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3.12.

2010
FRIDAY

Incorporation of Companies-In India and abroad

http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm

Introduction - Forming A Company In India

The Companies Act of 1956 sets down rules for the establishment of both public and
private companies. The most commonly used corporate form is the limited company,
unlimited companies being relatively uncommon. A company is formed by registering
the Memorandum and Articles of Association with the State Registrar of Companies of
the state in which the main office is to be located.

Foreign companies engaged in manufacturing and trading activities abroad are


permitted by the Reserve Bank of India to open branch offices in India for the
purpose of carrying on the following activities in India:
# To represent the parent company or other foreign companies in various matters in
India, for example, acting as buying/selling agents in India, etc.

# To conduct research work in which the parent company is engaged provided the
results of the research work are made available to Indian companies

# to undertake export and import trading activities

# to promote possible technical and financial collaboration between Indian


companies and overseas companies.

Application for permission to open a branch, a project office or liaison office is made
via the Reserve Bank of India by submitting form FNC-5 to the Controller, Foreign
Investment and Technology Transfer Section of the Reserve Bank of India. For
opening a project or site office, application may be made on Form FNC-10 to the
regional offices of the Reserve Bank of India. A foreign investor need not have a local
partner, whether or not the foreigner wants to hold full equity of the company. The
portion of the equity thus not held by the foreign investor can be offered to the
public.

Incorporating a Company - Approval of Name

The first step in the formation of a company is the approval of the name by the
Registrar of Companies (ROC) in the State/Union Territory in which the company will
maintain its Registered Office. This approval is provided subject to certain conditions:
for instance, there should not be an existing company by the same name. Further,
the last words in the name are required to be "Private Ltd." in the case of a private
company and "Limited" in the case of a Public Company. The application should
mention at least four suitable names of the proposed company, in order of
preference. In the case of a private limited company, the name of the company
should end with the words "Private Limited" as the last words. In case of a public
limited company, the name of the company should end with the word "Limited" as
the last word. The ROC generally informs the applicant within seven days from the
date of submission of the application, whether or not any of the names applied for is
available. Once a name is approved, it is valid for a period of six months, within
which time Memorandum of Association and Articles of Association together with
miscellaneous documents should be filed. If one is unable to do so, an application
may be made for renewal of name by paying additional fees. After obtaining the
name approval, it normally takes approximately two to three weeks to incorporate a
company depending on where the company is registered.

Memorandum and Articles

The Memorandum of Association and Articles of Association are the most important
documents to be submitted to the ROC for the purpose of incorporation of a
company. The Memorandum of Association is a document that sets out the
constitution of the company. It contains, amongst others, the objectives and the
scope of activity of the company besides also defining the relationship of the
company with the outside world.

The Articles of Association contain the rules and regulations of the company for the
management of its internal affairs. While the Memorandum specifies the objectives
and purposes for which the Company has been formed, the Articles lay down the
rules and regulations for achieving those objectives and purposes.

The ROC will give the certificate of incorporation after the required documents are
presented along with the requisite registration fee, which is scaled according to the
share capital of the company, as stated in its Memorandum. A private company can
commence business on receipt of its certificate of incorporation.

A public company has the option of inviting the public for subscription to its share
capital. Accordingly, the company has to issue a prospectus, which provides
information about the company to potential investors. The Companies Act specifies
the information to be contained in the prospectus.

The prospectus has to be filed with the ROC before it can be issued to the public. In
case the company decides not to approach the public for the necessary capital and
obtains it privately, it can file a "Statement in Lieu of Prospectus" with the ROC.
On fulfillment of these requirements, the ROC issues a Certificate of Commencement
of Business to the public company. The company can commence business
immediately after it receives this certificate.

Certificate of Incorporation

After the duly stamped Memorandum of Association and Articles of Association,


documents and forms are filed and the filing fees are paid, the ROC scrutinizes the
documents and, if necessary, instructs the authorised person to make necessary
corrections. Thereafter, a Certificate of Incorporation is issued by the ROC, from
which date the company comes in to existence. It takes one to two weeks from the
date of filing Memorandum of Association and Articles of Association to receive a
Certificate of Incorporation. Although a private company can commence business
immediately after receiving the certificate of incorporation, a public company cannot
do so until it obtains a Certificate of Commencement of Business from the ROC.

Miscellaneous Documents
The documents/forms stated below are filed along with Memorandum of Association
and Articles of Association on payment of filing fees (depending on the authorised
capital of the company):

# Declaration of compliance, duly stamped


# Notice of the situation of the registered office of the company
# Particulars of Directors, Manager or Secretary
# Authority executed on a non-judicial stamp paper, in favour of one of the
subscribers to the Memorandum of Association or any other person authorizing him
to file the documents and papers for registration and to make necessary corrections,
if any
# The ROC’s letter (in original) indicating the availability of the name.

Tax Registration

Businesses liable for income tax must obtain a tax identification card and number
[known as Permanent Account Number (PAN)] from the Revenue Department. In
addition to this, businesses liable to withhold tax must necessarily obtain a Tax
Deduction Account Number (TAN). Both the PAN and the TAN must be indicated on all
the returns, documents and correspondence filed with the Revenue Department. The
PAN is also required to be stated in various other documents such as the documents
pertaining to sale or purchase of any immovable property (exceeding Rs. five lakh),
sale or purchase of a motor vehicle, time deposit (exceeding Rs. 5 lakh), contract for
sale or purchase of securities (exceeding Rs. 10 lakh), to name a few.

Rules Applicable

Companies (Central Governments') General Rules and Forms,1956

Filing Registering/Approving Authority

One copy has to be submitted along with a forwarding letter addressed to the
concerned Registrar of Companies.

Enclosures

The declaration must be submitted with the following annexures


# Document evidencing payment of fee
# Memorandum and Articles of Association
# Copy of agreement if any, which the proposed company wishes to enter into with
any individual for appointment as its managing or whole-time director or manager
# Form 18
# Form 32 (except for section 25 company)
# Form 29 (only in case of public companies)
# Power of Attorney from subscribers
# Letter from Registrar of Companies making names available
# No objection letters from directors/promoters
# Requisite fees either in cash or demand draft

Fees

Fee payable depends on the nominal capital of the company to be registered and
may be paid in one of the following modes. Cash/postal order (upto Rs.501-), demand
draft favouring Registrar of Companies/Treasury Challan should be payable into
specified branches of Punjab National Bank for credit

Time-Limit / Practice Notes

Time-Limit
It should be submitted before incorporation or within 6 months of the name being
made available. Top

Practice Notes
The declaration has to be signed by an advocate of Supreme Court or High Court or
an attorney or pleader entitled to appear before the High Court or a secretary or
chartered accountant in whole-time practice in India who is engaged in the formation
of the proposed company or person named in the articles as director, manager or
secretary.

The Registrar of Companies has to be satisfied that not only the requirements of
section 33(1) and (2) have been complied with but be also satisfied that provisions
relating to number of subscribers, lawful nature of objects and name are complied
with.

The Registrar will check whether the documents have been duly stamped and also
whether the requirements of other laws are met.

Any defect in any of the documents filed has to be rectified either by all the
subscribers or their attorney, or by any one subscriber holding the power of attorney
on behalf of other subscribers.

This form is to be presented to the Registrar of Companies within three months from
the date of letter of Registrar allowing the name.

This declaration is to be given on a non-judicial stamp paper of the requisite value .


The stamp paper should be purchased in the name of the person signing the
declaration.

This declaration is to be given by all the companies at, the time of registration, public
or private.

The place of Registration No. of the company should be filled up by mentioning New
Company therein.

The Registrar of Companies will now accept computer laser printed documents for
purposes of registration provided the documents are neatly and legibly printed and
comply with the other requirements of the Act. This will be an additional option
available to the public to use laser print besides offset printing for submitting the
memorandum and articles for the registration of companies.

Where the executant of a memorandum of association is illiterate, he shall give his


thumb impression or marks which should be described as such by the subscriber or
person writing for him.

An agent may sign a memorandum on behalf of a subscriber if he is authorised by a


power-of-attorney to do so. In the case of an illiterate subscriber to the memorandum
and articles of association, the thumb impression or mark duly attested by the person
writing for him should be given. The person attesting the thumb mark should make
an endorsement on the document to the effect that it has been read and explained to
the subscriber. The Registrar of Companies will not accept zerox copies of the
memorandum and articles of association for the purposes of registration of
companies.

Presented by

This declaration is to be presented by the person signing the declaration or by his


bearer at the counter of the Registrar of Companies office.

Managerial Remuneration

# Any person in order to be appointed as the Managing Director of the company


should be a resident of India. Any person, being a non-resident in India, must obtain
an Employment Visa from the concerned Indian mission abroad at the time of their
appointment as the Managing Director.

# Whereas private companies are free to pay any remuneration to its directors,
public companies can remunerate their directors only within the specified limits.

# In case of public companies, in the event of absence or inadequacy of net profits in


any financial year, managerial remuneration is limited to amounts varying from Rs
75,000 to Rs 2,00,000 per month, depending on the effective capital of the company.
In case of an expatriate managerial person, perquisites in the form of children’s
education allowance, holiday passage money and leave travel concession provided to
him would not form part of the said ceiling of remuneration.

# In case of a managerial position in two companies, remuneration can be drawn


from one or both companies provided that the total remuneration drawn from the
companies does not exceed the higher maximum limit admissible from any one of
the companies of which he is a managerial person.

With whom to be filed

With the Registrar of Companies of the State in which the company is to be


registered.

Documents required to be submitted


# A printed copy each of the Memorandum and Articles of Association of the
proposed company filed along with the declaration duly stamped with the requisite
value of adhesive stamps from the State/ Union Territory Treasury (For value of
stamps to be affixed see Schedule printed in Part III Chapter 23). Below the
subscription clause the subscribers to the Memorandum should write in his own
handwriting his full name and father's, or husband's full name in block letters, full
address, occupation, e.g.,'business executive, engineer, housewife, etc. and number
of equity shares taken and then put his or her signatures in the column meant for
signature. Similarly at the end of the Articles Of Association the subscriber should
write in his own handwriting : his full name and father's full name in block letters, full
address, occupation. The signatures of the subscribers to the Memorandum and the
Article of Association should be witnessed by one person preferably by the person
representing the subscribers, for registration of the proposed company before the
Registrar of Companies. Under column 'Total number of equity shares' write the total
of the shares taken by the subscribers e.g., 20 (Twenty) only. Mention date e.g. 5th
day of August, 1996. Place-e.g. , 'New Delhi'.

# With the stamped copy, one spare copy each of the Memorandum and Articles of
Association of the proposed company.

# Original copy of the letter of the Registrar of Companies intimating the availability
of name.

# Form No. 18 - Situation of registered office of the proposed company.

# Form No. 29-Consent to act as a director etc. Dates on the consent Form and the
undertaking letters should be the same as is mentioned in the Memorandum of
Association signed by the director himself. A private company and a wholly-owned
Government company are not required to file Form No. 29.

# Form No. 32 (in duplicate). Particulars of proposed, directors, manager or


secretary.

# Power of attorney duly typed on a non-judicial stamp paper of the requisite value.
The stamp paper should be purchased in the name of the persons signing the
authority.

# No objection letter from the persons whose name has been given in application for
availability of name in Form No. 1-A as promoters/directors but are not interested at
a later stage should be obtained filed with the Registrar at the time of submitting
documents, for registration

# The agreements, if any, which the company proposes to enter with any individual
for, appointment as managing or whole-time director or manager are also to be filed.

Fee payable
Cash or a bank draft/ pay order treasury challan should be drawn in the name of the
Registrar of Companies of the State in which the Company is proposed to be
registered as per Schedule X.

Reporting Requirements

Annual Accounts
The Indian company law does not prescribe the books of accounts required to be
maintained by a company. It, however, provides that the same should be kept on
accrual basis and according to the double entry system of accounting and should be
such as may be necessary to give a true and fair state of affairs of the company.

The Indian company law requires every company to maintain proper books of
account with respect to the following:
# All sums of money received and expended and the matters in respect of which the
receipt and expenditure take place
# All sales and purchases of goods by the company
# The assets and liabilities of the company
# In case of companies engaged in manufacturing, processing, mining etc, such
particulars relating to utilization of material or labour or other items of cost.
The first annual accounts of a newly incorporated company should be drawn from the
date of its incorporation upto to the day not preceding the AGM date by more than 9
months. Thereafter, the accounts should be drawn from date of last account upto the
day not preceding the AGM date by more than 6 months subject to the extension of
the time limit in certain cases. The accounts of the company must relate to a
financial year (comprising of 12 months) but must not exceed 15 months. The
company can obtain an extension of the accounting period to the extent of 18
months by seeking a prior permission from the ROC.
The annual accounts must be filed with the ROC within 30 days from the date on
which the Annual General Meeting (AGM) of the company was held or where the AGM
is not held, then within 30 days of the last date on which the AGM was required to be
held.
Books of accounts to be kept by company

Every company is required to maintain proper books of account with respect to all
sums of money received and expended, all sales and purchases of goods, the assets
and liabilities. Central Government may also specifically require the maintenance of
certain additional particulars with respect to certain classes of Companies. The books
of account relating to eight years immediately preceding the current year together
with supporting vouchers are required to be preserved in good order. Every profit and
loss account and balance sheet of the company (together referred to as financial
statements) is required to comply with the accounting standards issued by the
Institute of Chartered Accountants of India. Any deviations from the accounting
standards, including the reasons and consequent financial effect, is required to be
disclosed in the financial statements.

The responsibility for the preparation of financial statements on a going concern


basis is that of the management. The management is also responsible for selection
and consistent application of appropriate accounting policies, including
implementation of applicable accounting standards along with proper explanation
relating to any material departures from those accounting standards. The
management is also responsible for making judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs of the
entity at the end of the financial year and of the profit or loss of the entity for that
period.

Annual Return
Every company having a share capital is required to file an annual return with the
ROC within 60 days from the date on which the AGM of the company was held or
where the AGM is not held, then within 60 days of the last date on which the AGM
was required to be held.

Certain Accounting related issues

Depreciation
The company law in India permits the use of depreciation rates according to the
nature of the classes of assets. Assets can be depreciated either on the basis of
straight-line method (based on the estimated life of the asset) or on the basis of
reducing balance method. The law prescribes the minimum rates of depreciation. A
company may, however, provide for a higher rate of depreciation, based on a
bonafide technological evaluation of the asset. Adequate disclosure in the annual
accounts must be made in this regard.
Dividend
There is no limit on the rate of dividend but there are certain conditions prescribed
with regard to computation of profits that can be distributed as dividend. Generally,
no dividend can be paid for any financial year except out of the profits of that year
after making an adequate provision for depreciation subject to certain conditions.
Dividends may also be distributed out of accumulated profits.

Repatriation of profits
A company has to retain a maximum of 10% of the profits as reserves before the
declaration of dividends. These reserves, inter alia, can be subsequently converted
into equity by way of issue of bonus shares. Dividends are freely repatriable once the
investment approval is granted.

Imposition of taxes
Currently, domestic companies are taxable at the rate of 35.875% (inclusive of
surcharge of 2.5%) on its taxable income. Foreign companies are taxed at a
marginally higher rate of 41% (including surcharge of 2.5%). However, in case where
the income tax liability of the company under the provisions of the domestic tax laws
works out to less than 7.5% of the book profits (derived after making the necessary
adjustments), a Minimum Alternate Tax of 7.6875% (including a surcharge of 2.5%)
on the book profits, would be payable. Domestic companies are required to pay a
dividend distribution tax of 12.8125% (including surcharge of 2.5%) on the dividends
distributed during the year.

Companies are required to withhold tax under the domestic law from certain
payments including salaries paid to employees, interest, professional fee, payments
to contractors, commission, winnings from games / lottery / horse races etc.
Moreover, taxes have to be withheld from all payments made to non-residents at the
lower of rates specified under the domestic law or under the applicable tax treaty, if
any.

Penalty

# Imprisonment up to two years and fine


# Person liable for default
# Person signing the declaration.

http://www.sethassociates.com/incorporation_of_business_entities_in_india.php

INCORPORATION OF BUSINESS ENTITY IN INDIA

A foreign company planning to set up business operations in India has the following
options to set up a business entity:-

1. As an incorporated entity under the Companies Act 1956 through JVs or wholly
owned subsidiaries
2. As an unincorporated entity through liaison office/representative office or project
office or branch office of a foreign company. Such offices can undertake activities
permitted under the Foreign Exchange Management (establishment in India of
branch office of other place of business) Regulations 2000.
Setting up Liaison / Representative / Branch/ Project Office

Liaison Office /Representative Office

A foreign company may open a liaison office in India to promote its business interest,
spread awareness of its products, explore further opportunities and act as a
communication channel between itself and various Indian companies. A Liaison Office
could be established with the approval of Reserve Bank of India. The role of Liaison
Office is limited to collection of information, promotion of exports/imports and facilitate
technical/financial collaborations. It is required to maintain itself out of inward
remittances received from abroad through normal banking channels. Liaison office
cannot undertake any commercial activity directly or indirectly. Permission for such
offices is initially granted for a period of three years and may be extended from time to
time. Applications for renewal of permission is required to be made to the concerned
regional office of Reserve Bank under whose jurisdiction the office is situated.

