue of shares through preferential allotment or private placement
basis;
19
c. Corporate restructuring;
d. Entering a new business area not germane to the existing business of the
company;
e. Variation in rights attached to class of securities;
f. Matters relating to change in management
(5) Audit qualifications
Company may move towards a regime of unqualified financial statements.
(6) Training of Board Members
Company shall train its Board members in the business model of the company as
well as the risk profile of the business parameters of the company, their
responsibilities as directors, and the best ways to discharge them.
(7) Mechanism for evaluating non-executive Board Members
The performance evaluation of non-executive directors should be done by a peer
group comprising the entire Board of Directors, excluding the director being
evaluated; and Peer Group evaluation should be the mechanism to determine
whether to extend / continue the terms of appointment of non-executive directors.
20
SEBI had constituted a Committee on Corporate Governance under the Chairmanship of
Shri N. R. Narayana Murthy. Based on the recommendations of the Committee and public
comments received, certain amendments were made in Clause 49 of the Listing Agreement,
vide circular dated August 26, 2003.
SEBI convened another meeting of the Narayana Murthy committee on Corporate
Governance be convened on November 17, 2003 for deliberating the suggestions and
representations received after the issuance of the aforesaid circular.
The committee has since submitted its report to SEBI. The report proposes certain
amendments in the revised clause 49 which was issued vide circular dated 26th August
2003. The report is reproduced below for seeking public comments.
Issues under clause 49 and proposed amendments
Issue 1 – Definition of independent director
Existing language – Explanation (i)(e) to clause I.A
Explanation (i): For the purpose of this clause, the expression ‘independent director’ shall
mean non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
b. is not related to promoters or management at the board level or at one
level below the board;
c. has not been an executive of the company in the immediately preceding
three financial years;
d. is not a partner or an executive of the statutory audit firm or the internal
audit firm that is associated with the company, and has not been a partner or
an executive of any such firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a material association with the
entity.
e. is not a supplier, service provider or customer of the company. This
should include lessor-lessee type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or
more of the block of voting shares.
Discussion
Explanation (i)(e) restricts any supplier, service provider or customer of the company from
being an independent director on the board of the company. This clause should ideally only
21
bar persons who are material suppliers, service providers or customers and not extend it to
any and all suppliers, service providers or customers.
This view is further supported by the fact that Explanation (i)(a) does not disqualify a nonexecutive director who has an immaterial pecuniary relationship or transaction with the
company, its promoters, its senior management or its holding company, its subsidiaries and
associated companies from serving as an independent director.
It is therefore proposed that the word "material" be inserted before supplier, in
Explanation (i)(e) to Clause I.A.
Revised language – Explanation (i)(e) to clause I.A
Explanation (i): For the purpose of this clause, the expression ‘independent director’
shall mean non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have, in the opinion
of the board, any material pecuniary relationships or transactions with the
company, its promoters, its senior management or its holding company, its
subsidiaries and associated companies which in the judgment of the board
may affect independence of judgment of the director;
b. is not related to promoters or management at the board level or at one
level below the board;
c. has not been an executive of the company in the immediately preceding
three financial years;
d. is not a partner or an executive of the statutory audit firm or the internal
audit firm that is associated with the company, and has not been a partner or
an executive of any such firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a material association with the
entity.
e. is not, in the opinion of the board, a material supplier, service provider or
customer of the company, which in the judgment of the board may affect
independence of judgment of the director". This should include lessor-lessee
type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or
more of the block of voting shares.
Note:
For the purposes of this clause:
a. Associated company shall mean a company which is an "associate" as
defined in Accounting Standard (AS) 23, "Accounting for Investments in
Associates in Consolidated Financial Statements", issued by the Institute of
Chartered Accountants of India.
b. Senior management shall have the meaning as prescribed in the explanation
to clause VII(E).
c. "Relative" shall mean "relative" as defined in section 2(41) and section 6 of
the Companies Act, 1956.
22
Issue 2 – Definition of independent director – "Institutional directors"
Existing language – Explanation (ii) to clause IA
Explanation (ii) : Institutional directors on the boards of companies shall be considered as
independent directors whether the institution is an investing institution or a lending
institution.
Discussion
a. The explanation does not make it clear that even an institutional director must in
order to be considered as independent, satisfy the tests laid down in clauses (a) to
(f).
b. It is also necessary to clarify that institutional directors have the same rights, duties
and responsibilities as any other member of the board.
Revised language – Explanation (ii) to clause IA
a. There shall be no nominee directors. Where an institution wishes to appoint a
director on the Board, such appointment should be made by the shareholders.
b. An institutional director on the boards of companies shall be considered as an
independent director unless he does not satisfy the requirements of any of the
clauses (a) to (f) listed above.
c. An institutional director shall have the same rights, duties and responsibilities as
other members of the board and as prescribed under the Companies Act, 1956 and
the Listing regulations.
d. Nominee of the Government on public sector companies shall be similarly elected
and shall be subject to the same responsibilities and liabilities as other directors.
Issue 3 – Remuneration paid to non-executive directors
Existing language – Clauses I.B(i), I.B(ii) and I.C(ii)
Clause I.B(i) – All remuneration paid to non-executive directors shall be fixed by the Board
of Directors and shall be approved by shareholders in general meeting. Limits shall be set
for the maximum number of stock options that can be granted to non-executive directors in
any financial year and in aggregate. The stock options granted to the non-executive
directors shall vest after a period of at least one year from the date such non-executive
directors have retired from the Board of the Company.
Clauses I.B(ii) and I.C(ii) – The considerations as regards remuneration paid to an
independent director shall be the same as those applied to a non-executive director
23
Discussion
It is recommended that a clarification be added to state that non-executive directors include
independent director. This will ensure clarity in drafting.
As a result of this, clauses I.B(ii) and I.C(ii) become redundant and should be deleted.
Revised language – Clauses I.B(i), I.B(ii) and I.C(ii)
49 I.B(i) All remuneration paid to non-executive directors, including independent directors,
shall be fixed by the Board of Directors and shall be agreed to by shareholders in general
meeting. Limits shall be set for the maximum number of stock options that can be granted to
non-executive directors, including independent directors, in any financial year and in
aggregate. The stock options granted to the non-executive directors, including independent
directors, shall vest after a period of at least one year from the date of grant of the stock
options. This requirement shall apply prospectively to all new option grants made after the
effective date of this circular.
Delete clauses I.B(ii) and I.C(ii)
Issue 4 – Responsibility of independent directors
Existing language – Clause I.C(i)
I.C(i) Independent director shall however periodically review legal
compliance reports prepared by the company as well as steps taken by the
company to cure any taint. In the event of any proceedings against an
independent director in connection with the affairs of the company, defence
shall not be permitted on the ground that the independent director was
unaware of this responsibility.
Discussion
The board as a whole should have the responsibility to periodically review legal compliance
reports prepared by the company as well as the steps taken to cure any instances of noncompliance.
A director is an officer of the company and the term "officer who is in default" has already
been defined in section 2(31) and section 5 of the Companies Act, 1956. It is therefore not
necessary to make any further provision in this respect and the second sentence to clause
I(C)(i) may be deleted.
Revised language – Clause I.C(i)
49 I C(i) The Board shall periodically review legal compliance reports
prepared by the company as well as steps taken by the company to
cure instances of non-compliances.
24
Issue 5 – Amendment to board procedures
Existing language – Clause I.D(iii)
I.D(iii) Further only the three committees viz. the Audit Committee, the
Shareholders’ Grievance Committee and the Remuneration Committee shall
be considered for this purpose.
Discussion
There is currently a shortage of independent directors. The Companies Act, 1956 prescribes
in section 277 that a person cannot hold more than 15 directorships and section 278
provides that in considering the limit, directorship as an alternate director should be
excluded, whereas the clause restricts committee memberships to 10. Therefore,
independent directors who would otherwise be willing to serve on such committees are
unable to do so.
The formation of a remuneration committee is not mandatory and it meets only occasionally.
It is therefore suggested that for the purposes of the calculation of the limit, only the audit
committee and the shareholders’ grievance committee should be counted.
Revised language – Clause I.D(iii)
I.D(iii) Further only two committees viz. the Audit Committee and the
Shareholders’ Grievance Committee shall be considered for this purpose.
Issue 6 – Term of office of non-executive directors
Existing language – Clause I.F(i)
I.F(i) Person shall be eligible for the office of non-executive director so long
as the term of office did not exceed nine years in three terms of three years
each, running continuously.
Discussion
The existing language in clause I.F(i) would require that no non-whole time director can
continue as a director beyond a period of three consecutive terms of three years each, i.e. a
total of nine years. This may create practical problems as it may prevent promoters and
directors protecting their interests from continuing on the board even while the promoters’
investment in the company continues. It may also prevent the continuance on the board of
other individuals, who may be making a significant contribution as a board member and
whose continuance on the board may be in the interest of the company.
It can however be argued that long association with the company may be perceived as
impairing the independence of a director. It may therefore be provided that where an
individual continues on the board beyond the prescribed term of nine years, he shall no
longer be considered as an independent director.
It is also necessary that this provision be made prospective, i.e. it should apply to a period of
nine years in the aggregate, such period to commence on or after the date the amended
clause 49 comes into force. It is therefore necessary that this clause be amended as follows:
25
Revised language – Clause I.F(i)
I.F(i) A director shall be considered to be an independent director only so
long as his tenure on the board does not exceed, in the aggregate, a period
of nine years, such period to be considered as commencing on or after the
date this circular comes into force or the date of his first appointment as a
director, whichever is later. After the expiry of the said period, the director
may continue to be a member of the board and be eligible for reappointment
on the expiry of his term, but he shall not be considered to be an
independent director.
Issue 7 – Requirements related to audit committees
Existing language –Clause II.A(iv)
II.A(iv) The Chairman shall be present at Annual General Meeting to answer
shareholder queries
Discussion
It may not be practical for the Chairman of the Audit Committee to be present at all annual
general meetings to answer shareholder queries due to various reasons, including travel, ill
health, etc. it is therefore recommended that in his absence, another member of the audit
committee, who is an independent director may be present to answer shareholder queries.
Revised language –Clause II.A(iv)
II.A(iv) The Chairman of the audit committee, or in his absence, a designated
member of the audit committee who is an independent director shall be
present at Annual General Meeting to answer shareholder queries
Issue 8 – Meeting of Audit Committee – Clause II.B
Existing language
II.B The audit committee shall meet at least thrice a year. One meeting shall
be held before finalization of annual accounts and one every six months. The
quorum shall be either two members or one third of the members of the audit
committee, whichever is higher and minimum of two independent directors.
Discussion
Clause II.D(i) requires that the audit committee should have an oversight of the disclosure of
financial information. A listed company is required to publish quarterly financial results and
annual financial statements. It is therefore necessary that the audit committee should meet
at least four times in a year.
26
Revised language
II.B The audit committee should meet at least four times in a year and not
more than four months shall elapse between two meetings. The quorum
shall be either two members or one third of the members of the audit
committee whichever is greater, but there should be a minimum of two
independent members present.
Issue 9 – Role of the audit committee
Existing language –Clause II.D
(i) The role of the audit committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending the appointment and removal of external auditor, fixation of audit fee
and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to
the board, focusing primarily on;
a.
b.
c.
d.
e.
f.
g.
Any changes in accounting policies and practices.
Major accounting entries based on exercise of judgment by management.
Qualifications in draft audit report.
Significant adjustments arising out of audit.
The going concern assumption.
Compliance with accounting standards.
Compliance with stock exchange and legal requirements concerning
financial statements
h. Any related party transactions
4. Reviewing with the management, external and internal auditors, the adequacy of
internal control systems.
5. Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
6. Discussion with internal auditors any significant findings and follow up there on.
7. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
8. Discussion with external auditors before the audit commences about nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
9. Reviewing the company’s financial and risk management policies.
10. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
Explanation (i): The term "related party transactions" shall
have the same meaning as contained in the Accounting
Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.
27
Explanation (ii): If the company has set up an audit
committee pursuant to provision of the Companies Act, the
company agrees that the said audit committee shall have
such additional functions / features as is contained in the
Listing Agreement.
Discussion
Section 217(2AA) of the Companies Act, 1956 requires that the Board’s report should
include a Director’s Responsibility Statement which covers many of the items covered in this
clause. To ensure consistency, it is necessary to reword some of the clauses.
Revised language –Clause II.D
(i) The role of the audit committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the external auditor and the fixation of audit fees.
3. Approval of payment to external auditors for any other services rendered by the
external auditors.
4. Reviewing, with the management, the annual financial statements before submission
to the board for approval, with particular reference to:
a. Matters required to be included in the Director’s Responsibility Statement to
be included in the Board’s report in terms of clause 2AA of section 217 of the
Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for the
same
c. Major accounting entries involving estimates based on the exercise of
judgment by management
d. Significant adjustments made in the financial statements arising out of audit
findings
e. Compliance with listing and other legal requirements relating to financial
statements
f. Disclosure of any related party transactions
g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before
submission to the board for approval
6. Reviewing, with the management, external and internal auditors, adequacy of the
internal control systems.
7. Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
8. Discussion with internal auditors any significant findings and follow up there on.
9. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
10. Discussion with external auditors before the audit commences about nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
11. Reviewing the company’s financial and risk management policies.
28
12. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
Explanation (i): The term "related party transactions" shall
have the same meaning as contained in the Accounting
Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.
Explanation (ii): If the company has set up an audit
committee pursuant to provision of the Companies Act, the
company agrees that the said audit committee shall have
such additional functions / features as is contained in the
Listing Agreement.
Clause II.E.5 becomes redundant and should therefore be deleted.
Issue 10 – Review of information by Audit Committee
Existing language –Clause II.E
(E) Review of information by Audit Committee
(i) The Audit Committee shall mandatorily review the following information:
1. Financial statements and draft audit report, including quarterly / half-yearly financial
information;
2. Management discussion and analysis of financial condition and results of operations;
3. Reports relating to compliance with laws and to risk management;
4. Management letters / letters of internal control weaknesses issued by statutory /
internal auditors; and
5. Records of related party transactions
6. The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee
Discussion
The requirement in sub-clause 1 is already covered in clause I.D and should be deleted
It is not practical to expect audit committees to review the records of related party
transactions. It should be sufficient if management places before the audit committee for
review, a statement of significant related party transactions and gives details of related party
transactions that are not at an arm’s length basis with reasons for the same.