ProjectOffice

Foreign companies planning to execute specific projects in India can set up a temporary
project/site offices in India for carrying out activities only relating to that project. RBI
has now granted general permission to foreign entities to establish project offices subject
to specified conditions

BranchOffice

Foreign companies engaged in manufacturing and trading activities abroad are allowed to
set up branch offices in India for the purposes of export/import of goods, rendering
professional or consultancies services, R&D, promoting technical or financial
collaborations, representing the parent company, acting as buying/selling agents,
rendering services in IT and development of software, rendering technical support to the
products supplied by the parent/group companies, foreign airline/shipping companies.
Branch offices could be established with the approval of RBI and may remit outside India
profit of the branch, subject to RBI guidelines after payment of applicable Indian taxes.

Procedure for establishing Liaison Office/Project Office/BranchOffice

Application for setting up these offices may be submitted to Chief General Manger,
Exchange Control Department (Foreign Investment Division), RBI, Central Office,
Mumbai in Form FNC-I.

http://www.companyformationindia.com/

Company is a voluntary association of persons formed for the purpose of doing


business having a distinct name and limited liability. It is a juristic person having a
separate legal entity distinct from the members who constitute it, capable of rights and
duties of its own and endowed with the potential of perpetual succession. The
Companies Act, 1956, states that 'company' includes company formed and registered
under the Act or an existing company i.e. a company formed or registered under any of
the previous company laws.

However, company is not a citizen so as to claim fundamental rights granted to citizens.

Company is a 'juristic person' and it can file a suit as an 'indigent person'

An Expression 'person' includes not merely a natural person but also other juridical
persons. A company being a juristic person would be represented before a Court of law
or any other place by a person competent to represent it. It is enough that the person
competent to represent a company presents the application on behalf of the company.
Minors, lunatics or person under any disability are also entitled to file a suit either
through guardian or the next friend. In such a case it is the guardian or next friend who
is competent to represent the petitioner.

Company is a separate legal entity


Company is separate legal entity distinct from its shareholders. The major constituents
of a company are its members, who are the ultimate owners and its directors. It is an
important feature of the company form of business, that there is a gap between the
ownership and control over the affairs of the company. In real sense the members are
the owners of a company, but it is being managed by the directors who are elected
representatives of its members, because it is absolutely necessary for it to have a human
agency called as the Company's board of directors. The Board of Directors comprises
the directors.
The Department has evolved the following guiding principles for deciding availability of
names:
A name which falls within the categories mentioned below will not generally be
made available:
1. If it is not in consonance with the principal objects of the company as set out in its
memorandum of association. This does not necessarily mean that every name
should be indicative of its objects. But when there is some indication of business in
the name then it should be in conformity with its objects.
2. If the Company/Companies main business is finance unless the name is indicative
of that particular financial activities. Viz. Chit Funds/ Investments / Loan, etc.
3. If it includes any word or words which are offensive to any section of the people.
4. If the proposed name is the exact Hindi translation of the name of an existing
company in English especially an existing company with a reputation.
5. If the proposed name has a close phonetic resemblance to the name of the company
in existence for example, J.K Industries Ltd., Jay Kay Industries Limited.
6. If the name is only a general one like Cotton Textile Mills Ltd., or Silk
Manufacturing Ltd., and not specific like Calcutta Cotton Textiles Mills Limited or
Lakshmi Silk Manufacturing Company Limited.
7. If it includes, the word "Co-operative", Sahakari or the equivalent of word "Co-
operative" in the regional languages of the country.
8. If it attracts the provisions of the Emblems and Names (Prevention of Improper
Use) Act, 1950 as amended from time to time, i.e. use of improper names prohibited
under this Act.
9. If it connotes Government's participation or patronage unless circumstances justify
it. E.g., a name may be deemed undesirable in certain context if it includes any of
the words such as National, Union, Central, Federal, Republic, President,
Rashtrapathi, Small-Scale Industries, Cottage Industries and Financial Corporation
etc.
10. If the proposed name contains the words "British India"
11. If the proposed name implies association or connection with Embassy or Consulate
which suggests connection with local authorities such as Municipal, Panchayat,
Delhi Development Authority or any other body connected with the Union or the
State Government.
12. If the proposed name is vague like D.J.M.O Limited or T.N.V.R Private Limited or
S.S.R.P Limited.
13. If a proposed name implies association or connection with or patronage of a national
hero or any person held in high esteem or important personages who are occupying
important positions in Government so long as they continue to hold such positions.
14. If it resembles closely the popular or abbreviated descriptions of important
companies like TISCO (Tata Iron and Steel Company Limited), HMT (Hindustan
Machine Tools), ICI (Imperial Chemical Industries), TEXMACO (Textile
Machinery Corporation), WIMCO (Western India Match Company) etc. In some
cases, the first word or first few words may be the key words and care should be
taken that they are not exploited. Such words should not be allowed even though
they have not been registered as trademarks.
• Where the existing companies are stated and found to be well known in their
respective fields by their abbreviated names, these companies may be allowed to
change their names, by way of abbreviation with the prior approval of the
Regional Director concerned.
15. If it is different from the name/names of the existing company/companies only to
the extent of having the name of a place within brackets before the word limited; for
example, Indian Press Limited. To this rule, however, frequent exceptions are made
in the case of the subsidiary and in the case of a company carrying on local business
and in other cases on their merits. As for an example, "Corner Garage (Delhi)
Private Limited" may be allowed notwithstanding that there is an existing company
"Corner Garage Private Limited" at Calcutta. So would be "Regent Cinema
Limited" at Madres, if there is a company by the name Regent Cinema (Delhi)
Limited. These names may also be allowed if they are in the same group of
management.
16. If the proposed name includes common words like "Popular, General, Janta", if they
are in the same State doing the same business. But in case of companies in different
business in the same State and in all cases when the registered office of the
company is in different States, the name might be allowed. For instance, if there is
"Popular Drug House Private Limited" existing, another company by the name of
"Popular Plastics Private Limited" should not be objected to.
17. If it includes a name of registered trade-mark unless the consent of the owner of the
trade-mark has been produced by the promoters. It may not be possible in all cases
to check up the proposed name with the trade mark. However, if the Registrars are
in the knowledge or some interested party / parties bring to their notice a trade mark
which is included in the proposed name then it should not be allowed unless a no-
objection certificate is obtained from the party who has registered the trade mark in
its own name. [Note: Section 20(2)/ (3) has been amended by the Trade Marks Act,
1999. The amended section now provides statutory protection of trade marks in the
matter of availability of name]
18. If a name is identical with or too nearly resembles, the name of which a company in
existence has been previously registered. A few illustrations of closely resembling
names are given below for guidance. The names as proposed in column 1 should not
(normally) be made available in view of the companies in existence as shown in
column 2. However, if a proposed company is to be under the same management or
in the same group and like to have a closely resembling name to the existing
companies under the same management or group with a view to have advantage of
the goodwill attached to the management or group name such a name may be
allowed.

Even in the case of unregistered companies or firms who have built up a reputation
over a considerable period, the principle (that if a name is identical with or
too closely resembles the name by which a company has been previously registered
and is in existence, it should not be allowed) should be observed as far as
practicable. In view of the difficulty in checking up whether a proposed
name is identical with or too nearly resembles the name of an unregistered
company or a firm of repute, it should at least be ensured that a proposed name is
not allowed if it is identical with or too nearly resembles the name of a firm
within the knowledge of the Registrar. The cases of foreign companies of repute
should also be similarly treated even if there are no branches of such companies
India
Proposed Name Existing Company too nearly resembling
name
Hindustan Motor and General Finance Hindustan Motor Limited
Company
The National Steel Mfg. Co. Private National Steel Works
Limited
Trade Corporation of India Limited State Trading Corporation of India Limited
Viswakaram Engineering Works Private Viswakaram Engineer (India) Private
Limited Limited
General Industrial Financing & Trading General Financial & Trading Corporation
Co. Ltd.
India Land & Finance Limited Northern India Land & Finance Limited
United News of India Limited United Newspaper Limited
Hindustan Chemicals and Fertilizer Hindustan Fertilizers Limited
Limited
19. If it is identical with or too nearly resembles the name of a company in liquidation,
since the name of a company in liquidation is borne on the register till it is finally
dissolved. A name which is identical with or too closely resembles the name of a
company dissolved as a result of liquidation proceeding should also not be allowed
for a period of 2 years from the date of such dissolution since the dissolution of the
company could be declared void within the period aforesaid by an order of the
Court under section 559 of the Act.

Further, as a company which is dissolved in pursuance of action under section


560 of the Act can be revived by an order of the court before the expiry of 20
years from the publication in the Official Gazette of the company being so
stuck off, it is considered desirable to stop or conditionally allow the
registration of a proposed name which is identical with or too nearly resembles the
name of such dissolved company for a period indicated below. Since the period of
20 years as prescribed under the law is considered an unduly long period, the
registration of a proposed name which is identical with or too nearly resembles the
name of the company dissolved in pursuance of section 560 should not be allowed
for a period of first five years only. During the next five years such a proposed
name maybe allowed subject to the condition that in the event of the dissolved
company being restored to life by an order of the Court the new company would
have to change its name. After a lapse of ten years, name identical with or too
nearly resembling those of the dissolved companies may be allowed without any
such condition.
20. If it is different from the name of an existing company merely by the addition of
words like New Modern, Nay etc. Names such as New Bata Shoe Company, New
Bharat Electronic etc should not be allowed. Different combination of the same
words also requires careful consideration. If there is a company in existence by the
name of “Builders and Contractors Limited” the name "Contractors and Builders
Limited" should not ordinarily be allowed.
21. If it includes words like "Bank", "Banking", "Investment", "Insurance" and "Trust".
These words may, however, be allowed in cases where the circumstance justify it.
In cases of banking companies the Reserve Bank of India should be consulted and
its advice should be taken before a name is allowed for registration. The purpose of
such consultation is to prevent small banking companies from misleading the
general public by adopting the names of some well established and leading banks
functioning elsewhere than in India. In case of differences of opinion with the
Reserve Bank of India the matter should be referred to the Board for advice.
22. If the name includes the word "Industries" or "Business" unless the name is
indicative of the business of the proposed company for otherwise it serves as a lever
for the company to diversify its activities.
23. If it includes proper name which is not a name or surname of a director - such
names should not be allowed except for valid reasons. For example, for sentimental
reasons, sometimes, the name of the relatives such as wife, son or daughter of the
director may have to be allowed provided one other word suggested makes the name
quite distinguishable.
24. If it is intended or likely to produce a misleading impression regarding the scope or
scale of its activities which would be beyond the resources at its disposal. For
example, names like Water Development Corporation of India (Private) Limited,
Telefilm of India (Private) Limited, All India Sales Organization Limited, Inter
Continental Import and Export Company Limited, etc. should not be allowed. When
the authorized capital is to be only a few lakh and the area of operation limited to a
State, words like "International", "Hindustan", "India", "Bharat", "New India" etc.,
included in the proposed name need not stand the same test as Hindustan, India etc.
(as they do not give the same sense). Similarly the words, Bharat, India etc. If stated
in the bracket before the words limited or private limited need not stand the same
test as the words India, etc., put at the beginning of the name. Also the word "India"
or "Bharat" in brackets before the words Limited or private limited does not
necessarily mean that the company is an Indian Branch of some foreign company,
such as "Marsdon Electricals (India) Private Limited".
If the proposed name includes the word "State" along with the name of the State
such as Kerala State Company Limited should not be allowed as it would give an
impression of the Kerala State Government participating in the share capital of the
proposed company. However, if the name of a State only is included without the
addition of the word "State" in the proposed name then it may be allowed as it is not
likely to give the impression that the company has the State Government's interest
in it.
If the proposed name includes the word "Corporation" unless the company could be
recorded as a big sized company. However, the word "Corporation" and "Company"
may be regarded as closely resembling for purposes of allowing a new name. For
example, a company by the name of Rajasthan Finance Company should be
regarded as undesirable within the meaning of section 20 of the Act as another
company by name "Rajasthan Finance Corporation" already exists.
If the proposed name includes words like French, British, German, etc., unless the
promoters satisfy that there is some form of collaboration and connection with the
foreigners of that particular company or place the name of which is incorporated in
the name. Thus, the name "German Tool Manufacturing Company Limited" should
not be allowed unless the company has some connection with Germany.
Even where except for the first word all the other words of the proposed name are
similar to those of an existing company, the first word should be considered to be
sufficient to distinguish it from the name of the existing company. For example,
"Oriental... Limited". [Circular Letter No. 10(1) - RS/65, dated 27-11-2965.
Guidelines as to use of Key words
"With a view to maintain uniformity, the following guidelines may be followed in the use
of keywords, as part of name, while making available The proposed names under section
20 and 21 of the Companies Act, 1956
# Key Words Required Authorized
Capital
1. Corporation Rs. 5 Crore
2. International, Globe, Universal, Continental, Inter Rs. 1 Crore
Continental, Asiatic, Asia being the first word of the
name
3. If any of the words at (2) above is used within the Rs. 50 Lakh
name (with or without brackets)
4. Hindustan, India, Bharat being first word of the Rs. 50 Lakh
name
5. If any of the words at (4) above is used within the Rs. 5 Lakh
name (with or without brackets)
6. Industries / Udyog Rs. 1 Crore
7. Enterprises, Products, Business, Manufacturing Rs. 10 Lakh

These names with key words at Serial Nos. (6) And (7) may be considered when the
company proposes to deal in various business activities or the company is already
carrying on various business activities (in the case of change of name). F. No. 27/1/87-
CL-III dated 13-03-1989: (1989) 65 com cases 536 (St.)

A company registered under the Companies Act has the following features:-

1. Separate legal entity;


2. Incorporated body ;
3. Artificial legal person;
4. Perpetual succession;
5. Limited liability;
6. Common seal;
7. Right to own property;
8. Right to sue;
9. Right to enter in to contracts;
10. Flexibility of investment;
11. Separation of control from the ownership.
 A company is a legal entity, distinct and independent of those persons who from time
to time are its members.

 The liability of the company’s members can be limited to the extent they have agreed
to contribute towards the capital of the company with reference to the number of shares
and/or the amount of guarantee respectively undertaken by them.
 As the company is having an independent personality of its own, its members are not
personally liable for any act or omission on the part of the company, unless the law
expressly provides otherwise.

 The company being a juristic person, distinct from the members constituting it, can
acquire, own, enjoy and alienate property in its own name. As such the property would be
that of the company and no member can make any claim upon it so long as the company
is a going concern.

 The company being a legal entity can sue and also be sued in its own name.

 The continuity of the company and its functioning is not effected by the death,
disability or retirement of any its members. The company continues to exist, irrespective
of change in its membership. It is commonly referred to as “perpetual succession”.

 Transfer of member’s interest in the company can be readily attained without in any
way adversely affecting its property, business, or existence.

 Transferability of the company’s shares provides an element of liquidity to the


investors in respect of their investment in the shares of the company and thus facilities
increased investment in the company’s fund without, in any way, adversely affecting its
economic stability.

 The members of the company equitably share the profit by way of divided and the
company’s assets in the event of its winding up in proportion of the capital respectively
contributed by them.

 Shares of small denomination afford an opportunity to the small investors to invest


according to their capacity.

 Increased investment in the company’s funds is further ensured by permitting large


number of persons to subscribe to the company’s shares. Incorporation of a company
affords better opportunity for strengthening capital resources, growth and development of
the enterprise.

 The corporate form of business organisation affords opportunity for


professionalisation of its management and entrusting the administration of its affairs to
persons of professional competence and standing.

 Arrangements between the company and its members are comparatively similar to
those of other forms of organisation. For example, a company may make a valid and
effective contract with one of its member. It is also possible for person in control of a
company, to be in its employment as an employee, subject to the provisions of the Act.

 Incorporation of company provides better borrowing facilities as the company can


raise large amount, on comparatively easier terms, by issue of debentures, especially
those secured by a floating charge or by accepting deposits from the public. Even
banking and financial institutions prefer to render financial assistance to incorporated
companies.

 In certain cases, an incorporated company comparatively stands in a better position


from the point of view of taxation on its income.

 Once the company is brought in to existence on its incorporation, it can only be


dissolved with the provisions of the law.
Companies under the Companies Act, 1956 may be classified on various grounds as
under:
I. On the basis of business activities undertaken:
Companies

(1) (2) (3) (4) (5)


Non-Banking Non-profit
Manufacturing Service Producer
Finance making
Activities Activities (Section 581 A)
Activities (Section-25)

II. On the basis of liabilities of the members and directors:


Companies

With Limited liability With unlimited liability


(1) (2)

(a) (b) (c)


Limited Limited by Limited by
By shares Guarantee & Guarantee
having share
capital

III. On the basis of membership pattern/size


Companies

(1) (2) (3)


Public Private Government

(a) (b) (a) (b)


Unlisted Listed Inde- Subsidiary
pendent of Public
Co.

IV. On the basis of place of registration:


Companies

(1) (2)
Indian Company Foreign Company
(Incorporated in India) (Company incorporated outside
India but having place of
business in India)

V. On the basis of control over the management:


Companies

(1) (2)
(Holding Company) (Subsidiary Company)

Section 3(1) (iii) defines a private company as one which—


(a) has a minimum paid-up share capital of Rs.1 Lakh or such higher capital as may be
prescribed;and

(b) by its Articles Association:


1. restricts the right of transfer of its share;
2. limits the number of its members to 50 which will not include:-
A. members who are employees of the company; and
B. members who are ex-employees of the company and were members while in
such employment and who have continued to be members after ceasing to be
employees;
3. prohibits any invitation to the public to subscribe for any shares or debentures of
the company; and
4. Prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.

This goes to say that a private company, in addition to the earlier conditions, shall have a
minimum paid-up share capital of Rupees One Lakh or such higher capital as may be
prescribed and its Articles shall prohibit invitation or acceptance of deposits from persons
other than its members, directors or their relatives. In case of such companies, public
interest is not involved.

The basic characteristics of a private company in terms of section 3(1)(iii) of the Act do
not get altered just because it is a subsidiary of a public company in view of the fiction in
terms of section 3(1)(iv)(c) of the Act that it is a public company. May be it is a public
company in relation to other provisions of the Act but not with reference to its basic
characteristics. In terms of that section, a company is a private company when its articles
restrict the right of transfer of shares, restrict its membership to 50 (other than employees
shareholders) and prohibits invitation to public to subscribe to its shares. Therefore, all
the provisions in the articles to maintain the basic characteristics of a private company in
terms of that section is restriction on the right to transfer and the same will apply even if a
private company is a subsidiary of a public company.
Persons desirous of forming a company must adhere to the step by step procedure
as discussed below:-
1. Selection of type of the company.
2. Selection of name for the proposed company.
3. Apply for Directors Identification Number and Digital Signatures.
4. Drafting of Memorandum and Articles of Association.
5. Stamping, digitally signing and e-filing of various documents with the Registrar.
6. Payment of Fees.
7. Obtaining Certificate of Incorporation.
8. Preparation and filing of Prospectus/Statement in lieu of Prospectus and e-Form
19/20 (in case of public companies) for obtaining the certificate of commencement of
business.
Obtaining Certificate of Commencement of business (in case of public limited
9.
companies).

1. Selection of the type of company


The Promoters of a company may be individual entrepreneurs or body corporate engaged
in efforts to incorporate a company. They have the power of defining the object of the
company and deciding various matters for the company proposed to be incorporated. It is
depending upon, the purposes for which the company is to be incorporated, proposed
scale of operations, capital involved, etc. The promoters can select type of the company
as they wish to form themselves into viz. private company, public company, non-profit
making company, etc.

2. Selection of name

Six names are required to be selected in order of preference after taking notes of
numerous provisions, clarifications, circulars and rules made by the Ministry of
Corporate Affairs, etc. In case key word is required, significance of each key word should
be given in the e-Form 1A.
2.1 Applying for ascertaining the availability of the selected name
The promoters are required to make an application to the concerned Registrar of
Companies to be submitted electronically to the Ministry of Corporate Affairs on the
portal of MCA. An application shall be in e-Form 1A as prescribed by Notification No.
GSR 56(E) dated 10th Feb., 2006 duly digitally signed by any one promoter or
managing director or director or manager or secretary of the company along with the
required fee for ascertaining whether the selected name is available for adoption by the
promoters of the proposed company.

2.2 Approval of the name


After receipt of completed application in e-Form 1A, the Registrar shall intimate
whether the proposed name is available for adoption or not. The confirmation of the
name made available by the Registrar shall be valid for a period of six months.In case,
if the promoters fail to submit all the required documents for incorporation within that
period, then they are required to submit another application after payment of requisite
fees.

3. Requirement for having DIN


As per proviso to section 253 of the Companies Act, 1956, inserted by the Companies
(Amendment) Act, 2006, w.e.f. 1-11-2006, no company shall appoint or re-appoint any
individual as director of the company unless he has been allotted a Director Identification
Number under section 266B.

New section 266A has been inserted by the Companies (Amendment) Act, 2006 which
provides that every individual, intending to be appointed as director of a company shall
make an application for allotment of Director Identification Number (DIN) to the Central
Government in the prescribed DIN Form. Therefore, before submission of e-Form 1A all
the directors of the proposed company must ensure that they are having DIN and if they
are not having DIN, it should be first obtained.

Specific care should be taken that a person cannot have more than one DIN, therefore, a
3.1 Requirement for having digital signatures
After 16th Sept., 2006, every documents prescribed under the Companies Act, 1956 is
required to be filed with the digital signature of the managing director or director or
manager or secretary of the Company, therefore, it is compulsorily required to obtain
digital signatures of at least one director to sign the e-Form 1A and other documents. It
may be noted that if the director or other persons covered are having digital signatures,
their signatures may be used for the above said purpose and there is no need take new
signature again.
DIN once obtained shall serve the requirement for all the companies in which he is a
director or intended to be a director.

4. Preparation of the Memorandum of Association (MOA) and Articles of


Association (AOA)
Drafting of the MOA and AOA is generally a step subsequent to the availability of name
made by the Registrar. It should be noted that the main objects should match with the
objects shown in e-Form. These two documents are basically the charter and internal
rules and regulations of the companies. Therefore, they must be drafted with utmost care
with the experts advise and the other object clause should be drafted in a very broader
sense.

5. Filing of documents with the Registrar


Next step for the promoters is to file the following documents with the Registrar for
incorporation of the company. The following documents shall be submitted to the
Registrar alongwith the adequate filing fees as applicable for registration of the company
online with in a period of six months from the date of intimation of availability of name:-
1. Memorandum of Association, duly signed by the subscribers and witnessed,
showing the number of shares against their names electronically attached in PDF
file. It should also be properly stamped as per the stamp duty applicable in the
State, where the registered office of the company is to be situated.Simultaneously
original stamped copy of the Memorandum of Association shall be submitted with
the Registrar of Companies concerned.

2. Articles of Association should be duly signed by the subscribers and witnessed,


showing the number of shares against their names electronically. It should be
properly stamped according to the authorized share capital as per the stamp duty
applicable in the state, where the registered office of the company to be situated.
Simultaneously original stamped copy of the Memorandum of Association shall be
submitted with the Registrar of Companies concerned.

3. Copy of the agreement, if any, which the company proposes to, enter in to with any
individual for appointment as its managing or whole-time director or manager shall
be attached in the PDF file.

4. Declaration in e-Form 1 by an advocate or company secretary or chartered


accountant engaged in whole time practice in India or by a person named in the
Articles as a director, manager or secretary of the company, that all the
requirements of the Companies Act, 1956 and the rules made thereunder have been
complied with in respect of registration and matters precedent and incidental
thereto, which may be accepted by the Registrar as sufficient evidence of such
compliance. It should be carefully noted that details of all the companies in which
directors are also director should be given and the names, addresses and other
particulars of directors and promoters should be matched with the information
provided in the DIN application Form. [ Section 33(2)] (Appendix 2).

5. Power of Attorney for should be furnished by all the subscribers in favour of any
one subscriber or any other person authorising him to file these documents and to
with the Registrar and to obtain certificate of incorporation. The power of attorney
should be given on Non-Judicial stamp paper of appropriate value and shall be
submitted to the Registrar. (Appendix 3).

6. Other agreement if any, which has been stated in the Memorandum or Articles of
Association shall also be filed in the PDF file with the Registrar because in such
cases the agreement will form part of this basic document.

7. E-Form 18 is to be filed with the Registrar electronically with the digital signatures
in regard to location of the registered office. E-Form 18 shall also be certified by
the company secretary or chartered accountant or cost accountant in whole –time
practice. [ Section 146 (2)] (Appendix 4)

8. E-Form 32 is required to be filed with the Registrar electronically for filing


particulars of directors. The personal details should match with the information
provided in the DIN. Following additional details are also required to given in e-
Form 32:
(a) Name and CIN of all the companies in which they are directors;
(b) Names of partnership concerns in which they are partner;
(c) Names of proprietorship concerns in which they are proprietor;

In case if the field provided in the e-From 32 is not sufficient, an annexure may
also be enclosed for the required details. As an e- Form 32 provides fields for three
directors only, e-Form 32AD i.e. Addendum to e-Form 32 shall be submitted for
additional appointments. E-Form 32 AD, if any is also required to be certified by
the company secretary or chartered accountant or cost accountant in practice
digitally before filing with the Registrar. Consent to act as director on plain paper
6. Payment of registration fees for a new company The fees payable to the Registrar
at the time of registration of a new company varies according to the authorized capital of
a company proposed to be registered as per Schedule X to the Act. Fees can be calculated
by the MCA portal. 7. Certificate of Incorporation (section 33 and 34)

On the satisfaction of the Registrar that the requirements specified in sections 33(1) and
33(2) have been complied with by the company, he shall retain the documents and
register the MOA, AOA and other documents. Section 34(1) cast an obligation on the
Registrar to issue a Certificate of Incorporation, normally within 7 days of the receipt of
documents.

8. Commencement of Business
A Private limited company and a company not having share capital may commence its
business activities from the date of its incorporation. However, a public Limited
Company having share capital is required to take certificate of commencement of
business before it can commence business.

http://www.indianembassy.org/doing-business-in-india.php

Doing Business In India Introduction

India - with its consistent growth performance and abundant highly skilled manpower
provides enormous opportunities for investments. India is the largest democracy and
tenth largest economy in the world. India is the fourth largest economy in the world in
terms of purchasing power parity.

India has a federal system of Government with clear demarcation of powers between the
Central Government and the State Governments.

India provides a liberal, attractive, and investor friendly investment climate.

India has the most liberal and transparent policies on foreign direct investment (FDI)
among major economies of the world.
100% FDI is allowed under the automatic route in all sectors/activities except in few
areas, which require prior approval of the Government.
Under automatic route, investors are required to only notify the Reserve Bank of
India within 30 days of receipt of inward remittances.

India has liberalized and simplified foreign exchange controls.


Rupee is freely convertible on current account.
Rupee is almost fully convertible on capital account for non-residents.
For FDI- Profits earned, dividends and proceeds out of the sale of investments
are fully repatriable.
There are some restrictions for resident Indians on capital account on incomes
earned in India.
Indian economy has been growing at an average growth rate of about 8.8% p.a over the
last three years; the growth rate in 2007-08 was 9%.
Imports in 2007-08 grew by 29% and exports by 25.8%.
Manufacturing sector grew by 8.8% and services by 12% in 2007-2008.
India has a large middle class and 55% of its population is below the age of 25.
High economic growth and rising per capita income has resulted in high growth
in the domestic market, which is the prime growth engine for Indian economy.

Government of India accords high priority to development of infrastructure in highways,


ports, railways, airports, power, telecom, etc. Government is actively seeking domestic
and foreign private investment, for infrastructure sector development.

http://business.gov.in/legal_aspects/index.php

Legal aspects are an indispensable part of a successful business environment in any


country. They reflect the policy framework and the mind set of the Governmental
structure of that country. They ensure that every company is functioning as per the
statutory framework of the country. Every enterprise must take into account this legal set
up while framing the basic aims and objectives of its company. This is because, it is
necessary for efficient and healthy functioning of the organisation and helps it to know
about the rights, responsibilities as well as the challenges that it may have to face.

In India, the most important law which regulates all aspects relating to a company is the
Companies Act,1956. It contains provisions relating to formation of a company, powers
and responsibilities of the directors and managers, raising of capital, holding company
meetings, maintenance and audit of company accounts, powers of inspection and
investigation of company affairs, reconstruction and amalgamation of a company and
even winding up of a company.

The Indian Contract Act,1872, is another legislation which regulates all the transactions
of a company. It lays down the general principles relating to the formation and
enforceability of contracts; rules governing the provisions of an agreement and offer; the
various types of contracts including those of indemnity and guarantee, bailment and
pledge and agency. It also contains provisions pertaining to breach of a contract.

The other major legislations are:- the Industries (Development and Regulation) Act 1951;
Trade Unions Act; the Competition Act, 2002; the Arbitration and Conciliation Act,
1996; the Foreign Exchange Management Act (FEMA),1999; laws relating to intellectual
property rights; as well as laws relating to labour welfare.

Industrial Acts and Legislations

In India there are several Acts and legislations enacted by the Government of India for
regulation of industries in the country. These enactments play a very important role in the
country's overall progress and economic development. These legislations are amended
from time to time in accordance with the changing circumstances and environment. The
most important Act is the Companies Act,1956 which relates to setting up and operation
of companies in India. It empowers the Central Government to regulate the formation,
financing, functioning and winding up of companies. It contains the mechanism
regarding organisational, financial, managerial and all the relevant aspects of a company.

In order to provide the Central Government with the means to implement its industrial
policies, several legislations have been enacted. The most important being the Industries
(Development and Regulation) Act, 1951 (IDRA). The main objectives of the Act is to
empower the Government to take necessary steps for the development of industries; to
regulate the pattern and direction of industrial development; and to control the activities,
performance and results of industrial undertakings in the public interest.

The bulk of the transactions in trade, commerce and industry are based on contracts. In
India, the Indian Contract Act,1872 is the governing legislation for contracts, which lays
down the general principles relating to formation, performance and enforceability of
contracts and the rules relating to certain special types of contracts like Indemnity and
Guarantee; Bailment and Pledge; as well as Agency.

Another important aspect of legislations is the industrial relations, which involves various
aspects of interactions between the employer and the employees; among the employees as
well as between the employers. In such relations whenever there is a clash of interest, it
may result in dissatisfaction for either of the parties involved and hence lead to industrial
disputes or conflicts. The Industrial Disputes Act, 1947 is the main legislation for
investigation and settlement of all industrial disputes. The Act enumerates the
contingencies when a strike or lock-out can be lawfully resorted to, when they can be
declared illegal or unlawful, conditions for laying off, retrenching, discharging or
dismissing a workman, circumstances under which an industrial unit can be closed down
and several other matters related to industrial employees and employers.

Trade unions are also an important part of an industrial set up. The legislation regulating
these trade unions is the Indian Trade Unions Act, 1926 . The Act deals with the
registration of trade unions, their rights, their liabilities and responsibilities as well as
ensures that their funds are utilised properly. It gives legal and corporate status to the
registered trade unions. It also seeks to protect them from civil or criminal prosecution so
that they could carry on their legitimate activities for the benefit of the working class.

Key Regulations

An entrepreneur has to take into account the basic regulatory requirements of the country
in order to ensure sustainability of the profits and productivity of his/her business. The
most important regulation relates to the environment. The environmental regulatory
requirements envisage a wide legislative framework covering every aspect of
environment protection. Broadly, it includes the emission standards for air, noise, water,
etc. Separate set of laws for emission of hazardous wastes have also been enacted. Every
industry has to abide by these guidelines and parameters for environmental protection.
An organization for its smooth and effective functioning, must ensure health and safety of
its employees. The major legislations relating to Occupational Health and Safety in India
are:- the Factories Act, 1948; the Mines Act, 1952 and the Dock Workers (Safety, Health
& Welfare) Act, 1986. The Directorate General of Mines Safety (DGMS) and the
Directorate General of Factory Advice Service and Labour Institutes (DGFASLI) are the
two field organisations of the Ministry of Labour and Employment in the area of
occupational safety and health in mines, factories and ports.

Besides, the Government of India has taken steps like, announcing a competition policy,
enacting Competition Act, 2002 and setting up of Competition Commission of India , in
order to ensure a healthy and fair competition in the market economy. These aim to
prohibit the anti-competitive business practices, abuse of dominance by an enterprise as
well as regulate various business combinations like mergers and acquisitions.