Clause VII provides that risk management procedures should be reviewed by the Board.
Therefore, there is no need for the audit committee to also perform this review.
29
Revised language –Clause II.E
II (E) Review of information by Audit Committee
(i) The Audit Committee shall mandatorily review the following information:
1. Management discussion and analysis of financial condition and results of
operations;
2. Statement of significant related party transactions (as defined by the audit
committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the
external auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee.
Issue 11 – Audit reports and qualifications
Existing language –Clause III.A
A. Disclosure of Accounting Treatment
In case it has followed a treatment different from that prescribed in an Accounting
Standards, management shall justify why they believe such alternative treatment is more
representative of the underlined business transactions. Management shall also clearly
explain the alternative accounting treatment in the footnote of financial statements.
Discussion
Where an accounting standard is not followed, the auditor is required to disclose that fact
and qualify his report. What is proposed, in addition, is that management should provide an
explanation in a note to the financial statements as to the fact that an accounting standard is
not followed and the reason for the departure. The language in the clause does not bring
this out.
Since this is a matter of disclosure, it would be more appropriate to delete this clause and
include an amended clause under clause VII as sub-clause (AA)
Revised language –Clause VII.AA
AA. Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from that prescribed
in an Accounting Standard has been followed, the fact shall be disclosed in the financial
statements, together with the management’s explanation as to why it believes such
alternative treatment is more representative of the true and fair view of the underlined
business transaction.
Issue 12 – Whistle Blower Policy
30
Existing language –Clause IV.A
(A) Internal Policy on access to Audit Committees:
i.
ii.
iii.
iv.
v.
Personnel who observe an unethical or improper practice (not necessarily a violation
of law) shall be able to approach the audit committee without necessarily informing
their supervisors.
Companies shall take measures to ensure that this right of access is communicated
to all employees through means of internal circulars, etc. The employment and other
personnel policies of the company shall contain provisions protecting "whistle
blowers" from unfair termination and other unfair prejudicial employment practices.
Company shall annually affirm that it has not denied any personnel access to the
audit committee of the company (in respect of matters involving alleged misconduct)
and that it has provided protection to "whistle blowers" from unfair termination and
other unfair or prejudicial employment practices.
Such affirmation shall form a part of the Board report on Corporate Governance that
is required to be prepared and submitted together with the annual report.
The appointment, removal and terms of remuneration of the chief internal auditor
shall be subject to review by the Audit Committee.
Discussion
The intention of this clause is that management establishes a mechanism for employees to
report concerns about unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy. The exact details of such a mechanism should
be left to each company, through its Board of Directors, to decide but the existence and
implementation must be reviewed by the audit committee. The mechanism must have
adequate provisions to ensure there is no victimization of employees who avail of this
procedure. The clause may be reworded accordingly.
Revised language – Clause IV.A
i.
ii.
iii.
iv.
v.
The company will establish a mechanism for employees to report to the
management concerns about unethical behaviour, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy.
The mechanism must provide for adequate safeguards against victimization of
employees who avail of the mechanism.
The mechanism must also provide, where senior management is involved, direct
access to the Chairman of the Audit Committee.
The existence of the mechanism must be appropriately communicated within the
organization.
The Audit Committee must periodically review the existence and functioning of the
mechanism.
Issue 13 – Deletion of redundant clause on internal audit
Existing language –Clause IV.A(v)
IV.A(v) The appointment, removal and terms of remuneration of the chief
internal auditor shall be subject to review by the Audit Committee.
31
Discussion
Clause IV.A(v) dealing with the audit committee review of the appointment, removal and
terms of remuneration of the Chief Internal Auditor should be deleted since this is a
repetition of clause II.E.6 of clause 49. This ensures absence of redundant language.
Revised language –Clause IV.A(v)
Clause IV.A(v) should be deleted.
Issue 14 – Subsidiary companies
Existing language –Clause V
i. The company agrees that provisions relating to the composition of the
Board of Directors of the holding company shall be made applicable to the
composition of the Board of Directors of subsidiary companies
ii. At least one independent director on the Board of Directors of the holding
company shall be a director on the Board of Directors of the subsidiary
company.
iii. The Audit Committee of the holding company shall also review the
financial statements, in particular the investments made by the subsidiary
company.
iv. The minutes of the Board meetings of the subsidiary company shall be
placed for review at the Board meeting of the holding company.
v. The Board report of the holding company should state that they have
reviewed the affairs of the subsidiary company also.
Discussion
It has been pointed out that the implementation of this clause may create the following
practical difficulties:
1. Subsidiaries are often of small size and it may be too onerous if all the
provisions regarding the composition of the board as applicable to a holding
company are made applicable to every subsidiary. There may also be
difficulties in applying this clause to joint ventures, when the composition of
the board may be determined by the joint venture agreement.
2. Where there are a large number of subsidiaries, independent directors on
the board of the parent company may not be willing to become directors on
the board of a subsidiary, particularly where such a directorship is included
in the number of directorships to which the ceiling prescribed under the
Companies Act, 1956 applies.
3. It may be very expensive for a company if the independent director is
required to attend board meetings of foreign subsidiaries
At the same time, it needs to be appreciated that the intention in formulating
this clause was the need for the board of the holding company to have some
32
independent link with the board of the subsidiary and provide necessary
oversight.
It is therefore suggested that the clause may be revised as under:
1. The provisions of sub-clause (ii), which provide that at least one
independent director in the holding company shall be a director of the
subsidiary company shall apply only to material Indian subsidiaries
i.e. subsidiaries whose turnover or net worth in the immediately
preceding year exceeds 20% of the consolidated turnover or
consolidated net worth respectively, of the holding company and its
subsidiaries.
2. There should be an obligation on the part of the management to
bring to the attention of the board of the holding company significant
transactions and arrangements entered into by the subsidiary
companies. For this purpose, "significant transaction and
arrangement" shall mean any individual transaction or arrangement
that exceeds or is likely to exceed 10% of the total revenues or total
expenses or total assets or total liabilities of the company, as the
case may be, in the immediately preceding year.
Clause V (v) pertaining to a disclosure of the review of affairs of a subsidiary company by
the board of the parent company should be deleted since it is superfluous. This aspect is
already covered in clauses V(iii) and V(iv).
Revised language –Clause V
i. At least one independent director on the Board of Directors of the holding
company shall be a director on the Board of Directors of a material non listed
Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the
financial statements, in particular, the investments made by the unlisted
subsidiary company.
iii.
The minutes of the Board meetings of the unlisted subsidiary company shall be
placed at the Board meeting of the listed holding company. The management should
periodically bring to the attention of the Board of Directors of the listed holding
company, a statement of all significant transactions and arrangements entered into
by the unlisted subsidiary company.
Explanation (i): The term "material non-listed Indian subsidiary" shall mean
an unlisted subsidiary, incorporated in India, whose turnover or net worth
(i.e. paid up capital and free reserves) in the preceding accounting year
exceeds 20% of the consolidated turnover or net worth respectively, of the
listed holding company and its subsidiaries in the immediately preceding
accounting year.
Explanation (ii): The term "significant transaction or arrangement" shall mean
any individual transaction or arrangement that exceeds or is likely to exceed
10% of the total revenues or total expenses or total assets or total liabilities,
as the case may be, of the material unlisted subsidiary for the immediately
preceding accounting year.
33
Explanation (iii): Where a listed holding company has a listed subsidiary
company which is itself a holding company, the above provisions shall apply
to the listed subsidiary insofar as its subsidiaries are concerned.
Issue 15 – Disclosure of contingent liabilities
Existing language –Clause VI
VI(i) The company agrees that management shall provide a clear description
in plain English of each material contingent liability and its risks, which shall
be accompanied by the auditor’s clearly worded comments on the
management’s view. This section shall be highlighted in the significant
accounting policies and notes on accounts, as well as, in the auditor’s report,
where necessary.
Discussion
The disclosure of contingent liabilities is already required under Schedule VI to the
Companies Act, 1956. It is also impractical for auditors to comment on management’s views
and any such view/comment may be construed as an admission of the liability, which may
be detrimental to the interests of the shareholders. It is therefore suggested that this clause
be deleted.
Revised language –Clause VI
Delete clause VI(i) in its entirety.
Issue 16 – Basis of related party transactions
Existing language –Clause VII.A(i)
VII.A(i) A statement of all transactions with related parties including their
basis shall be placed before the Audit Committee for formal
approval/ratification. If any transaction is not on an arm’s length basis,
management shall provide an explanation to the Audit Committee justifying
the same.
Discussion
It may be cumbersome and unnecessary for the audit committee to review all transactions
with related parties which are in the ordinary course of business. It should therefore be
sufficient if these transactions are placed periodically in a summary form before the audit
committee.
It is however necessary that material individual transactions which are not in the normal
course of business are placed before the audit committee. It is also necessary that
management identify and place before the audit committee, material individual transactions,
whether in the normal course of business or otherwise, with related parties or others which
are not on an arm’s length basis, together with a justification for the same.
34
Revised language –Clause VII.A(i)
VII.A(i) A statement in summary form of transactions with related parties in
the ordinary course of business shall be placed periodically before the audit
committee.
(ii) Material individual transactions with related parties which are not in the
normal course of business shall be placed before the audit committee.
(iii) Material individual transactions with related parties or others which are
not on an arm’s length basis should be placed before the audit committee,
together with Management’s justification for the same.
Issue 17 – Board disclosures – risk management
Existing language –Clause VII.B(i)
VII.B(i) Management shall place a report certified by the compliance officer
of the company, before the entire Board of Directors every quarter
documenting the business risks faced by the company, measures to address
and minimize such risks, and any limitations to the risk taking capacity of the
corporation. This document shall be formally approved by the Board.
Discussion
The compliance officer of a company may not be the right person to attest/certify disclosure
of the business risks faced by a company. It is recommended that this requirement be
deleted.
Revised language –Clause VII.B(i)
Delete clause VII.B(i) in its entirety.
Issue 18 – Proceeds from Initial Public Offering (IPO)
Existing language –Clause VII.C(i)
VII.C(i) When money is raised through an Initial Public Offering (IPO) it shall
disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc), on
a quarterly basis as a part of their quarterly declaration of financial results.
Further, on an annual basis, the company shall prepare a statement of funds
utilized for purposes other than those stated in the offer
document/prospectus. This statement shall be certified by the independent
auditors of the company. The audit committee shall make appropriate
recommendations to the Board to take up steps in this matter.
Discussion
The current language in clause 49 requires companies to disclose use of IPO proceeds
without specifying any time limitation. It is recommended that clause 49 be amended to
35
ensure this disclosure is required only till funds are spent. There is no reason why this
provision should apply only to an IPO and not be made applicable to all public offerings.
Further, funds utilised for purposes other than that for which they were raised should be
placed before the audit committee.
Revised language –Clause VII.C(i)
When money is raised through an issue to public (including public issues, rights issues), it
shall disclose to the Audit Committee, the uses / applications of funds by major category
(capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a
part of their quarterly declaration of financial results. Further, on an annual basis, the
company shall prepare a statement of funds utilized for purposes other than those stated in
the offer document/prospectus and place it before the audit committee. Such disclosure
shall be made only till such time that the full money raised through the issue has been fully
spent. This statement shall be certified by the statutory auditors of the company. The audit
committee shall make appropriate recommendations to the Board to take up steps in this
matter.
Issue 19 – Remuneration of directors
Existing language –Clause VII.D(ii)(a)
VII.D(ii)(a) All elements of remuneration package of all the
directors, i.e. salary, benefits, bonuses, stock options,
pension etc.
Discussion
It is recommended that the disclosure of remuneration provided to directors should be
aggregated by major category and disclosed. This will facilitate a robust disclosure of
director’s remuneration.
Revised language –Clause VII.D(ii)(a)
VII.D(ii)(a) All elements of remuneration package of individual
directors, summarized under major groups, such as
salary, benefits, bonuses, stock options, pension etc.
Issue 20 – Management
Existing language –Clause VII.E(i)
VIII.E(i) Management shall make disclosures to the board relating to all
material financial and commercial transactions, where they have personal
interest, that may have a potential conflict with the interest of the company at
large (for e.g. dealing in company shares, commercial dealings with bodies,
which have shareholding of management and their relatives etc.)
36
Discussion
Clause VII.E requires management to disclose to the board details of transactions where
they have personal interests. It is recommended to change "Management" to "Senior
management" as follows, to make the language tighter and more precise.
Revised language –Clause VII.E(i)
VII.E(i) Senior management shall make disclosures to the board relating to
all material financial and commercial transactions, where they have personal
interest, that may have a potential conflict with the interest of the company at
large (for e.g. dealing in company shares, commercial dealings with bodies,
which have shareholding of management and their relatives etc.)
Explanation: For this purpose, the term "senior management" shall
mean personnel of the company who are members of its management /
operating council (i.e. core management team excluding independent
directors). This would also include all members of management one
level below the executive directors
Issue 21 – CEO/CFO certification
Discussion
(a) The CEO and the CFO must assume primary responsibility for ensuring
that the company does not enter into transactions which are fraudulent,
illegal or violative of the company’s code of conduct or ethics policy.
i.
Clause (f) which deals with two separate matters viz. (i) internal control and (ii)
accounting policies should be split into two clauses as changes an internal control
cannot be disclosed in the notes to the financial statements.
Revised language – CEO/CFO certification
The CEO (either the Executive Chairman or the Managing Director or Manager) and the
CFO (either the whole-time Finance Director or any other person heading the Finance
function) discharging that function shall certify to the Board that:
a. They have reviewed financial statements and the cash flow statement and the
Directors’ Report and that to the best of their knowledge and belief :
i.
these statements do not contain any materially untrue statement or omit any
material fact or contain statements that might be misleading;
ii.
these statements together present a true and fair view of the company’s
affairs and are in compliance with existing accounting standards, applicable
laws and regulations.
b. There are to the best of their knowledge and belief, no transactions entered into by
the company which are fraudulent, illegal or violative of the company’s code of
conduct or ethics policy.
c. They accept responsibility for establishing and maintaining internal controls and that
they have evaluated the effectiveness of the internal control systems of the company
and they have disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of internal controls, if any, of which they are aware and the steps
they have taken or propose to take to rectify these deficiencies.