For regulation of the export and import of goods and services an entrepreneur has to
abide by the Foreign Trade (Development and Regulation) Act, 1992 and the EXIM
policy announced by the Government from time to time. The Ministry of Commerce and
Industry is the most important organ concerned with the promotion and regulation of the
foreign trade in India. The Ministry has an elaborate organizational set up to look after
the various aspects of trade. Within the Ministry, the Department of Commerce is
responsible for formulating and implementing the foreign trade policy.

Key Regulations:
Competition Protection

The main legislation governing competition in India is the Competition Act,2002 which
repealed the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 and provided
for a modern framework of competition protection. The main objectives of the Act are:-
(i) to provide for the establishment of a commission to prevent practices having adverse
effect on competition; (ii) to promote and sustain competition in markets in India ; (iii) to
protect the interests of consumers; (iv) to ensure freedom of trade carried on by the
participants in the markets in India and for related matters.

Competition refers to a market situation in which sellers independently strive for buyer's
patronage in order to achieve the business objectives of profits, sales or market share. In
other words, it is the act of competing by an enterprise against other business enterprises
for the purpose of achieving dominance in the market or attaining a reward or goal. It is
the foundation on which a market system works. For market economy to function
effectively, this competition has to be free and fair. Such a competition:- stimulates
innovation and productivity and thus leads to the optimum allocation of resources in the
economy; guarantees the protection of consumer interests; reduces costs and improves
quality; accelerates growth and development and preserves economic and political
democracy.

In the absence of adequate safeguards, enterprises may undermine the market by


resorting to unfair practices for their short term gains. As a result, market-distortionary
practices and anti-competitive forces may restrict the working of healthy competition in
an economy. Thus, there arises the need to have a proper regulatory environment which
can ensure a healthy competition so that all business enterprises can grow and expand and
stimulate economic development of the country. Accordingly, Government has
formulated a Competition Policy which protects the interests of consumers and producers
by promoting and sustaining a fair competition. As per the provisions of the Competition
policy, the Government of India has enacted the Competition Act.

Under the Act, an autonomous body called Competition Commission of India (CCI) has
been set up with regulatory and quasi-judicial powers. To build and further strengthen the
capacity of the functionaries of the Commission, the Competition Commission of India
has established a Competition Forum with eminent personalities in the field of law,
economics, finance, public administration, management and such other fields as are
deemed appropriate.

The main provisions of the Act are:-

 The Central Government may, by notification, establish a Commission to be


called the 'Competition Commission of India'. It shall be the duty of the
Commission to eliminate practices having adverse effect on competition, promote
and sustain competition, protect the interests of consumers and ensure freedom of
trade carried on by other participants, in markets in India.

 The Act prohibits anti-competitive agreements. It declares void any agreement by


an enterprise or association of enterprises which restricts the production, supply,
distribution, acquisition or control of goods or provision of services. It recognises
horizontal and vertical agreements as having potential of restricting competition
in an economy.

The horizontal agreements are the agreements between those enterprises which are at the
same stage of production,services,etc. It includes, any collusive agreement which :-

• Directly or indirectly determines purchase or sale prices;


• Limits or controls production, supply, markets, technical
development, investment or provision of services;

• Shares the market or source production or provision of services by


way of allocation of geographical area of market, or type of goods or
services, or number of customers in the market or in any other similar
way;

• Directly or indirectly results in bid rigging or collusive bidding.

The vertical agreements are the agreements between those enterprises which are at the
different stages of production, distribution, etc. It includes the following agreements:-

• Tie-in arrangement;

• Exclusive supply agreement;

• Exclusive distribution agreement;

• Refusal to deal;

• Resale price maintenance.

 The Act prohibits abuse of dominant position by any enterprise. Dominant


position means a position of strength, enjoyed by an enterprise ,in the relevant
market in India . Such a position enables a firm to:- ( i ) operate independently of
competitive forces prevailing in the relevant market; or (ii) affect its competitors
or consumers or the relevant market in its favour .

According to the Act, abuse of dominance by an enterprise will include the following
practices :-
• Directly or indirectly imposing unfair or discriminatory conditions
in the purchase or sale of goods and services;

• Restricting the technical or scientific development relating to


goods or services to the prejudice of consumers;

• Indulging in practice(s) resulting in denial of market access;

• Making conclusions of contracts subject to acceptance by other


parties,which have no connection with the subject of such contracts;

• Using dominant position in one relevant market in order to enter


into another market.

 The Act regulates the various forms of business combinations and not prohibit
their formation. Under it, no person or enterprise shall enter into a combination, in
the form of an acquisition, merger or amalgamation, which causes or is likely to
cause an appreciable adverse effect on competition in the relevant market and
such a combination shall be void. But, all combinations do not call for scrutiny
unless the resulting combination exceeds the threshold limits in terms of assets or
turnover as specified by the Competition Commission of India (CCI) . Thus,the
Act does not seek to eliminate combinations and only aims to eliminate their
harmful effects.

 If any person contravenes, without any reasonable ground, any order of the
Commission, or any condition or restriction subject to which any approval,
sanction, direction or exemption in relation to any matter has been accorded,
given, made or granted under this Act or fails to pay the penalty imposed under
this Act, he shall be liable to be detained in civil prison.

Laws relating to Specific Industries


There are several legislations which regulate the conditions of employment, work
environment and other welfare requirements of certain specific industries. These
enactments deal with factories and workshops; mines and minerals; plantations; shops
and establishments as well as transportation. Some of the major legislations are:-

 The Factories Act,1948 is the umbrella legislation enacted to regulate the working
conditions in factories. According to the Act, a 'factory' means "any premises
including the precincts thereof:- (i) whereon ten or more workers are working, or
were working on any day of the preceding twelve months, and in any part of
which a manufacturing process is being carried on with the aid of power, or is
ordinarily so carried on; or (ii) whereon twenty or more workers are working, or
were working on any day of the preceding twelve months, and in any part of
which a manufacturing process is being carried on without the aid of power, or is
ordinarily so carried on; but this does not include a mine subject to the operation
of the Mines Act, 1952 , or a mobile unit belonging to the armed forces of the
union, a railway running shed or a hotel, restaurant or eating place."

The Act is administered by the Ministry of Labour and Employment through its
Directorate General Factory Advice Service & Labour Institutes (DGFASLI) and by the
State Governments through their factory inspectorates. DGFASLI serves as a technical
arm to assist the Ministry in formulating national policies on occupational safety and
health in factories and docks.

 The Plantation Labour Act, 1951 provides for the welfare of plantation labour and
regulates the conditions of work in plantations. According to the Act, the term
'plantation' means "any plantation to which this Act, whether wholly or in part,
applies and includes offices, hospitals, dispensaries, schools, and any other
premises used for any purpose connected with such plantation, but does not
include any factory on the premises to which the provisions of the Factories
Act,1948 apply".

The Act is administered by the Ministry of Labour through its Industrial Relations
Division . The Division is concerned with improving the institutional framework for
dispute settlement and amending labour laws relating to industrial relations. It works in
close co-ordination with the Central Industrial Relations Machinery (CIRM) in an effort
to ensure that the country gets a stable, dignified and efficient workforce, free from
exploitation and capable of generating higher levels of output.

 The Mines Act, 1952 contains provisions for measures relating to the health,
safety and welfare of workers in the coal, metalliferous and oil mines. According
to the Act,the term 'mine' means "any excavation where any operation for the
purpose of searching for or obtaining minerals has been or is being carried on and
includes all borings, bore holes, oil wells and accessory crude conditioning plants,
shafts, opencast workings, conveyors or aerial ropeways, planes, machinery
works, railways, tramways, slidings, workshops, power stations, etc. or any
premises connected with mining operations and near or in the mining area".
The Act is administered by the Ministry of Labour and Employment through the
Directorate General of Mines Safety (DGMS). DGMS is the Indian Government
regulatory agency for safety in mines and oil-fields. It conducts inspections and inquiries,
issues competency tests for the purpose of appointment to various posts in the mines,
organises seminars/conferences on various aspects of safety of workers.

 The Contract Labour (Regulation & Abolition) Act, 1970 was enacted to regulate
employment of contract labour so as to place it at par with labour employed
directly, with regard to the working conditions and certain other benefits. Contract
labour refers to "the workers engaged by a contractor for the user enterprises".
These workers are generally engaged in agricultural operations, plantation,
construction industry, ports & docks, oil fields, factories, railways, shipping,
airlines, road transport, etc.

The Act is implemented both by the Centre and the State Governments. The Central
Government has jurisdiction over establishments like railways, banks, mines etc. and the
State Governments have jurisdiction over units located in that state. In the Central sphere,
the Central Industrial Relations Machinery (CIRM) headed by Chief Labour
Commissioner (Central) and his officers have been entrusted with the responsibility of
enforcing the provisions of the Act and the rules made thereunder.

 The Building & Other Construction Workers (Regulation of Employment &


Conditions of Service) Act, 1996 was enacted to regulate the employment and
conditions of service of building and other construction workers and to provide
for their safety, health and welfare measures. The Act is applicable to every
establishment which employs ten or more workers in any building or other
construction work and to the projects costing more than Rs. 10 lakh. The Act
contains provision for immediate assistance to the workers in case of accidents;
old age pension; loans for construction of house; premia for group insurance;
financial assistance for education, medical expenses and maternity benefits, etc.

 The Motor Transport Workers Act, 1961 was enacted to provide for the welfare of
motor transport workers and to regulate the conditions of their work. It applies to
every motor transport undertaking employing five or more motor transport
workers. The State Government may, after giving notification in the Official
Gazette, apply all or any of the provisions of this Act to any motor
transport undertaking employing less than five motor transport workers.
According to the Act, 'motor transport undertaking' means "an undertaking
engaged in carrying passengers or goods or both by road for hire or reward and
includes a private carrier".

Every employer of a motor transport undertaking to which this Act applies shall have the
undertaking registered under this Act. No adult motor transport worker shall be required
or allowed to work for more than eight hours in any day and forty-eight hours in any
week. Also, no adolescent shall be employed or required to work as a motor transport
worker in any motor transport undertaking for more than six hours a day including rest
interval of half-an-hour; and between the hours of 10 P.M. and 6 A.M.

 The Sales Promotion Employees (Conditions of Service) Act, 1976 was enacted
to regulate certain conditions of service of sales promotion employees in certain
establishments. According to the Act, the term 'sales promotion employees'
means, "any person by whatever name called (including an apprentice) employed
or engaged in any establishment for hire or reward to do include any such person:-
(i) who, being employed or engaged in a supervisory capacity, draws wages
exceeding sixteen hundred rupees per mensem; or (ii) who is employed or
engaged mainly in a managerial or administrative capacity".

The Act shall apply to every establishment engaged in the pharmaceutical industry. The
Central Government may, by notification in the Official Gazette, apply the provisions of
this Act, to any other establishment engaged in any notified industry. Every employer in
relation to an establishment shall keep and maintain such registers and other documents
and in such manner as may be prescribed.

 The Shops and Establishments Act,1953 was enacted to provide statutory


obligation and rights to employees and employers in the unorganised sector of
employment, i.e. shops and establishments. It is applicable to all persons
employed in an establishment with or without wages, except the members of the
employer's family. It is a State legislation and each State has framed its own rules
for the Act. The State Government can exempt, either permanently or for a
specified period, any establishments from all or any provisions of this Act. The
Act provides for compulsory registration of shop/ establishment within thirty days
of commencement of work and all communications of closure of an establishment
within 15 days from its closing. It also lays down the hours of work per day and
week as well as the guidelines for spread-over, rest interval, opening and closing
hours, closed days, national and religious holidays, overtime work, etc.

 The Inter-State Migrant Workmen (Regulation of Employment and Conditions of


Service) Act, 1979 was enacted to protect the rights and safeguard the interest of
migrant workers. The Act intends to regulate the employment of inter-state
migrant workmen and to provide their conditions of service. It applies to every
establishment and the contractor, who employ five or more inter-state migrant
workmen. The Act has provision for issue of Pass-Book to every inter-state
migrant workman with full details, payment of displacement allowance, payment
of journey allowance including payment of wage during the period of journey,
suitable residential accommodation, medical facilities and protective clothing,
payment of wages, equal pay for equal work irrespective of sex etc.

The responsibility for enforcement of the Act in establishments where the Central
Government is the appropriate Government lies with the office of the Chief Labour
Commissioner (Central) and for the establishments located under the States sphere lies
with the respective State Governments.

 Also, to extend a measure of social assistance to workers in the unorganised


sector, the concept of 'Labour Welfare Fund' was evolved and five welfare funds
were set up under the Ministry of Labour and Employment. These funds are
aimed to provide housing, medical care, educational and recreational facilities to
workers employed in beedi industry, certain non-coal mines and cine workers.
Such funds are financed out of the proceeds of cess levied under respective
Cess/Fund Acts. The various legislation so enacted include:-

• The Mica Mines Labour Welfare Fund Act, 1946 - was enacted to provide
for constitution of a fund for financing the activities which promote
welfare of labour employed in the mica mining industry.

• The Limestone and Dolomite Mines Labour Welfare Fund Act, 1972 - was
enacted to provide for the levy and collection of a cess on limestone and
dolomite for financing the activities which promote the welfare of persons
employed in the limestone and dolomite mines.

• The Iron Ore Mines, Manganese Ore Mines & Chrome Ore Mines Labour
Welfare Fund Act, 1976 - was enacted to provide for financing the
activities which promote the welfare of persons employed in the iron ore
mines, manganese ore mines and chrome ore mines.

• The Beedi Workers Welfare Fund Act, 1976 - was enacted to provide for
financing the measures which promote the welfare of persons engaged in
beedi establishments.; and

• The Cine Workers Welfare Fund Act, 1981 - was enacted to provide for
financing the activities which promote the welfare of certain cine-workers.

The above Acts provide that the fund may be applied by the Central Government to meet
the expenditure incurred in connection with measures and facilities which are necessary
to provide the welfare of the respective workers.

Laws relating to Doing Business Abroad

An entrepreneur while expanding and growing his/her business abroad must take into
account the basic legal framework of the particular foreign country as well. It is
necessary for him/ her to abide by such laws and regulations in order to ensure efficient
and healthy functioning of the organisation and face the various challenges that he/ she
may encounter abroad.
In order to encourage capital inflows and provide safe business environment for all
investments abroad, many countries have entered into bilateral investment treaties or
agreements. Bilateral Investment Promotion and Protection Agreement (BIPA) is one
such bilateral treaty which is defined as an agreement between two countries (or States)
for the reciprocal encouragement, promotion and protection of investments in each
other's territories by the companies based in either country (or State). These bilateral
agreements have, by and large, standard elements and provide a legal basis for enforcing
the rights of the investors in the countries involved. The Government of India has, so far,
signed BIPAs with 58 countries out of which 49 BIPAs have already come into force and
the remaining agreements are in the process of being enforced.

In India, the most important law which regulates all foreign exchange transactions
including investments abroad is the Foreign Exchange Management Act (FEMA),1999 .
It is an investor friendly legislation which aims to facilitate external trade and payments
as well as promote an orderly development and maintenance of foreign exchange market.
Under the Act, Reserve Bank of India (RBI) has been authorised to frame various rules,
regulations and norms pertaining to overseas investments in consultation with the Central
Government.

Manpower
Manpower legislation is a very important factor that shapes the overall labour
environment of a country. Protection of the interests of labour is the responsibility of the
State in the democratic countries. Under the Constitution of India, Labour is a subject in
the Concurrent List where both the Central and the State Governments are competent to
enact legislations subject to certain matters being reserved for the Centre. Union List
includes:- (i) Regulation of labour and safety in mines and oil fields; (ii) Industrial
disputes concerning Union employees; and (iii) Union agencies and institutions for
"vocational. training.". While, the concurrent List includes:- (i) Trade Unions; industrial
and labour disputes; (ii) Social security and social insurance; employment and
unemployment; and (iii) Welfare of labour including conditions of work, provident funds,
employers' liability, workmen's compensation, invalidity and old age pensions and
maternity benefit.

The Ministry of Labour and Employment has the responsibility of protecting and
safeguarding the interests of workers in general and those of the poor, deprived and
disadvantaged sections of the society, in particular. It also has the responsibility of
creating a healthy work environment for higher production and productivity and to
develop and coordinate vocational skill training and employment services. These
objectives are sought to be achieved through enactment and implementation of various
labour laws, which regulate the terms and conditions of service and employment of
workers. Broadly, the Ministry has been allocated the work of:-

 Labour policy (including wage policy) and legislation.