37
d. They have indicated to the auditors and the Audit committee
i.
significant changes in internal control during the year;
ii.
significant changes in accounting policies during the year and that the same
have been disclosed in the notes to the financial statements; and
iii.
instances of significant fraud of which they have become aware and the
involvement, if any, of the management or an employee having a significant
role in the company’s internal control system.
Issue 22 – Annexure 1C – 4. Postal Ballot
With effect from June 15, 2001, section 192A was introduced in the Companies Act, 1956
providing for the passing of resolutions by postal ballot. Since this is now part of law, it is
suggested that paragraph 4 of Annexure 1C be deleted.
SEBI convened deliberating theafter the issuance of the aforesaid circular. SEBI hosted
aforesaid in its The commentsin its meeting held on
The committee has since submitted its report to SEBI. The report is reproduced below for
seeking public comments.*****
Issues under clause 49 and proposed amendments
Issue 1 – Definition of independent director
Existing language – Explanation (i)(e) to clause I.A
Explanation (i): For the purpose of this clause, the expression ‘independent director’ shall
mean non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
b. is not related to promoters or management at the board level or at one
level below the board;
c. has not been an executive of the company in the immediately preceding
three financial years;
d. is not a partner or an executive of the statutory audit firm or the internal
audit firm that is associated with the company, and has not been a partner or
an executive of any such firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a material association with the
entity.
e. is not a supplier, service provider or customer of the company. This
should include lessor-lessee type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or
more of the block of voting shares.
38
Discussion
Explanation (i)(e) restricts any supplier, service provider or customer of the company from
being an independent director on the board of the company. This clause should ideally only
bar persons who are material suppliers, service providers or customers and not extend it to
any and all suppliers, service providers or customers.
This view is further supported by the fact that Explanation (i)(a) does not disqualify a nonexecutive director who has an immaterial pecuniary relationship or transaction with the
company, its promoters, its senior management or its holding company, its subsidiaries and
associated companies from serving as an independent director.
It is therefore proposed that the word "material" be inserted before supplier, in
Explanation (i)(e) to Clause I.A.
Revised language – Explanation (i)(e) to clause I.A
Explanation (i): For the purpose of this clause, the expression ‘independent director’
shall mean non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have, in the opinion
of the board, any material pecuniary relationships or transactions with the
company, its promoters, its senior management or its holding company, its
subsidiaries and associated companies which in the judgment of the board
may affect independence of judgment of the director;
b. is not related to promoters or management at the board level or at one
level below the board;
c. has not been an executive of the company in the immediately preceding
three financial years;
d. is not a partner or an executive of the statutory audit firm or the internal
audit firm that is associated with the company, and has not been a partner or
an executive of any such firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a material association with the
entity.
e. is not, in the opinion of the board, a material supplier, service provider or
customer of the company, which in the judgment of the board may affect
independence of judgment of the director". This should include lessor-lessee
type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or
more of the block of voting shares.
Note:
For the purposes of this clause:
a. Associated company shall mean a company which is an "associate" as
defined in Accounting Standard (AS) 23, "Accounting for Investments in
Associates in Consolidated Financial Statements", issued by the Institute of
Chartered Accountants of India.
39
b. Senior management shall have the meaning as prescribed in the explanation
to clause VII(E).
c. "Relative" shall mean "relative" as defined in section 2(41) and section 6 of
the Companies Act, 1956.
Issue 2 – Definition of independent director – "Institutional directors"
Existing language – Explanation (ii) to clause IA
Explanation (ii) : Institutional directors on the boards of companies shall be considered as
independent directors whether the institution is an investing institution or a lending
institution.
Discussion
a. The explanation does not make it clear that even an institutional director must in
order to be considered as independent, satisfy the tests laid down in clauses (a) to
(f).
b. It is also necessary to clarify that institutional directors have the same rights, duties
and responsibilities as any other member of the board.
Revised language – Explanation (ii) to clause IA
a. There shall be no nominee directors. Where an institution wishes to appoint a
director on the Board, such appointment should be made by the shareholders.
b. An institutional director on the boards of companies shall be considered as an
independent director unless he does not satisfy the requirements of any of the
clauses (a) to (f) listed above.
c. An institutional director shall have the same rights, duties and responsibilities as
other members of the board and as prescribed under the Companies Act, 1956 and
the Listing regulations.
d. Nominee of the Government on public sector companies shall be similarly elected
and shall be subject to the same responsibilities and liabilities as other directors.
Issue 3 – Remuneration paid to non-executive directors
Existing language – Clauses I.B(i), I.B(ii) and I.C(ii)
Clause I.B(i) – All remuneration paid to non-executive directors shall be fixed by the Board
of Directors and shall be approved by shareholders in general meeting. Limits shall be set
for the maximum number of stock options that can be granted to non-executive directors in
any financial year and in aggregate. The stock options granted to the non-executive
directors shall vest after a period of at least one year from the date such non-executive
directors have retired from the Board of the Company.
Clauses I.B(ii) and I.C(ii) – The considerations as regards remuneration paid to an
independent director shall be the same as those applied to a non-executive director
40
Discussion
It is recommended that a clarification be added to state that non-executive directors include
independent director. This will ensure clarity in drafting.
As a result of this, clauses I.B(ii) and I.C(ii) become redundant and should be deleted.
Revised language – Clauses I.B(i), I.B(ii) and I.C(ii)
49 I.B(i) All remuneration paid to non-executive directors, including independent directors,
shall be fixed by the Board of Directors and shall be agreed to by shareholders in general
meeting. Limits shall be set for the maximum number of stock options that can be granted to
non-executive directors, including independent directors, in any financial year and in
aggregate. The stock options granted to the non-executive directors, including independent
directors, shall vest after a period of at least one year from the date of grant of the stock
options. This requirement shall apply prospectively to all new option grants made after the
effective date of this circular.
Delete clauses I.B(ii) and I.C(ii)
Issue 4 – Responsibility of independent directors
Existing language – Clause I.C(i)
I.C(i) Independent director shall however periodically review legal
compliance reports prepared by the company as well as steps taken by the
company to cure any taint. In the event of any proceedings against an
independent director in connection with the affairs of the company, defence
shall not be permitted on the ground that the independent director was
unaware of this responsibility.
Discussion
The board as a whole should have the responsibility to periodically review legal compliance
reports prepared by the company as well as the steps taken to cure any instances of noncompliance.
A director is an officer of the company and the term "officer who is in default" has already
been defined in section 2(31) and section 5 of the Companies Act, 1956. It is therefore not
necessary to make any further provision in this respect and the second sentence to clause
I(C)(i) may be deleted.
Revised language – Clause I.C(i)
49 I C(i) The Board shall periodically review legal compliance reports
prepared by the company as well as steps taken by the company to
cure instances of non-compliances.
Issue 5 – Amendment to board procedures
41
Existing language – Clause I.D(iii)
I.D(iii) Further only the three committees viz. the Audit Committee, the
Shareholders’ Grievance Committee and the Remuneration Committee shall
be considered for this purpose.
Discussion
There is currently a shortage of independent directors. The Companies Act, 1956 prescribes
in section 277 that a person cannot hold more than 15 directorships and section 278
provides that in considering the limit, directorship as an alternate director should be
excluded, whereas the clause restricts committee memberships to 10. Therefore,
independent directors who would otherwise be willing to serve on such committees are
unable to do so.