 Safety, health and welfare of labour.
 Social security of labour.
 Policy relating to special target group such as women, child labour.
 Industrial relations and enforcement of labour laws in the Central sphere.
 Adjudication of industrial disputes through Central Government Industrial
Tribunals- cum-Labour Courts and National Industrial Tribunals.
 Workers' Education.
 Labour and Employment Statistics.
 Employment Services and Vocational training.
 Administration of Central Labour & Employment Services.
 International Cooperation in Labour & Employment matters.

The major legislations that have been enacted for regulating manpower are:- the Factories
Act,1948 to regulate the working conditions in factories; to ensure provision of the basic
minimum requirements for safety, health and welfare of the factories workers as well as
to regulate the working hours, leave, holidays, employment of children, women, etc; the
Minimum Wages Act,1948 to safeguard the interests of workers, mostly in the
unorganised sector by providing for the fixation of minimum wages in certain specified
employments. It binds the employers to pay their workers the minimum wages fixed
under the Act from time to time; the Employees' Provident Fund and Miscellaneous
Provisions Act, 1952, with the main objective of making some provisions for the future
of industrial workers after their retirement and for their dependents in case of death, etc.

Corporate Governance

Corporate governance is a concept, rather than an individual instrument. It includes


debate on the appropriate management and control structures of a company. It includes
the rules relating to the power relations between owners, the board of directors,
management and the stakeholders such as employees, suppliers, customers as well as the
public at large.

Corporations around the world are increasing recognizing that sustained growth of their
organization requires cooperation of all stakeholders, which requires adherence to the
best corporate governance practices. In this regard, the management needs to act as
trustees of the shareholders at large and prevent asymmetry of benefits between various
sections of shareholders, especially between the owner-managers and the rest of the
shareholders.

In India, corporate governance initiatives have been undertaken by the Ministry of of


Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). The
first formal regulatory framework for listed companies specifically for corporate
governance was established by the SEBI in February 2000, following the
recommendations of Kumarmangalam Birla Committee Report. It was enshrined as
Clause 49 of the Listing Agreement. Further, SEBI is maintaining the standards of
corporate governance through other laws like the Securities Contracts (Regulation) Act,
1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.

The Ministry of of Corporate Affairs had appointed a Naresh Chandra Committee on


Corporate Audit and Governance in 2002 in order to examine various corporate
governance issues. It made recommendations in two key aspects of corporate governance:
financial and non-financial disclosures: and independent auditing and board oversight of
management. It is making all efforts to bring transparency in the structure of corporate
governance through the enactment of Companies Act and its amendments.

Prerequisites and Constituents


Today adoption of good Corporate Governance practices has emerged as an integral
element for doing business. It is not only a pre-requisite for facing intense competition
for sustainable growth in the emerging global market scenario but is also an embodiment
of the parameters of fairness, accountability, disclosures and transparency to maximize
value for the stakeholders.

Corporate governance is beyond the realm of law. It cannot be regulated by legislation


alone. Legislation can only lay down a common framework – the "form" to ensure
standards. The "substance" will ultimately determine the credibility and integrity of the
process. Substance is inexorably linked to the mindset and ethical standards of
management.

Studies of corporate governance practices across several countries conducted by the


Asian Development Bank, International Monetary Fund, Organization for Economic
Cooperation and Development and the World Bank reveal that there is no single model of
good corporate governance.

The OECD Code also recognizes that different legal systems, institutional frameworks
and traditions across countries have led to the development of a range of different
approaches to corporate governance. However, a high degree of priority has been placed
on the interests of shareholders, who place their trust in corporations to use their
investment funds wisely and effectively is common to all good corporate governance
regimes.

Also, irrespective of the model, there are three different forms of corporate
responsibilities which all models do respect:

 Political Responsibilities: the basic political obligations are abiding by legitimate


law; respect for the system of rights and the principles of constitutional state.
 Social Responsibilities: the corporate ethical responsibilities, which the company
understands and promotes either as a community with shared values or as a part of
larger community with shared values.
 Economic Responsibilities: acting in accordance with the logic of competitive
markets to earn profits on the basis of innovation and respect for the
rights/democracy of the shareholders which can be expressed in terms of
managements' obligation as 'maximizing shareholders value'.

In addition, business ethics and corporate awareness of the environmental and societal
interest of the communities, within which they operate, can have an impact on the
reputation and long-term performance of corporations.
The three key constituents of corporate governance are the Board of Directors, the
Shareholders and the Management.

 The pivotal role in any system of corporate governance is performed by the board
of directors. It is accountable to the stakeholders and directs and controls the
management. It stewards the company, sets its strategic aim and financial goals
and oversees their implementation, puts in place adequate internal controls and
periodically reports the activities and progress of the company in the company in
a transparent manner to all the stakeholders.
 The shareholders' role in corporate governance is to appoint the directors and the
auditors and to hold the board accountable for the proper governance of the
company by requiring the board to provide them periodically with the requisite
information in a transparent fashion, of the activities and progress of the
company.
 The responsibility of the management is to undertake the management of the
company in terms of the direction provided by the board, to put in place adequate
control systems and to ensure their operation and to provide information to the
board on a timely basis and in a transparent manner to enable the board to monitor
the accountability of management to it.

The underlying principles of corporate governance revolve around three basic inter-
related segments. These are:

 Integrity and Fairness


 Transparency and Disclosures
 Accountability and Responsibility

The Main Constituents of Good Corporate Governance are:

 Role and powers of Board: the foremost requirement of good corporate


governance is the clear identification of powers, roles, responsibilities and
accountability of the Board, CEO and the Chairman of the board.
 Legislation: a clear and unambiguous legislative and regulatory framework is
fundamental to effective corporate governance.
 Code of Conduct: it is essential that an organization's explicitly prescribed code
of conduct are communicated to all stakeholders and are clearly understood by
them. There should be some system in place to periodically measure and evaluate
the adherence to such code of conduct by each member of the organization.
 Board Independence: an independent board is essential for sound corporate
governance. It means that the board is capable of assessing the performance of
managers with an objective perspective. Hence, the majority of board members
should be independent of both the management team and any commercial
dealings with the company. Such independence ensures the effectiveness of the
board in supervising the activities of management as well as make sure that there
are no actual or perceived conflicts of interests.
 Board Skills: in order to be able to undertake its functions effectively, the board
must possess the necessary blend of qualities, skills, knowledge and experience so
as to make quality contribution. It includes operational or technical expertise,
financial skills, legal skills as well as knowledge of government and regulatory
requirements.
 Management Environment: includes setting up of clear objectives and
appropriate ethical framework, establishing due processes, providing for
transparency and clear enunciation of responsibility and accountability,
implementing sound business planning, encouraging business risk assessment,
having right people and right skill for jobs, establishing clear boundaries for
acceptable behaviour, establishing performance evaluation measures and
evaluating performance and sufficiently recognizing individual and group
contribution.
 Board Appointments: to ensure that the most competent people are appointed in
the board, the board positions must be filled through the process of extensive
search. A well defined and open procedure must be in place for reappointments as
well as for appointment of new directors.
 Board Induction and Training: is essential to ensure that directors remain
abreast of all development, which are or may impact corporate governance and
other related issues.
 Board Meetings: are the forums for board decision making. These meetings
enable directors to discharge their responsibilities. The effectiveness of board
meetings is dependent on carefully planned agendas and providing relevant papers
and materials to directors sufficiently prior to board meetings.
 Strategy Setting: the objective of the company must be clearly documented in a
long term corporate strategy including an annual business plan together with
achievable and measurable performance targets and milestones.
 Business and Community Obligations: though the basic activity of a business
entity is inherently commercial yet it must also take care of community's
obligations. The stakeholders must be informed about the approval by the
proposed and on going initiatives taken to meet the community obligations.
 Financial and Operational Reporting: the board requires comprehensive,
regular, reliable, timely, correct and relevant information in a form and of a
quality that is appropriate to discharge its function of monitoring corporate
performance.
 Monitoring the Board Performance: the board must monitor and evaluate its
combined performance and also that of individual directors at periodic intervals,
using key performance indicators besides peer review.
 Audit Committee: is inter alia responsible for liaison with management, internal
and statutory auditors, reviewing the adequacy of internal control and compliance
with significant policies and procedures, reporting to the board on the key issues.
 Risk Management: risk is an important element of corporate functioning and
governance. There should be a clearly established process of identifying,
analysing and treating risks, which could prevent the company from effectively
achieving its objectives. The board has the ultimate responsibility for identifying
major risks to the organization, setting acceptable levels of risks and ensuring that
senior management takes steps to detect, monitor and control these risks.

A good corporate governance recognizes the diverse interests of shareholders, lenders,


employees, government, etc. The new concept of governance to bring about quality
corporate governance is not only a necessity to serve the divergent corporate interests, but
also is a key requirement in the best interests of the corporates themselves and the
economy.

Organizational Framework
The organizational framework for corporate governance initiatives in India consists of the
Ministry of of Corporate Affairs (MCA) and the Securities and Exchange Board of India
(SEBI). The first formal regulatory framework for listed companies specifically for
corporate governance was established by the SEBI in February 2000, following the
recommendations of Kumarmangalam Birla Committee Report. It was enshrined as
Clause 49 of the Listing Agreement.

Thereafter SEBI had set up another committee under the chairmanship of Mr. N. R.
Narayana Murthy, to review Clause 49, and suggest measures to improve corporate
governance standards. Some of the major recommendations of the committee primarily
related to audit committees, audit reports, independent directors, related party
transactions, risk management, directorships and director compensation, codes of conduct
and financial disclosures.

The Ministry of of Corporate Affairs had also appointed a Naresh Chandra Committee on
Corporate Audit and Governance in 2002 in order to examine various corporate
governance issues.It made recommendations in two key aspects of corporate governance:
financial and non-financial disclosures: and independent auditing and board oversight of
management.

It had also set up a National Foundation for Corporate Governance (NFCG) in


association with the CII, ICAI and ICSI as a not-for-profit trust to provide a platform to
deliberate on issues relating to good corporate governance, to sensitise corporate leaders
on the importance of good corporate governance practices as well as to facilitate
exchange of experiences and ideas amongst corporate leaders, policy makers, regulators,
law enforcing agencies and non- government organizations.

Legal Framework
An effective regulatory and legal framework is indispensable for the proper and sustained
growth of the company. In rapidly changing national and global business environment, it
has become necessary that regulation of corporate entities is in tune with the emerging
economic trends, encourage good corporate governance and enable protection of the
interests of the investors and other stakeholders. Further, due to continuous increase in
the complexities of business operation, the forms of corporate organizations are
constantly changing. As a result, there is a need for the law to take into account the
requirements of different kinds of companies that may exist and seek to provide common
principles to which all kinds of companies may refer while devising their corporate
governance structure.

The important legislations for regulating the entire corporate structure and for dealing
with various aspects of governance in companies are Companies Act, 1956 and
Companies Bill, 2004. These laws have been introduced and amended, from time to time,
to bring more transparency and accountability in the provisions of corporate governance.
That is, corporate laws have been simplified so that they are amenable to clear
interpretation and provide a framework that would facilitate faster economic growth.

Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange
Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities
and Exchange Board of India (SEBI), with a view to protect the interests of investors in
the securities markets as well as to maintain the standards of corporate governance in the
country.

Guidelines/Principles At International Level


In the changing global scenario, it has become necessary to bring in effective governance
practices in the corporate sector. Various important and valuable lessons have been
learned from the series of corporate collapses that occurred in different parts of the world.
Accordingly, several codes, guidelines and principles have been made and implemented
covering varied aspects of corporate governance. They were introduced in order to
restore investors' confidence as well as to enhance corporate transparency and
accountability. They seek to establish the accountability standards of Directors and
CEOs; as well as define the roles and responsibilities of the Board of Directors and
stakeholders in the company.

Over the years, the issue of corporate governance has received a high level of attention.
There are several reports and recommendations of the International Committees/
Associations, etc. on the development of appropriate framework for promoting good
corporate governance standards, codes and practices to be followed globally. These are:-

 Cadbury Committee Report-The Financial Aspects of Corporate Governance


(1992)
 Greenbury Committee Report on Directors' Remuneration (1995)
 Hampel Committee Report on Corporate Governance (1998)
 The Combined Code, Principles of Good Governance and Code of Best Practice,
London Stock Exchange (1998)
 CalPERS' Global Principles of Accountable Corporate Governance (1999)
 Blue Ribbon Report (1999)
 King Committee On Corporate Governance (2002)
 Sarbanes Oxley Act (2002)
 Higgs Report: Review of the role and effectiveness of non-executive directors
(2003)
 The Combined Code on Corporate Governance (2003)
 ASX Corporate Governance Council Report (2003)
 OECD Principles of Corporate Governance (2004)
 The Combined Code on Corporate Governance (2006)
 UNCTAD Guidance on Good Practices in Corporate Governance Disclosure
(2006)
 The Combined Code on Corporate Governance (2008)

These recommendations and principles have been mainly focused on structure of the
company, financial and non-financial disclosures, compliance with codes of corporate
governance, competitive remuneration policy, shareholders rights and responsibilities,
financial reporting and internal controls, etc. All these efforts at international level, in
turn, helps to bring favourable changes in the operating systems of Board of Directors,
Company's management and administration; as well as improve face of relationship
between supervisory and executive bodies. Some of the main codes and principles on the
Corporate Governance are as follows:
Benefits and Limitations
The concept of corporate governance has been attracting public attention for quite some
time. It has been finding wide acceptance for its relevance and importance to the industry
and economy. It contributes not only to the efficiency of a business enterprise, but also, to
the growth and progress of a country's economy. Progressively, firms have voluntarily
put in place systems of good corporate governance for the following reasons:

 Several studies in India and abroad have indicated that markets and investors take
notice of well managed companies and respond positively to them. Such
companies have a system of good corporate governance in place, which allows
sufficient freedom to the board and management to take decisions towards the
progress of their companies and to innovate, while remaining within the
framework of effective accountability.
 In today's globalised world, corporations need to access global pools of capital as
well as attract and retain the best human capital from various parts of the world.
Under such a scenario, unless a corporation embraces and demonstrates ethical
conduct, it will not be able to succeed.
 The credibility offered by good corporate governance procedures also helps
maintain the confidence of investors – both foreign and domestic – to attract more
long-term capital. This will ultimately induce more stable sources of financing.
 A corporation is a congregation of various stakeholders, like customers,
employees, investors, vendor partners, government and society. Its growth
requires the cooperation of all the stakeholders. Hence it imperative for a
corporation to be fair and transparent to all its stakeholders in all its transactions
by adhering to the best corporate governance practices.
 Good Corporate Governance standards add considerable value to the operational
performance of a company by:

1. improving strategic thinking at the top through induction of independent


directors who bring in experience and new ideas;
2. rationalizing the management and constant monitoring of risk that a firm
faces globally;
3. limiting the liability of top management and directors by carefully
articulating the decision making process;
4. assuring the integrity of financial reports, etc.

It also has a long term reputational effects among key stakeholders, both
internally and externally.

 Also, the instances of financial crisis have brought the subject of corporate
governance to the surface. They have shifted the emphasis on compliance with
substance, rather than form, and brought to sharper focus the need for intellectual
honesty and integrity. This is because financial and non-financial disclosures
made by any firm are only as good and honest as the people behind them.
 Good governance system, demonstrated by adoption of good corporate
governance practices, builds confidence amongst stakeholders as well as
prospective stakeholders. Investors are willing to pay higher prices to the
corporates demonstrating strict adherence to internally accepted norms of
corporate governance.
 Effective governance reduces perceived risks, consequently reduces cost of
capital and enables board of directors to take quick and better decisions which
ultimately improves bottom line of the corporates.
 Adoption of good corporate governance practices provides long term sustenance
and strengthens stakeholders' relationship.
 A good corporate citizen becomes an icon and enjoy a position of respects.
 Potential stakeholders aspire to enter into relationships with enterprises whose
governance credentials are exemplary.
 Adoption of good corporate governance practices provides stability and growth to
the enterprise.

Effectiveness of corporate governance system cannot merely be legislated by law neither


can any system of corporate governance be static. As competition increases, the
environment in which firms operate also changes and in such a dynamic environment the
systems of corporate governance also need to evolve. Failure to implement good
governance procedures has a cost in terms of a significant risk premium when competing
for scarce capital in today's public markets.
Future Prospects
The issues of governance, accountability and transparency in the affairs of the company,
as well as about the rights of shareholders and role of Board of Directors have never been
so prominent as it is today. The corporate governance has come to assume a centre stage
in the Board room discussions.

India has become one of the fastest emerging nations to have aligned itself with the
international trends in Corporate Governance. As a result, Indian companies have
increasingly been able to access to newer and larger markets around the world; as well as
able to acquire more businesses. The response of the Government and regulators have
also been admirably quick to meet the challenges of corporate delinquency. But, as the
global environment changing continuously, there is a greater need of adopting and
sustaining good corporate governance practices for value creation and building
corporations of the future.

It is true that the 'corporate governance' has no unique structure or design and is largely
considered ambiguous. There is still lack of awareness about its various issues, like,
quality and frequency of financial and managerial disclosure, compliance with the code
of best practice, roles and responsibilities of Board of Directories, shareholders rights,
etc. There have been many instances of failure and scams in the corporate sector, like
collusion between companies and their accounting firms, presence of weak or ineffective
internal audits, lack of required skills by managers, lack of proper disclosures, non-
compliance with standards, etc. As a result, both management and auditors have come
under greater scrutiny.

But, with the integration of Indian economy with global markets, industrialists and
corporates in the country are being increasingly asked to adopt better and transparent
corporate practices. The degree to which corporations observe basic principles of good
corporate governance is an increasingly important factor for taking key investment
decisions. If companies are to reap the full benefits of the global capital market, capture
efficiency gains, benefit by economies of scale and attract long term capital, adoption of
corporate governance standards must be credible, consistent, coherent and inspiring.

Quality of corporate governance primarily depends on following factors, namely:-


integrity of the management; ability of the Board; adequacy of the processes;
commitment level of individual Board members; quality of corporate reporting;
participation of stakeholders in the management; etc. Since this is an important element
affecting the long-term financial health of companies, good governance framework also
calls for effective legal and institutional environment, business ethics and awareness of
the environmental and societal interests.

Hence, in the years to come, corporate governance will become more relevant and a more
acceptable practice worldwide. This is easily evident from the various activities
undertaken by many companies in framing and enforcing codes of conduct and honest
business practices; following more stringent norms for financial and non-financial
disclosures, as mandated by law; accepting higher and appropriate accounting standards;
enforcing tax reforms coupled with deregulation and competition; etc.

However, inapt application of corporate governance requirements can adversely affect


the relationship amongst participants of the governance system. As owners of equity,
institutional investors are increasingly demanding a decisive role in corporate
governance. Individual shareholders, who usually do not exercise governance rights, are
highly concerned about getting fair treatment from controlling shareholders and
management. Creditors, especially banks, play a key role in governance systems, and
serve as external monitors over corporate performance. Employees and other
stakeholders also play an important role in contributing to the long term success and
performance of the corporation. Thus, it is necessary to apply governance practices in a
right manner for better growth of a company.
Suggestions and Opinions
Corporations are the prominent players in the global markets. They are mainly
responsible for generating majority of economic activities in the world, ranging from
goods and services to capital and resources. The essence of corporate governance is in
promoting and maintaining integrity, transparency and accountability in the management
of the company as well as in manifestation of the values, principles and policies of a
corporation.

Many efforts are being made, both at the Centre and the State level, to promote adoption
of good corporate governance practices, which are the integral element for doing and
managing business. However, the concepts and principles of good governance are still
not clearly known to the Indian business set up.

Hence, there is a greater need to increase awareness among entrepreneurs about the
various aspects of corporate governance. There are some of the areas that need special
attention, namely:-

 Quality of audit, which is at the root of effective corporate governance;


 Role of Board of Directors as well as accountability of the CEOs and CFOs;
 Quality and effectiveness of the legal, administrative and regulatory framework;
etc.

That is, it is necessary to provide the corporates desired level of comfort in compliance
with the code, principles and requirements of corporate governance; as well as provide
relevant information to all stakeholders regarding the performance, policies and
procedures of the company in a transparent manner. There should be proper financial and
non-financial disclosures by the companies, such as, about remuneration package,
financial reporting, auditing, internal controls, etc.
Ministry of Corporate Affairs (MCA)
Ministry of Corporate Affairs , earlier known as Department of Corporate Affairs under
Ministry of Finance, is primarily concerned with the administration of the Companies
Act, 1956, and other allied Acts, etc framed there-under for regulating the functioning of
the corporate sector in accordance with the law. It is also responsible for administering
the Competition Act, 2002 and exercises supervision over the three professional bodies,
namely, Institute of Chartered Accountants of India (ICAI), Institute of Company
Secretaries of India (ICSI) and Institute of Cost and Works Accountants of India
(ICWAI), which have been constituted for proper and orderly growth of the professions
concerned.

It also has the responsibility of carrying out the functions of the Central Government
relating to administration of Partnership Act, 1932, the Companies (Donations to
National Funds) Act, 1951 and Societies Registration Act, 1980.

Naresh Chandra Committee Report on Corporate Audit and Governance


The Ministry of Corporate Affairs had appointed a high level committee in August 2002
to examine various corporate governance issues. The committee had been entrusted to
analyse and recommend changes, if necessary, in diverse areas such as:

 the statutory auditor-company relationship so as to further strengthen the


professional nature of this interface;
 the need, if any, for rotation of statutory audit firms or partners;
 the procedure for appointment of auditors and determination of audit fees;
 restrictions, if necessary, on non-audit fees;
 independence of auditing functions;
 measures required to ensure that the management and companies actually present
'true and fair' statement of the financial affairs of companies;
 the need to consider measures such as certification of accounts and financial
statements by the management and directors;
 the necessity of having a transparent system of random scrutiny of audited
accounts;
 adequacy of regulation of chartered accountants, company secretaries and other
similar statutory oversight functionaries;
 advantages, if any, of setting up an independent regulator similar to the Public
Company Accounting Oversight Board in the Sarbanes Oaxley Act (SOX Act),
and if so, its constitution; and
 role of independent directors, and how their independence and effectiveness can
be ensured.

The Committee's recommendations relate to:

 Disqualifications for audit assignments;


 List of prohibited non-audit services;
 Independence Standards for Consulting and Other Entities that are Affiliated to
Audit Firms;
 Compulsory Audit Partner Rotation;
 Auditor's disclosure of contingent liabilities;
 Auditor's disclosure of qualifications and consequent action;
 Management's certification in the event of auditor's replacement;
 Auditor's annual certification of independence;
 Appointment of auditors;
 Setting up of Independent Quality Review Board;
 Proposed disciplinary mechanism for auditors;
 Defining an independent director;
 Percentage of independent directors;
 Minimum board size of listed companies;
 Disclosure on duration of board meetings/committee meetings;
 Additional disclosure to directors;
 Independent directors on Audit Committees of listed companies;
 Audit Committee charter;
 Remuneration of non-executive directors;
 Exempting non-executive directors from certain liabilities;
 Training of independent directors;
 SEBI and Subordinate Legislation;
 Corporate Serious Fraud Office; etc.

National Foundation for Corporate Governance (NFCG)

Ministry of Corporate Affairs has set up a National Foundation for Corporate Governance
(NFCG) in association with CII, ICAI and ICSI, as a not-for-profit trust. It provides a
platform to deliberate on issues relating to good corporate governance, to sensitise
corporate leaders on importance of good corporate governance practices as well as
facilitate exchange of experiences and ideas amongst corporate leaders, policy makers,
regulators, law enforcing agencies and non- government organizations.

The NFCG has a three-tier structure for its management, viz, the Governing Council
under the Chairmanship of Minister of Corporate Affairs, the Board of Trustees and the
Executive Directorate.

NFCG had framed an action plan, which includes development of good corporate
governance principles on identified themes i.e. (i) corporate governance norms for
institutional investors, (ii) corporate governance norms for independent directors, and (iii)
corporate governance norms for audit.

The foundation has been set up with the mission to:

 foster a culture for promoting good governance, voluntary compliance and


facilitate effective participation of different stakeholders;
 create a framework of best practices, structure, processes and ethics;
 make significant difference to Indian corporate sector by raising the standard of
corporate governance in India towards achieving stability and growth.

Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) was


established on April 12, 1992 in accordance with the Kumar Mangalam
provisions of the Securities and Exchange Board of India Birla Committee
Act, 1992. It monitors and regulates corporate governance N.R Narayan Murthy
of listed companies in India through Clause 49 of the Committee
Listing Agreement. This clause is incorporated in the
listing agreement of stock exchanges and it is compulsory
for them to comply with its provisions. It was first introduced in the financial year 2000-
01 based on the recommendations of Kumar Mangalam Birla committee.

Provisions of Clause 49 of the Listing Agreement


Board of Directors

Board of directors of a 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 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. All pecuniary relationship or transactions of the non-executive directors viz-a-
viz. the company should be disclosed in the Annual Report.

Audit Committee

 A qualified and independent audit committee shall be set up and that:

1. audit committee shall have minimum three members, all being non-
executive directors, with the majority of them being independent, and with
at least one director having financial and accounting knowledge;
2. chairman of the committee shall be an independent director;
3. chairman shall be present at Annual General Meeting to answer
shareholder queries;
4. 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;
5. company secretary shall act as the secretary to the committee.

 The audit committee shall meet at least thrice a year. One meeting shall be held
before finalisation 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.

 The audit committee shall have powers, which should include the following to:

1. investigate any activity within its terms of reference.


2. seek information from any employee.
3. obtain outside legal or other professional advice.
4. secure attendance of outsiders with relevant expertise, if it considers
necessary.

 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;

• Any changes in accounting policies and practices.


• Major accounting entries based on exercise of judgement 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
• Any related party transactions i.e. transactions of the company of
material nature, with promoters or the management, their
subsidiaries or relatives etc. that may have potential conflict with
the interests of company at large.

4. Reviewing with the management, external and internal auditors, and 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 nature and
scope of audit as well as have 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.
 If the company has set up an audit committee pursuant to provision of the
Companies Act, the said audit committee shall have such additional functions /
features as is contained in the Listing Agreement.

Remuneration of Directors

 The remuneration of non-executive directors shall be decided by the board of


directors.
 The following disclosures on the remuneration of directors shall be made in the
section on the corporate governance of the annual report.

1. All elements of remuneration package of all the directors i.e. salary,


benefits, bonuses, stock options, pension etc.
2. Details of fixed component and performance linked incentives, along with
the performance criteria.
3. Service contracts, notice period, severance fees.
4. Stock option details, if any – and whether issued at a discount as well as
the period over which accrued and over which exercisable.

Board Procedure

 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 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.

Management

 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:

1. Industry structure and developments.


2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational
performance.
8. Material developments in Human Resources / Industrial Relations front,
including number of people employed.

 Disclosures must be made by the management 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.)

Shareholders

 In case of the appointment of a new director or re-appointment of a director the


shareholders must be provided with the following information:

1. A brief resume of the director;


2. Nature of his expertise in specific functional areas; and
3. Names of companies in which the person also holds the directorship and
the membership of Committees of the board.

 The 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.
 A board committee under the chairmanship of a non-executive director shall be
formed to specifically look into the redressing 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'.
 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.

Report on Corporate Governance

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
there of and the extent to which the non-mandatory requirements have been adopted
should be specifically highlighted.

Compliance

A company shall obtain a certificate from the auditors of the company regarding
compliance of conditions of corporate governance as stipulated in this clause and annexe
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.

Kumar Mangalam Birla Committee

In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee
under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the
standards of good corporate governance. The report submitted by the committee is the
first formal and comprehensive attempt to evolve a ‘Code of Corporate Governance', in
the context of prevailing conditions of governance in Indian companies, as well as the
state of capital markets.

The Committee's terms of the reference were to:

 suggest suitable amendments to the listing agreement executed by the stock


exchanges with the companies and any other measures to improve the standards
of corporate governance in the listed companies, in areas such as continuous
disclosure of material information, both financial and non-financial, manner and
frequency of such disclosures, responsibilities of independent and outside
directors;
 draft a code of corporate best practices; and
 suggest safeguards to be instituted within the companies to deal with insider
information and insider trading.

The primary objective of the committee was to view corporate governance from the
perspective of the investors and shareholders and to prepare a ‘Code' to suit the Indian
corporate environment.

The committee had identified the Shareholders, the Board of Directors and the
Management as the three key constituents of corporate governance and attempted to
identify in respect of each of these constituents, their roles and responsibilities as also
their rights in the context of good corporate governance.

Corporate governance has several claimants –shareholders and other stakeholders - which
include suppliers, customers, creditors, and the bankers, the employees of the company,
the government and the society at large. The Report had been prepared by the committee,
keeping in view primarily the interests of a particular class of stakeholders, namely, the
shareholders, who together with the investors form the principal constituency of SEBI
while not ignoring the needs of other stakeholders.

Mandatory and non-mandatory recommendations

The committee divided the recommendations into two categories, namely, mandatory and
non- mandatory. The recommendations which are absolutely essential for corporate
governance can be defined with precision and which can be enforced through the
amendment of the listing agreement could be classified as mandatory. Others, which are
either desirable or which may require change of laws, may, for the time being, be
classified as non-mandatory.

Mandatory Recommendations:

 Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above
 Composition Of Board Of Directors – Optimum Combination Of Executive &
Non-Executive Directors
 Audit Committee – With 3 Independent Directors With One Having Financial
And Accounting Knowledge.
 Remuneration Committee
 Board Procedures – Atleast 4 Meetings Of The Board In A Year With Maximum
Gap Of 4 Months Between 2 Meetings. To Review Operational Plans, Capital
Budgets, Quarterly Results, Minutes Of Committee's Meeting.Director Shall Not
Be A Member Of More Than 10 Committee And Shall Not Act As Chairman Of
More Than 5 Committees Across All Companies
 Management Discussion And Analysis Report Covering Industry Structure,
Opportunities, Threats, Risks, Outlook, Internal Control System
 Information Sharing With Shareholders

Non-Mandatory Recommendations:

 Role Of Chairman
 Remuneration Committee Of Board
 Shareholders' Right For Receiving Half Yearly Financial PerformancePostal
Ballot Covering Critical Matters Like Alteration In Memorandum Etc
 Sale Of Whole Or Substantial Part Of The Undertaking
 Corporate Restructuring
 Further Issue Of Capital
 Venturing Into New Businesses

As per the committee, the recommendations should be made applicable to the listed
companies, their directors, management, employees and professionals associated with
such companies, in accordance with the time table proposed in the schedule given later in
this section. Compliance with the code should be both in letter and spirit and should
always be in a manner that gives precedence to substance over form. The ultimate
responsibility for putting the recommendations into practice lies directly with the board
of directors and the management of the company.

The recommendations will apply to all the listed private and public sector companies, in
accordance with the schedule of implementation. As for 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
recommendations will apply to the extent that they do not violate their respective statutes,
and guidelines or directives issued by the relevant regulatory authorities .
The Committee recognizes that compliance with the recommendations would involve
restructuring the existing boards of companies. It also recognizes that some companies,
especially the smaller ones, may have difficulty in immediately complying with these
conditions.

The recommendations were implemented through Clause 49 of the Listing Agreements,


in a phased manner by SEBI.

N.R Narayan Murthy Committee

With the belief that the efforts to improve corporate governance standards in India must
continue because these standards themselves were evolving in keeping with the market
dynamics, the Securities and Exchange Board of India (SEBI) had constituted a
Committee on Corporate Governance in 2002 , in order to evaluate the adequacy of
existing corporate governance practices and further improve these practices. It was set up
to review Clause 49, and suggest measures to improve corporate governance standards.

The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana
Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The Committee
comprised members from various walks of public and professional life. This included
captains of industry, academicians, public accountants and people from financial press
and industry forums.

The terms of reference of the committee were to:

 review the performance of corporate governance; and


 determine the role of companies in responding to rumour and other price sensitive
information circulating in the market, in order to enhance the transparency and
integrity of the market.

The issues discussed by the committee primarily related to audit committees, audit
reports, independent directors, related parties, risk management, directorships and
director compensation, codes of conduct and financial disclosures.

The committee's recommendations in the final report were selected based on parameters
including their relative importance, fairness, accountability, transparency, ease of
implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

 strengthening the responsibilities of audit committees;


 improving the quality of financial disclosures, including those related to related
party transactions and proceeds from initial public offerings;
 requiring corporate executive boards to assess and disclose business risks in the
annual reports of companies;
 introducing responsibilities on boards to adopt formal codes of conduct; the
position of nominee directors; and
 stock holder approval and improved disclosures relating to compensation paid to
non-executive directors.

Non-mandatory recommendations included:

 moving to a regime where corporate financial statements are not qualified;


 instituting a system of training of board members; and
 evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good


governance' into specific requirements, since certain corporate responsibilities are too
important to be left to loose concepts of fiduciary responsibility. Their implementation
through SEBI's regulatory framework will strengthen existing governance practices and
also provide a strong incentive to avoid corporate failures.