The formation of a remuneration committee is not mandatory and it meets only occasionally.
It is therefore suggested that for the purposes of the calculation of the limit, only the audit
committee and the shareholders’ grievance committee should be counted.
Revised language – Clause I.D(iii)
I.D(iii) Further only two committees viz. the Audit Committee and the
Shareholders’ Grievance Committee shall be considered for this purpose.
Issue 6 – Term of office of non-executive directors
Existing language – Clause I.F(i)
I.F(i) Person shall be eligible for the office of non-executive director so long
as the term of office did not exceed nine years in three terms of three years
each, running continuously.
Discussion
The existing language in clause I.F(i) would require that no non-whole time director can
continue as a director beyond a period of three consecutive terms of three years each, i.e. a
total of nine years. This may create practical problems as it may prevent promoters and
directors protecting their interests from continuing on the board even while the promoters’
investment in the company continues. It may also prevent the continuance on the board of
other individuals, who may be making a significant contribution as a board member and
whose continuance on the board may be in the interest of the company.
It can however be argued that long association with the company may be perceived as
impairing the independence of a director. It may therefore be provided that where an
individual continues on the board beyond the prescribed term of nine years, he shall no
longer be considered as an independent director.
It is also necessary that this provision be made prospective, i.e. it should apply to a period of
nine years in the aggregate, such period to commence on or after the date the amended
clause 49 comes into force. It is therefore necessary that this clause be amended as follows:
42
Revised language – Clause I.F(i)
I.F(i) A director shall be considered to be an independent director only so
long as his tenure on the board does not exceed, in the aggregate, a period
of nine years, such period to be considered as commencing on or after the
date this circular comes into force or the date of his first appointment as a
director, whichever is later. After the expiry of the said period, the director
may continue to be a member of the board and be eligible for reappointment
on the expiry of his term, but he shall not be considered to be an
independent director.
Issue 7 – Requirements related to audit committees
Existing language –Clause II.A(iv)
II.A(iv) The Chairman shall be present at Annual General Meeting to answer
shareholder queries
Discussion
It may not be practical for the Chairman of the Audit Committee to be present at all annual
general meetings to answer shareholder queries due to various reasons, including travel, ill
health, etc. it is therefore recommended that in his absence, another member of the audit
committee, who is an independent director may be present to answer shareholder queries.
Revised language –Clause II.A(iv)
II.A(iv) The Chairman of the audit committee, or in his absence, a designated
member of the audit committee who is an independent director shall be
present at Annual General Meeting to answer shareholder queries
Issue 8 – Meeting of Audit Committee – Clause II.B
Existing language
II.B The audit committee shall meet at least thrice a year. One meeting shall
be held before finalization of annual accounts and one every six months. The
quorum shall be either two members or one third of the members of the audit
committee, whichever is higher and minimum of two independent directors.
Discussion
Clause II.D(i) requires that the audit committee should have an oversight of the disclosure of
financial information. A listed company is required to publish quarterly financial results and
annual financial statements. It is therefore necessary that the audit committee should meet
at least four times in a year.
43
Revised language
II.B The audit committee should meet at least four times in a year and not
more than four months shall elapse between two meetings. The quorum
shall be either two members or one third of the members of the audit
committee whichever is greater, but there should be a minimum of two
independent members present.
Issue 9 – Role of the audit committee
Existing language –Clause II.D
(i) The role of the audit committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending the appointment and removal of external auditor, fixation of audit fee
and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to
the board, focusing primarily on;
a.
b.
c.
d.
e.
f.
g.
Any changes in accounting policies and practices.
Major accounting entries based on exercise of judgment by management.
Qualifications in draft audit report.
Significant adjustments arising out of audit.
The going concern assumption.
Compliance with accounting standards.
Compliance with stock exchange and legal requirements concerning
financial statements
h. Any related party transactions
4. Reviewing with the management, external and internal auditors, the adequacy of
internal control systems.
5. Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
6. Discussion with internal auditors any significant findings and follow up there on.
7. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
8. Discussion with external auditors before the audit commences about nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
9. Reviewing the company’s financial and risk management policies.
10. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
Explanation (i): The term "related party transactions" shall
have the same meaning as contained in the Accounting
Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.
44
Explanation (ii): If the company has set up an audit
committee pursuant to provision of the Companies Act, the
company agrees that the said audit committee shall have
such additional functions / features as is contained in the
Listing Agreement.
Discussion
Section 217(2AA) of the Companies Act, 1956 requires that the Board’s report should
include a Director’s Responsibility Statement which covers many of the items covered in this
clause. To ensure consistency, it is necessary to reword some of the clauses.
Revised language –Clause II.D
(i) The role of the audit committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the external auditor and the fixation of audit fees.
3. Approval of payment to external auditors for any other services rendered by the
external auditors.
4. Reviewing, with the management, the annual financial statements before submission
to the board for approval, with particular reference to:
a. Matters required to be included in the Director’s Responsibility Statement to
be included in the Board’s report in terms of clause 2AA of section 217 of the
Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for the
same
c. Major accounting entries involving estimates based on the exercise of
judgment by management
d. Significant adjustments made in the financial statements arising out of audit
findings
e. Compliance with listing and other legal requirements relating to financial
statements
f. Disclosure of any related party transactions
g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before
submission to the board for approval
6. Reviewing, with the management, external and internal auditors, adequacy of the
internal control systems.
7. Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
8. Discussion with internal auditors any significant findings and follow up there on.
9. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
10. Discussion with external auditors before the audit commences about nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
11. Reviewing the company’s financial and risk management policies.
45
12. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
Explanation (i): The term "related party transactions" shall
have the same meaning as contained in the Accounting
Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.
Explanation (ii): If the company has set up an audit
committee pursuant to provision of the Companies Act, the
company agrees that the said audit committee shall have
such additional functions / features as is contained in the
Listing Agreement.
Clause II.E.5 becomes redundant and should therefore be deleted.
Issue 10 – Review of information by Audit Committee
Existing language –Clause II.E
(E) Review of information by Audit Committee
(i) The Audit Committee shall mandatorily review the following information:
1. Financial statements and draft audit report, including quarterly / half-yearly financial
information;
2. Management discussion and analysis of financial condition and results of operations;
3. Reports relating to compliance with laws and to risk management;
4. Management letters / letters of internal control weaknesses issued by statutory /
internal auditors; and
5. Records of related party transactions
6. The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee
Discussion
The requirement in sub-clause 1 is already covered in clause I.D and should be deleted
It is not practical to expect audit committees to review the records of related party
transactions. It should be sufficient if management places before the audit committee for
review, a statement of significant related party transactions and gives details of related party
transactions that are not at an arm’s length basis with reasons for the same.
Clause VII provides that risk management procedures should be reviewed by the Board.
Therefore, there is no need for the audit committee to also perform this review.
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Revised language –Clause II.E
II (E) Review of information by Audit Committee
(i) The Audit Committee shall mandatorily review the following information:
1. Management discussion and analysis of financial condition and results of
operations;
2. Statement of significant related party transactions (as defined by the audit
committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the
external auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee.