The Committee noted that the recommendations contained in their report can be
implemented by means of an amendment to the Listing Agreement, with changes made to
the existing clause 49.

Companies Laws
The Ministry of Corporate Affairs (MCA) is the main authority for regulating and
promoting efficient, transparent and accountable form of corporate governance in the
Indian corporate sector. It is constantly working towards improvement in the legislative
framework and administrative set up, so as to enable easy incorporation and exit of the
companies, as well as convenient compliance of regulations with transparency and
accountability in corporate governance. It is primarily concerned with administration of
the Companies Act, 1956 and related legislations.

1. The Companies Act, 1956 is the central legislation in India that empowers the Central
Government to regulate the formation, financing, functioning and winding up of
companies. It applies to whole of India and to all types of companies, whether registered
under this Act or an earlier Act. It provides for the powers and responsibilities of the
directors and managers, raising of capital, holding of company meetings, maintenance
and audit of company accounts, powers of inspection, etc. That is, it empowers the
Central Government to inspect the books of accounts of a company, to direct special
audit, to order investigation into the affairs of a company and to launch prosecution for
violation of the Act. These inspections are designed to find out whether the companies
conduct their affairs in accordance with the provisions of the Act, whether any unfair
practices prejudicial to the public interest are being resorted to by any company or a
group of companies and to examine whether there is any mismanagement which may
adversely affect any interest of the shareholders, creditors, employees and others.
The main objectives with which this Act has been introduced are to:- (i) help in the
development of companies on healthy lines; (ii) maintain a minimum standard of good
behaviour and business honesty in company promotion and management; (iii) protect the
interests of the shareholders as well as the creditors; (iv) ensure fair and true disclosure of
the affairs of companies in their annual published balance sheet and profit and loss
accounts; (v) ensure proper standard of accounting and auditing; (vi) provide fair
remuneration to management and Board of Directors as well as to company's employees;
etc.

The Companies Act, 1956 has elaborate provisions relating to the Governance of
Companies, which deals with management and administration of companies. It contains
special provisions with respect to the accounts and audit, directors remuneration, other
financial and non-financial disclosures, corporate democracy, prevention of
mismanagement, etc.

Every company shall in each year, hold in addition to any other meetings, a general
meeting as its annual general meeting and shall specify the meeting as such in the notices
calling it; and not more than fifteen months shall elapse between the date of one annual
general meeting of a company and that of the next. At each annual general meeting, every
company shall appoint an auditor or auditors to hold office from the conclusion of that
meeting until the conclusion of the next annual general meeting and shall, within seven
days of the appointment, give intimation thereof to every auditor so appointed.

Every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, whether kept at the head office of the company or
elsewhere, and shall be entitled to require from the officers of the company such
information and explanations as the auditor may think necessary for the performance of
his duties as auditor.

The auditor shall inquire:- (i) whether loans and advances made by the company on the
basis of security have been properly secured and whether the terms on which they have
been made are not prejudicial to the interests of the company or its members; (ii) whether
transactions of the company which are represented merely by book entries are not
prejudicial to the interests of the company; etc.

In the case of every company, a meeting of its Board of directors shall be held at least
once in every three months and at least four such meetings shall be held in every year.
Every director of a company who is in any way, whether directly or indirectly, concerned
or interested in a contract or arrangement, or proposed contract or arrangement, entered
into or to be entered into, by or on behalf of the company, shall disclose the nature of his
concern or interest at a meeting of the Board of directors.

No director of a company shall, as a director, take any part in the discussion of, or vote
on, any contract or arrangement entered into, or to be entered into, by or on behalf of the
company, if he is in any way, whether directly or indirectly, concerned or interested in
the contract or arrangement; nor shall his presence count for the purpose of forming a
quorum at the time of any such discussion or vote; and if he does vote, his vote shall be
void.

Every company shall keep one or more registers in which shall be entered separately
particulars of all contracts or arrangements, including the following particulars to the
extent they are applicable in each case, namely:- (i) the date of the contract or
arrangement; (ii) the names of the parties thereto; (iii) the principal terms and conditions
thereof; (iv) in the case of a contract or arrangement to which this Act applies, the date on
which it was placed before the Board; (v) the names of the directors voting for and
against the contract or arrangement and the names of those remaining neutral. Further,
every company shall keep at its registered office a register of its directors, managing
director, managing agent, secretaries and treasurers, manager and secretary.

The remuneration payable to the directors of a company, including any managing or


whole-time director, shall be determined, either by the articles of the company, or by a
resolution or, if the articles so require, by a special resolution, passed by the company in
general meeting; and the remuneration payable to any such director determined as
aforesaid shall be inclusive of the remuneration payable to such director for services
rendered by him in any other capacity. However, any remuneration for services rendered
by any such director in any other capacity shall not be so included if:- (i) the services
rendered are of a professional nature; and (ii) in the opinion of the Central Government,
the director possesses the requisite qualifications for the practice of the profession.

A director may receive remuneration by way of a fee for each meeting of the Board, or a
committee thereof, attended by him. A director who is neither in the whole-time
employment of the company nor a managing director may be paid remuneration, either
by way of a monthly, quarterly or annual payment with the approval of the Central
Government; or by way of commission if the company by special resolution authorises
such payment. However, the remuneration paid to such director, or where there is more
than one such director, to all of them together, shall not exceed:- (i) one per cent of the
net profits of the company, if the company has a managing or whole-time director, a
managing agent or secretaries and treasurers or a manager; (ii) three per cent of the net
profits of the company, in any other case.

Every public company having paid-up capital of not less than five crores of rupees shall
constitute a committee of the Board knows as 'Audit Committee' which shall consist of
not less than three directors and such number of other directors as the Board may
determine of which two thirds of the total number of members shall be directors, other
than managing or whole-time directors. The annual report of the company shall disclose
the composition of the Audit Committee. The auditors, the internal auditor, if any, and
the director-in-charge of finance shall attend and participate at meetings of the Audit
Committee but shall not have the right to vote.

The Audit Committee should have discussions with the auditors periodically about
internal control systems, the scope of audit including the observations of the auditors and
review the half-yearly and annual financial statements before submission to the Board
and also ensure compliance of internal control systems. It shall have authority to
investigate into any matter in relation to the items specified by the Board and for this
purpose, shall have full access to information contained in the records of the company
and external professional advice, if necessary. The recommendations of the Audit
Committee on any matter relating to financial management, including the audit report,
shall be binding on the Board. If the Board does not accept the recommendations of the
Audit Committee, it shall record the reasons thereof and communicate such reasons to the
shareholders.

Besides, a listed public company may, and in the case of resolutions relating to such
business as the Central Government may, by notification, declare to be conducted only by
postal ballot, shall, get any resolution passed by means of a postal ballot, instead of
transacting the business in general meeting of the company. Where a company decides to
pass any resolution by resorting to postal ballot, it shall send a notice to all the
shareholders, along with a draft resolution explaining the reasons thereof, and requesting
them to send their assent or dissent in writing on a postal ballot within a period of thirty
days from the date of posting of the letter. If a resolution is assented to by a requisite
majority of the shareholders by means of postal ballot, it shall be deemed to have been
duly passed at a general meeting convened in that behalf. However, if a shareholder sends
his assent or dissent in writing on a postal ballot and thereafter any person fraudulently
defaces or destroys the ballot paper or declaration of identify of the shareholder, such
person shall be punishable with imprisonment for a term which may extend to six months
or with fine or with both.

2. In the competitive and technology driven business environment, while corporates


require greater autonomy of operation and opportunity for self-regulation with optimum
compliance costs, there is a need to bring about transparency through better disclosures
and greater responsibility on the part of corporate owners and management for improved
compliance. In response to such changing corporate climate, the Companies Act, 1956
has been amended from time to time so as to provide more transparency in corporate
governance and protect the interests of small investors, depositors and debenture holders,
etc.

The important step in this direction has been the Companies Bill, 2004, which has been
introduced to provide the comprehensive review of the company law. It contained
important provisions relating to corporate governance, like, independence of auditors,
relationship of auditors with the management of company, independent directors with a
view to improve the corporate governance practices in the corporate sector. It is subjected
to greater flexibility and self-regulation by companies, better financial and non-financial
disclosures, more efficient enforcement of law, etc.

This amendment to the Companies Act 1956 mainly focused on reforming the audit
process and the board of directors. It mainly aimed at:- (i) laying down the process of
appointment and qualification of auditors, (ii) prohibiting non-audit services by the
auditors; (iii) prescribing compulsory rotation, at least of the Audit Partner; (iv) requiring
certification of annual audited accounts by both CEO and CFO; etc. For reforming the
boards, the bill included that remuneration of non-executive directors can be fixed only
by shareholders and must be disclosed. A limit on the amount which can be paid would
also be laid down. It is also envisaged that the directors should be imparted suitable
training. However, among others, an independent director should not have substantial
pecuniary interest in the company’s shares.

SEBI Laws
An improved corporate governance is the key objective of the regulatory framework in
the securities market. Accordingly, Securities and Exchange Board of India (SEBI) has
made several efforts with a view to evaluate the adequacy of existing corporate
governance practices in the country and further improve these practices. It is
implementing and maintaining the standards of corporate governance through the use of
its legal and regulatory framework, namely:-

1. Securities Contracts (Regulation) Act, 1956

This Act was enacted to prevent undesirable transactions and to check speculation in the
securities by regulating the business of dealing therein. Any stock exchange, which is
desirous of being recognised, may make an application in the prescribed manner to the
Central Government. Every application shall contain such particulars as may be
prescribed, and shall be accompanied by a copy of the bye-laws of the stock exchange for
the regulation and control of contracts as well as a copy of the rules relating in general to
the constitution of the stock exchange, and in particular to:- (i) the governing body of
such stock exchange, its constitution and powers of management and the manner in
which its business is to be transacted; (ii) the powers and duties of the office bearers of
the stock exchange; (iii) the admission into the stock exchange of various classes of
members, the qualifications for membership, and the exclusion, suspension, expulsion
and re-admission of members there from or there into; (iv) the procedure for the
registration of partnerships as members of the stock exchange, in cases where the rules
provide for such membership; and the nomination and appointment of authorised
representatives and clerks.

Every recognised stock exchange shall furnish the Central Government with a copy of the
annual report, and such annual report shall contain such particulars as may be prescribed.
It may make rules or amend any rules made by it to provide for all or any of the
following matters, namely:- (i) the restriction of voting rights to members only in respect
of any matter placed before the stock exchange at any meeting; (ii) the regulation of
voting rights in respect of any matter placed before the stock exchange at any meeting so
that each member may be entitled to have one vote only, irrespective of his share of the
paid-up equity capital of the stock exchange; (iii) the restriction on the right of a member
to appoint another person as his proxy to attend and vote at a meeting of the stock
exchange; etc.

If, in the opinion of the Central Government, an emergency has arisen and for the
purpose of meeting the emergency, the Central Government considers it expedient so to
do, it may, by notification in the Official Gazette, for reasons to be set out therein, direct
a recognised stock exchange to suspend such of its business for such period not
exceeding seven days and subject to such conditions as may be specified in the
notification, and, if, in the opinion of the Central Government, the interest of the trade or
the public interest requires that the period should be extended, it may, by like notification
extend the said period from time to time.

Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in order to
further amend the Securities Contracts (Regulation) Act, 1956, with a view to include
securitisation instruments under the definition of 'securities' and provide for disclosure
based regulation for issue of the securitised instruments and the procedure thereof. This
has been done keeping in view that there is considerable potential in the securities market
for the certificates or instruments under securitisation transactions. Further, replication of
the securities markets framework for these instruments would facilitate trading on stock
exchanges and, in turn, help development of the market in terms of depth and liquidity.

2. Securities and Exchange Board of India Act, 1992

This Act was enacted to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected
therewith or incidental thereto. For this purpose, the SEBI (the Board), by regulation,
specify:- (i) the matters relating to issue of capital, transfer of securities and other matters
incidental thereto; and (b) the manner in which such matters shall be disclosed by the
companies.

No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust


deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment
adviser and such other intermediary who may be associated with securities market shall
buy, sell or deal in securities except under, and in accordance with, the conditions of a
certificate of registration obtained from the Board in accordance with the regulations
made under this Act.

No depository, participant, custodian of securities, foreign institutional investor, credit


rating agency, or any other intermediary associated with the securities market as the
Board may by notification in this behalf specify, shall buy or sell or deal in securities
except under and in accordance with the conditions of a certificate of registration
obtained from the Board in accordance with the regulations made under this Act.

Further, no person shall sponsor or cause to be sponsored or carry on or caused to be


carried on any venture capital funds or collective investment scheme including mutual
funds, unless he obtains a certificate of registration from the Board in accordance with
the regulations.

Every application for registration shall be in such manner and on payment of such fees as
may be determined by regulations. The Board may, by order, suspend or cancel a
certificate of registration in a prescribed manner, as may be determined by regulations
under this Act. However, no order shall be made unless the person concerned has been
given a reasonable opportunity of being heard.

3. Depositories Act, 1996

This Act was enacted to provide for regulation of depositories in securities and for
matters connected therewith or incidental thereto. It provides for the introduction of
scripless trading system and settlement, which is considered necessary for the effective
functioning of the securities markets. As per the Act, the term 'depository' means "a
company formed and registered under the Companies Act, 1956 and which has been
granted a certificate of registration under sub-section (1A) of section 12 of the Securities
and Exchange Board of India Act, 1992".

No depository shall act as a depository unless it obtains a certificate of commencement of


business from the Board (the SEBI). The Board shall grant a certificate only if it is
satisfied that the depository has adequate systems and safeguards to prevent manipulation
of records and transactions. However, a certificate shall not be refused unless the
depository concerned has been given a reasonable opportunity of being heard.

A depository shall enter into an agreement with one or more participants as its agent, in
such form as may be specified by the bye-laws. Any person, through a participant, may
enter into an agreement, in such form as may be specified by the bye-laws, with any
depository for availing its services. Any such person shall surrender the certificate of
security, for which he seeks to avail the services of a depository, to the issuer in such
manner as may be specified by the regulations. The issuer, on receipt of certificate of
security, shall cancel the certificate of security and substitute in its records the name of
the depository as a registered owner in respect of that security and inform the depository
accordingly. A depository shall, on receipt of information, enter the name of the person
referred in its records, as the beneficial owner.

On receipt of intimation from a participant, every depository shall register the transfer of
security in the name of the transferee. If a beneficial owner or a transferee of any security
seeks to have custody of such security, the depository shall inform the issuer accordingly.

Every person subscribing to securities offered by an issuer shall have the option either to
receive the security certificates or hold securities with a depository. Where a person opts
to hold a security with a depository, the issuer shall intimate such depository the details
of allotment of the security, and on receipt of such information the depository shall enter
in its records the name of the allottee as the beneficial owner of that security.

A depository shall be deemed to be the registered owner for the purposes of effecting
transfer of ownership of security on behalf of a beneficial owner. However, it shall not
have any voting rights or any other rights in respect of securities held by it. The
beneficial owner shall be entitled to all the rights and benefits and be subjected to all the
liabilities in respect of his securities held by a depository.
The Board, on being satisfied that it is necessary in the public interest or in the interest of
investors so to do, may, by order in writing,:- (i) call upon any issuer, depository,
participant or beneficial owner to furnish in writing such information relating to the
securities held in a depository as it may require; or (ii) authorise any person to make an
enquiry or inspection in relation to the affairs of the issuer, beneficial owner, depository
or participant, who shall submit a report of such enquiry or inspection to it within such
period as may be specified in the order.