Issue 11 – Audit reports and qualifications
Existing language –Clause III.A
A. Disclosure of Accounting Treatment
In case it has followed a treatment different from that prescribed in an Accounting
Standards, management shall justify why they believe such alternative treatment is more
representative of the underlined business transactions. Management shall also clearly
explain the alternative accounting treatment in the footnote of financial statements.
Discussion
Where an accounting standard is not followed, the auditor is required to disclose that fact
and qualify his report. What is proposed, in addition, is that management should provide an
explanation in a note to the financial statements as to the fact that an accounting standard is
not followed and the reason for the departure. The language in the clause does not bring
this out.
Since this is a matter of disclosure, it would be more appropriate to delete this clause and
include an amended clause under clause VII as sub-clause (AA)
Revised language –Clause VII.AA
AA. Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from that prescribed
in an Accounting Standard has been followed, the fact shall be disclosed in the financial
statements, together with the management’s explanation as to why it believes such
alternative treatment is more representative of the true and fair view of the underlined
business transaction.
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Issue 12 – Whistle Blower Policy
Existing language –Clause IV.A
(A) Internal Policy on access to Audit Committees:
i.
ii.
iii.
iv.
v.
Personnel who observe an unethical or improper practice (not necessarily a violation
of law) shall be able to approach the audit committee without necessarily informing
their supervisors.
Companies shall take measures to ensure that this right of access is communicated
to all employees through means of internal circulars, etc. The employment and other
personnel policies of the company shall contain provisions protecting "whistle
blowers" from unfair termination and other unfair prejudicial employment practices.
Company shall annually affirm that it has not denied any personnel access to the
audit committee of the company (in respect of matters involving alleged misconduct)
and that it has provided protection to "whistle blowers" from unfair termination and
other unfair or prejudicial employment practices.
Such affirmation shall form a part of the Board report on Corporate Governance that
is required to be prepared and submitted together with the annual report.
The appointment, removal and terms of remuneration of the chief internal auditor
shall be subject to review by the Audit Committee.
Discussion
The intention of this clause is that management establishes a mechanism for employees to
report concerns about unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy. The exact details of such a mechanism should
be left to each company, through its Board of Directors, to decide but the existence and
implementation must be reviewed by the audit committee. The mechanism must have
adequate provisions to ensure there is no victimization of employees who avail of this
procedure. The clause may be reworded accordingly.
Revised language – Clause IV.A
i.
ii.
iii.
iv.
v.
The company will establish a mechanism for employees to report to the
management concerns about unethical behaviour, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy.
The mechanism must provide for adequate safeguards against victimization of
employees who avail of the mechanism.
The mechanism must also provide, where senior management is involved, direct
access to the Chairman of the Audit Committee.
The existence of the mechanism must be appropriately communicated within the
organization.
The Audit Committee must periodically review the existence and functioning of the
mechanism.
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Issue 13 – Deletion of redundant clause on internal audit
Existing language –Clause IV.A(v)
IV.A(v) The appointment, removal and terms of remuneration of the chief
internal auditor shall be subject to review by the Audit Committee.
Discussion
Clause IV.A(v) dealing with the audit committee review of the appointment, removal and
terms of remuneration of the Chief Internal Auditor should be deleted since this is a
repetition of clause II.E.6 of clause 49. This ensures absence of redundant language.
Revised language –Clause IV.A(v)
Clause IV.A(v) should be deleted.
Issue 14 – Subsidiary companies
Existing language –Clause V
i. The company agrees that provisions relating to the composition of the
Board of Directors of the holding company shall be made applicable to the
composition of the Board of Directors of subsidiary companies
ii. At least one independent director on the Board of Directors of the holding
company shall be a director on the Board of Directors of the subsidiary
company.
iii. The Audit Committee of the holding company shall also review the
financial statements, in particular the investments made by the subsidiary
company.
iv. The minutes of the Board meetings of the subsidiary company shall be
placed for review at the Board meeting of the holding company.
v. The Board report of the holding company should state that they have
reviewed the affairs of the subsidiary company also.
Discussion
It has been pointed out that the implementation of this clause may create the following
practical difficulties:
1. Subsidiaries are often of small size and it may be too onerous if all the
provisions regarding the composition of the board as applicable to a holding
company are made applicable to every subsidiary. There may also be
difficulties in applying this clause to joint ventures, when the composition of
the board may be determined by the joint venture agreement.
2. Where there are a large number of subsidiaries, independent directors on
the board of the parent company may not be willing to become directors on
the board of a subsidiary, particularly where such a directorship is included
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in the number of directorships to which the ceiling prescribed under the
Companies Act, 1956 applies.
3. It may be very expensive for a company if the independent director is
required to attend board meetings of foreign subsidiaries
At the same time, it needs to be appreciated that the intention in formulating
this clause was the need for the board of the holding company to have some
independent link with the board of the subsidiary and provide necessary
oversight.
It is therefore suggested that the clause may be revised as under:
1. The provisions of sub-clause (ii), which provide that at least one
independent director in the holding company shall be a director of the
subsidiary company shall apply only to material Indian subsidiaries
i.e. subsidiaries whose turnover or net worth in the immediately
preceding year exceeds 20% of the consolidated turnover or
consolidated net worth respectively, of the holding company and its
subsidiaries.
2. There should be an obligation on the part of the management to
bring to the attention of the board of the holding company significant
transactions and arrangements entered into by the subsidiary
companies. For this purpose, "significant transaction and
arrangement" shall mean any individual transaction or arrangement
that exceeds or is likely to exceed 10% of the total revenues or total
expenses or total assets or total liabilities of the company, as the
case may be, in the immediately preceding year.
Clause V (v) pertaining to a disclosure of the review of affairs of a subsidiary company by
the board of the parent company should be deleted since it is superfluous. This aspect is
already covered in clauses V(iii) and V(iv).
Revised language –Clause V
i. At least one independent director on the Board of Directors of the holding
company shall be a director on the Board of Directors of a material non listed
Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the
financial statements, in particular, the investments made by the unlisted
subsidiary company.
iii.
The minutes of the Board meetings of the unlisted subsidiary company shall be
placed at the Board meeting of the listed holding company. The management should
periodically bring to the attention of the Board of Directors of the listed holding
company, a statement of all significant transactions and arrangements entered into
by the unlisted subsidiary company.
Explanation (i): The term "material non-listed Indian subsidiary" shall mean
an unlisted subsidiary, incorporated in India, whose turnover or net worth
(i.e. paid up capital and free reserves) in the preceding accounting year
exceeds 20% of the consolidated turnover or net worth respectively, of the
listed holding company and its subsidiaries in the immediately preceding
accounting year.
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Explanation (ii): The term "significant transaction or arrangement" shall mean
any individual transaction or arrangement that exceeds or is likely to exceed
10% of the total revenues or total expenses or total assets or total liabilities,
as the case may be, of the material unlisted subsidiary for the immediately
preceding accounting year.
Explanation (iii): Where a listed holding company has a listed subsidiary
company which is itself a holding company, the above provisions shall apply
to the listed subsidiary insofar as its subsidiaries are concerned.
Issue 15 – Disclosure of contingent liabilities
Existing language –Clause VI
VI(i) The company agrees that management shall provide a clear description
in plain English of each material contingent liability and its risks, which shall
be accompanied by the auditor’s clearly worded comments on the
management’s view. This section shall be highlighted in the significant
accounting policies and notes on accounts, as well as, in the auditor’s report,
where necessary.
Discussion
The disclosure of contingent liabilities is already required under Schedule VI to the
Companies Act, 1956. It is also impractical for auditors to comment on management’s views
and any such view/comment may be construed as an admission of the liability, which may
be detrimental to the interests of the shareholders. It is therefore suggested that this clause
be deleted.
Revised language –Clause VI
Delete clause VI(i) in its entirety.
Issue 16 – Basis of related party transactions
Existing language –Clause VII.A(i)
VII.A(i) A statement of all transactions with related parties including their
basis shall be placed before the Audit Committee for formal
approval/ratification. If any transaction is not on an arm’s length basis,
management shall provide an explanation to the Audit Committee justifying
the same.
Discussion
It may be cumbersome and unnecessary for the audit committee to review all transactions
with related parties which are in the ordinary course of business. It should therefore be
sufficient if these transactions are placed periodically in a summary form before the audit
committee.
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It is however necessary that material individual transactions which are not in the normal
course of business are placed before the audit committee. It is also necessary that
management identify and place before the audit committee, material individual transactions,
whether in the normal course of business or otherwise, with related parties or others which
are not on an arm’s length basis, together with a justification for the same.
Revised language –Clause VII.A(i)
VII.A(i) A statement in summary form of transactions with related parties in
the ordinary course of business shall be placed periodically before the audit
committee.
(ii) Material individual transactions with related parties which are not in the
normal course of business shall be placed before the audit committee.
(iii) Material individual transactions with related parties or others which are
not on an arm’s length basis should be placed before the audit committee,
together with Management’s justification for the same.
Issue 17 – Board disclosures – risk management
Existing language –Clause VII.B(i)
VII.B(i) Management shall place a report certified by the compliance officer
of the company, before the entire Board of Directors every quarter
documenting the business risks faced by the company, measures to address
and minimize such risks, and any limitations to the risk taking capacity of the
corporation. This document shall be formally approved by the Board.
Discussion
The compliance officer of a company may not be the right person to attest/certify disclosure
of the business risks faced by a company. It is recommended that this requirement be
deleted.
Revised language –Clause VII.B(i)
Delete clause VII.B(i) in its entirety.
Issue 18 – Proceeds from Initial Public Offering (IPO)
Existing language –Clause VII.C(i)
VII.C(i) When money is raised through an Initial Public Offering (IPO) it shall
disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc), on
a quarterly basis as a part of their quarterly declaration of financial results.
Further, on an annual basis, the company shall prepare a statement of funds
utilized for purposes other than those stated in the offer
document/prospectus. This statement shall be certified by the independent
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auditors of the company. The audit committee shall make appropriate
recommendations to the Board to take up steps in this matter.
Discussion
The current language in clause 49 requires companies to disclose use of IPO proceeds
without specifying any time limitation. It is recommended that clause 49 be amended to
ensure this disclosure is required only till funds are spent. There is no reason why this
provision should apply only to an IPO and not be made applicable to all public offerings.
Further, funds utilised for purposes other than that for which they were raised should be
placed before the audit committee.
Revised language –Clause VII.C(i)
When money is raised through an issue to public (including public issues, rights issues), it
shall disclose to the Audit Committee, the uses / applications of funds by major category
(capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a
part of their quarterly declaration of financial results. Further, on an annual basis, the
company shall prepare a statement of funds utilized for purposes other than those stated in
the offer document/prospectus and place it before the audit committee. Such disclosure
shall be made only till such time that the full money raised through the issue has been fully
spent. This statement shall be certified by the statutory auditors of the company. The audit
committee shall make appropriate recommendations to the Board to take up steps in this
matter.
Issue 19 – Remuneration of directors
Existing language –Clause VII.D(ii)(a)
VII.D(ii)(a) All elements of remuneration package of all the
directors, i.e. salary, benefits, bonuses, stock options,
pension etc.
Discussion
It is recommended that the disclosure of remuneration provided to directors should be
aggregated by major category and disclosed. This will facilitate a robust disclosure of
director’s remuneration.
Revised language –Clause VII.D(ii)(a)
VII.D(ii)(a) All elements of remuneration package of individual
directors, summarized under major groups, such as
salary, benefits, bonuses, stock options, pension etc.
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Issue 20 – Management
Existing language –Clause VII.E(i)
VIII.E(i) Management shall make disclosures to the board relating to all
material financial and commercial transactions, where they have personal
interest, that may have a potential conflict with the interest of the company at
large (for e.g. dealing in company shares, commercial dealings with bodies,
which have shareholding of management and their relatives etc.)
Discussion
Clause VII.E requires management to disclose to the board details of transactions where
they have personal interests. It is recommended to change "Management" to "Senior
management" as follows, to make the language tighter and more precise.
Revised language –Clause VII.E(i)
VII.E(i) Senior management shall make disclosures to the board relating to
all material financial and commercial transactions, where they have personal
interest, that may have a potential conflict with the interest of the company at
large (for e.g. dealing in company shares, commercial dealings with bodies,
which have shareholding of management and their relatives etc.)
Explanation: For this purpose, the term "senior management" shall
mean personnel of the company who are members of its management /
operating council (i.e. core management team excluding independent
directors). This would also include all members of management one
level below the executive directors
Issue 21 – CEO/CFO certification
Discussion
(a) The CEO and the CFO must assume primary responsibility for ensuring
that the company does not enter into transactions which are fraudulent,
illegal or violative of the company’s code of conduct or ethics policy.
i.
Clause (f) which deals with two separate matters viz. (i) internal control and (ii)
accounting policies should be split into two clauses as changes an internal control
cannot be disclosed in the notes to the financial statements.
Revised language – CEO/CFO certification
The CEO (either the Executive Chairman or the Managing Director or Manager) and the
CFO (either the whole-time Finance Director or any other person heading the Finance
function) discharging that function shall certify to the Board that:
a. They have reviewed financial statements and the cash flow statement and the
Directors’ Report and that to the best of their knowledge and belief :
i.
these statements do not contain any materially untrue statement or omit any
material fact or contain statements that might be misleading;
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ii.
these statements together present a true and fair view of the company’s
affairs and are in compliance with existing accounting standards, applicable
laws and regulations.
b. There are to the best of their knowledge and belief, no transactions entered into by
the company which are fraudulent, illegal or violative of the company’s code of
conduct or ethics policy.
c. They accept responsibility for establishing and maintaining internal controls and that
they have evaluated the effectiveness of the internal control systems of the company
and they have disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of internal controls, if any, of which they are aware and the steps
they have taken or propose to take to rectify these deficiencies.
d. They have indicated to the auditors and the Audit committee
i.
significant changes in internal control during the year;
ii.
significant changes in accounting policies during the year and that the same
have been disclosed in the notes to the financial statements; and
iii.
instances of significant fraud of which they have become aware and the
involvement, if any, of the management or an employee having a significant
role in the company’s internal control system.
Issue 22 – Annexure 1C – 4. Postal Ballot
With effect from June 15, 2001, section 192A was introduced in the Companies Act, 1956
providing for the passing of resolutions by postal ballot. Since this is now part of law, it is
suggested that paragraph 4 of Annexure 1C be deleted.
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