Cadbury Committee Report (1992)


The 'Cadbury Committee' was set up in May 1991 with a view to overcome the huge
problems of scams and failures occurring in the corporate sector worldwide in the late
1980s and the early 1990s. It was formed by the Financial Reporting Council, the London
Stock of Exchange and the accountancy profession, with the main aim of addressing the
financial aspects of Corporate Governance. Other objectives include: (i) uplift the low
level of confidence both in financial reporting and in the ability of auditors to provide the
safeguards which the users of company's reports sought and expected; (ii) review the
structure, rights and roles of board of directors, shareholders and auditors by making
them more effective and accountable; (iii) address various aspects of accountancy
profession and make appropriate recommendations, wherever necessary; (iv) raise the
standard of corporate governance; etc. Keeping this in view, the Committee published its
final report on 1st December 1992. The report was mainly divided into three parts:-

 Reviewing the structure and responsibilities of Boards of Directors and


recommending a Code of Best Practice The boards of all listed companies
should comply with the Code of Best Practice. All listed companies should make
a statement about their compliance with the Code in their report and accounts as
well as give reasons for any areas of non-compliance. The Code of Best Practice
is segregated into four sections and their respective recommendations are:-

1. Board of Directors - The board should meet regularly, retain full and
effective control over the company and monitor the executive
management. There should be a clearly accepted division of
responsibilities at the head of a company, which will ensure a balance of
power and authority, such that no one individual has unfettered powers of
decision. Where the chairman is also the chief executive, it is essential that
there should be a strong and independent element on the board, with a
recognised senior member. Besides, all directors should have access to the
advice and services of the company secretary, who is responsible to the
Board for ensuring that board procedures are followed and that applicable
rules and regulations are complied with.
2. Non-Executive Directors - The non-executive directors should bring an
independent judgement to bear on issues of strategy, performance,
resources, including key appointments, and standards of conduct. The
majority of non-executive directors should be independent of management
and free from any business or other relationship which could materially
interfere with the exercise of their independent judgment, apart from their
fees and shareholding.
3. Executive Directors - There should be full and clear disclosure of
directors’ total emoluments and those of the chairman and highest-paid
directors, including pension contributions and stock options, in the
company's annual report, including separate figures for salary and
performance-related pay.
4. Financial Reporting and Controls - It is the duty of the board to present
a balanced and understandable assessment of their company’s position, in
reporting of financial statements, for providing true and fair picture of
financial reporting. The directors should report that the business is a going
concern, with supporting assumptions or qualifications as necessary. The
board should ensure that an objective and professional relationship is
maintained with the auditors.

 Considering the role of Auditors and addressing a number of


recommendations to the Accountancy Profession

The annual audit is one of the cornerstones of corporate governance. It


provides an external and objective check on the way in which the financial
statements have been prepared and presented by the directors of the
company. The Cadbury Committee recommended that a professional and
objective relationship between the board of directors and auditors should
be maintained, so as to provide to all a true and fair view of company's
financial statements. Auditors' role is to design audit in such a manner so
that it provide a reasonable assurance that the financial statements are free
of material misstatements. Further, there is a need to develop more
effective accounting standards, which provide important reference points
against which auditors exercise their professional judgement. Secondly,
every listed company should form an audit committee which gives the
auditors direct access to the non-executive members of the board. The
Committee further recommended for a regular rotation of audit partners to
prevent unhealthy relationship between auditors and the management. It
also recommended for disclosure of payments to the auditors for non-audit
services to the company. The Accountancy Profession, in conjunction with
representatives of preparers of accounts, should take the lead in:- (i)
developing a set of criteria for assessing effectiveness; (ii) developing
guidance for companies on the form in which directors should report; and
(iii) developing guidance for auditors on relevant audit procedures and the
form in which auditors should report. However, it should continue to
improve its standards and procedures.

 Dealing with the Rights and Responsibilities of Shareholders

The shareholders, as owners of the company, elect the directors to run the
business on their behalf and hold them accountable for its progress. They
appoint the auditors to provide an external check on the directors’
financial statements. The Committee's report places particular emphasis on
the need for fair and accurate reporting of a company's progress to its
shareholders, which is the responsibility of the board. It is encouraged that
the institutional investors/shareholders to make greater use of their voting
rights and take positive interest in the board functioning. Both
shareholders and boards of directors should consider how the effectiveness
of general meetings could be increased as well as how to strengthen the
accountability of boards of directors to shareholders.

Sarbanes Oxley Act (2002)


The Sarbanes Oxley Act was enacted in the year 2002 with a view to protect investors by
improving the accuracy and reliability of corporate disclosures made pursuant to the
securities laws and for other purposes. Some of the main provisions of the Act are:-

1. The Act called for establishment of the Public Company Accounting Oversight
Board, whose duties are to:-

 register and regulate all public accounting firms that prepare audit reports;
 establish or adopt, or both, by rule, auditing, quality control, ethics,
independence, and other standards relating to the preparation of audit
reports;
 conduct inspections of registered public accounting firms;
 conduct investigations and disciplinary proceedings concerning, and
impose appropriate sanctions where justified upon, registered public
accounting firms and associated persons of such firms;
 perform such other duties or functions as the Board determines are
necessary or appropriate to promote high professional standards among,
and improve the quality of audit services offered by, registered public
accounting firms and associated persons thereof, or otherwise to carry out
this Act, in order to protect investors, or to further the public interest;
 enforce compliance with professional standards, and the securities laws
relating to the preparation and issuance of audit reports and the obligations
and liabilities of accountants with respect thereto, by registered public
accounting firms and associated persons thereof; and
 set the budget and manage the operations of the Board and the staff of the
Board.

2. It prohibits any public accounting firm from providing non-audit services while
auditing firm. These services include:-

 bookkeeping or other services related to the accounting records or


financial statements of the audit client;
 financial information systems design and implementation;
 appraisal or valuation services, fairness opinions, or contribution-in-kind
reports;
 actuarial services;
 internal audit outsourcing services;
 management functions or human resources;
 broker or dealer, investment adviser, or investment banking services;
 legal services and expert services unrelated to the audit; and
 any other service that the Board determines, by regulation, is
impermissible.

3. The lead audit and reviewing partner must rotate off the audit every 5 years. It
shall be unlawful for a registered public accounting firm to provide audit services
to an issuer if the lead (or coordinating) audit partner (having primary
responsibility for the audit), or the audit partner responsible for reviewing the
audit, has performed audit services for that issuer in each of the 5 previous fiscal
years.

4. The Act calls for the formation of an independent and competent audit committee,
which is directly responsible for the appointment, compensation, and oversight of
the work of any registered public accounting firm and of auditor's activities. It
requires that each member of a firm’s audit committee be a member of the board
of directors and be 'independent'. In order to be considered independent, a
member of an audit committee may not accept any consulting, advisory, or other
compensatory fee from the issuer; or be an affiliated person of the issuer or any
subsidiary thereof.

5. Each registered public accounting firm that performs for any issuer any audit shall
timely report to the audit committee of the issuer:- (i) all critical accounting
policies and practices to be used; (ii) all alternative treatments of financial
information within generally accepted accounting principles that have been
discussed with management officials of the issuer, ramifications of the use of such
alternative disclosures and treatments, and the treatment preferred by the
registered public accounting firm; and (iii) other material written communications
between the registered public accounting firm and the management of the issuer,
such as any management letter or schedule of unadjusted differences.

6. Each audit committee shall establish procedures for:- (i) the receipt, retention and
treatment of complaints received by the issuer regarding accounting, internal
accounting controls, or auditing matters; and (ii) the confidential, anonymous
submission by employees of the issuer of concerns regarding questionable
accounting or auditing matters.

7. The Act requires that the principal executive officer or officers and the principal
financial officer or officers, or persons performing similar functions, to certify
that the financial statements accurately and fairly represent the financial condition
and results of operations of the company, in each annual or quarterly report filed
or submitted.

8. The Act requires rapid disclosure of material changes in the financial conditions
or operations of the firm, which may include trend and qualitative information
and graphic presentations, as necessary or useful for the protection of investors
and in the public interest.

9. It prohibits loans to any of the firm’s directors or executives. It shall be unlawful


for any issuer to extend or maintain credit, to arrange for the extension of credit,
or to renew an extension of credit, in the form of a personal loan to or for any
director or executive officer (or equivalent thereof) of that issuer.

10. It requires that each annual report contain an internal control report. This report
shall state the responsibility of management for establishing and implementing
adequate procedures for financial reporting, as well as contain an assessment of
effectiveness of internal control structure and procedures, any code of ethics and
contents of that code.

Guidelines at International Level


OECD Principles of Corporate Governance (2004)
The OECD Principles of Corporate Governance were developed with a view to assist
OECD and non-OECD governments in their efforts to evaluate and improve the legal,
institutional and regulatory framework for corporate governance in their countries, and to
provide guidance and suggestions for stock exchanges, investors, corporations, and other
parties that have a role in the process of developing good corporate governance.
Although, these principles mainly focuses on publicly traded companies (both financial
and non-financial), they also act as a useful tool to improve corporate governance in non-
traded companies, for example, privately held and state owned enterprises.

These principles majorly include:-

 An effective corporate governance framework should be developed with a view to


its impact on overall economic performance, market integrity and the incentives it
creates for market participants as well as for the promotion of transparent and
efficient markets. The legal and regulatory requirements that affect corporate
governance practices in a jurisdiction should be consistent with the rule of law,
transparent and enforceable. They should clearly articulate the division of
responsibilities among different supervisory, regulatory and enforcement
authorities.
 The corporate governance framework should protect and facilitate the exercise of
basic shareholders’ rights, which should include the right to: (i) secure methods of
ownership registration; (ii) convey or transfer shares; (iii) obtain relevant and
material information on the corporation on a timely and regular basis; (iv)
participate and vote in general shareholder meetings; (v) elect and remove
members of the board; and (vi) share in the profits of the corporation.
Shareholders should have the right to participate in, and to be sufficiently
informed on, decisions concerning fundamental corporate changes, such as,
amendments to the statutes or articles of incorporation; authorisation of additional
shares; etc.
 Capital structures and arrangements that enable certain shareholders to obtain a
degree of control disproportionate to their equity ownership should be disclosed.
The rules and procedures governing the acquisition of corporate control in the
capital markets, and extraordinary transactions, such as mergers and sales of
substantial portions of corporate assets, should be clearly articulated and disclosed
so that investors understand their rights and recourse. Transactions should occur
at transparent prices and under fair conditions that protect the rights of all
shareholders according to their class.
 All shareholders of the same series of a class, including minority and foreign
shareholders, should be treated equally. Within any series of a class, all shares
should carry the same rights. All investors should be able to obtain information
about the rights attached to all series and classes of shares before they purchase.
Besides, all shareholders should have the opportunity to obtain effective redress
for violation of their rights.
 Insider trading and abusive self-dealing should be prohibited.
 The corporate governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage active co-
operation between corporations and stakeholders in creating wealth, jobs and the
sustainability of financially sound enterprises. Further, it should be complemented
by an effective, efficient insolvency framework and by effective enforcement of
creditor rights.
 Performance-enhancing mechanisms for employee participation should be
permitted to develop.
 The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, operating results, objectives, performance, ownership,
remuneration policy and governance of the company. Information should be
prepared and disclosed in accordance with high quality standards of accounting
and financial and non-financial disclosure.
 An annual audit should be conducted by an independent, competent and qualified
auditor in order to provide an external and objective assurance to the board and
shareholders, such that the financial statements fairly represent the financial
position and performance of the company in all material respects. External
auditors should be accountable to the shareholders and owe a duty to the company
to exercise due professional care in the conduct of the audit.

 The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board's
accountability to the company and its shareholders. That is, the Board members
should act on a fully informed basis, in good faith, with due diligence and care,
and in the best interest of the company and the shareholders. It should review and
guide corporate strategy, major plans of action, risk policy, annual budgets,
business plans, performance objectives, etc. as well as monitor the effectiveness
of company's governance practices and make changes, wherever needed

UNCTAD Guidance on Good Practices in Corporate Governance


Disclosure

UNCTAD has undertaken various actions to strengthen their regulatory frameworks in


order to restore investor confidence as well as enhance corporate transparency and
accountability. Accordingly, it has issued 'Guidance on Good Practices in Corporate
Governance Disclosure' in 2006 for promoting improved corporate governance standards.
This guidance is a voluntary technical aid for, among others, regulators and companies in
developing countries and transition economies. Its purpose is to assist the preparers of
enterprise reporting in producing disclosures on corporate governance, which will
address the major concerns of investors and other stakeholders. This is most relevant for
enterprises eager to attract investment, regardless of their legal form or size. This
guidance is also useful for promoting awareness in countries and companies that are not
sufficiently adhering to international good practices and are consequently failing to
satisfy investors’ expectations regarding corporate governance disclosures.

The guidance revisits the content of major corporate governance codes and regulations
with a focus on financial disclosures, a range of non-financial disclosures, disclosures in
relation to general meetings, the timing and means of disclosures, and the disclosure of
the degree of compliance with local or other codes of corporate governance. The
recommendations under these guidelines include:-

 One of the major responsibilities of the board of directors is to ensure that


shareholders and other stakeholders are provided with high-quality disclosures on
the financial and operating results of the entity. The quality of financial disclosure
depends significantly on the robustness of the financial reporting standards on the
basis of which the financial information is prepared and reported. Thus, the
board’s responsibilities and duties regarding financial communications like
overseeing the process of producing the financial statements should be disclosed.
 Enterprises should fully disclose significant transactions with related parties.
However, in circumstances where the financial reporting requirements are less
stringent, as a minimum, the board of directors should provide the following
disclosures that are generally considered best-practice: significant related-party
transactions and any related-party relationships where control exists; disclosure of
the nature, type and elements of the related-party transactions; and related-party
relationships where control exists (irrespective of whether there have been
transactions with parties under common control). The decision making process for
approving related-party transactions should also be disclosed. Members of the
board and managers should disclose any material interests in transactions or other
matters affecting the company.
 The objectives of the enterprise should be disclosed, such as governance
objectives, like 'why does the company exist?', etc. The objectives of enterprises
may vary according to the values of society.
 The beneficiary ownership structure of an enterprise is of great importance in an
investment decision, especially with regard to the equitable treatment of
shareholders, and thus, it should be fully disclosed to all interested parties.
Changes in the shareholdings of substantial investors should be disclosed to the
market as soon as a company becomes aware of them.
 Disclosure should be made of the control structure and of how shareholders or
other members of the organisation can exercise their control rights through voting
or other means. Any arrangement under which some shareholders may have a
degree of control disproportionate to their equity ownership, whether through
differential voting rights, appointment of directors or other mechanisms, should
be disclosed. Any specific structures or procedures which are in place to protect
the interests of minority shareholders should be disclosed. Rules and procedures
governing the acquisition of corporate control in the capital markets and
extraordinary transactions such as mergers and sales of substantial portions of
corporate assets should be disclosed.
 The composition of the board should be disclosed, in particular the balance of
executives and non-executive directors, and whether any of the non-executives
have any affiliations (direct or indirect) with the company. The board’s role and
functions must be fully disclosed. The existence of an enterprise code of ethics
and governance structures should be disclosed. In particular, the board should
disclose structures put in place to prevent conflicts between the interests of the
directors and management on the one side, and those of shareholders and other
stakeholders on the other.
 The composition and functions of any groups or committees, which have been
established to facilitate fulfillment of certain of the board’s functions and address
some potential conflicts of interest, should be fully disclosed. Committee charters,
terms of reference or other company documents outlining the duties and powers
of the committee or its members should also be disclosed, including whether or
not the committee is empowered to make decisions which bind the board, or
whether the committee can only make recommendations to the board.
 The number, type and duties of board positions held by an individual director
should be disclosed. An enterprise should also disclose the actual board positions
held, and whether or not the enterprise has a policy limiting the number of board
positions any one director can hold. There should be sufficient disclosure of the
qualifications and biographical information of all board members to assure
shareholders and other stakeholders that the members can effectively fulfil their
responsibilities. There should also be disclosure of the mechanisms which are in
place to act as 'checks and balances' on key individuals in the enterprise. The
board should also disclose facilities which may exist to provide members with
professional advice as well as whether those facilities have been used during the
reporting period.
 The board should disclose whether it has a performance evaluation process in
place, either for the board as a whole or for individual members. Disclosure
should be made of how the board has evaluated its performance and how the
results of the appraisal are being used.
 Directors should disclose the mechanism for setting directors’ remuneration and
its structure. A clear distinction should be made between remuneration
mechanisms for executive directors and non-executive directors. Disclosure
should be comprehensive to demonstrate to shareholders and other stakeholders
whether remuneration is tied to the company’s long-term performance as
measured by recognized criteria. Information regarding compensation packages
should include salary, bonuses, pensions, share payments and all other benefits,
financial or otherwise, as well as reimbursed expenses. Where share options for
directors are used as incentives but are not disclosed as disaggregated expenses in
the accounts, their cost should be fully disclosed using a widely accepted pricing
model. The length of directors’ contracts and the termination of service notice
requirements, as well as the nature of compensation payable to any director for
cancellation of service contract, should be disclosed.
 The board should give appropriate disclosures and assurance regarding its risk
management objectives, systems and activities. It should disclose existing
provisions for identifying and managing the effects of risk bearing activities. It
should report on internal control systems designed to mitigate risks. Such
reporting should include risk identification mechanisms.
 The board should disclose that it has confidence that the external auditors are
independent and their competency and integrity have not been compromised in
any way. The process for the appointment of and interaction with external
auditors should be disclosed. Disclosures should cover the selection and approval
process for the external auditor, any prescriptive requirements of audit partner
rotation, the duration of the current auditor, what percentage of the total fees paid
to the auditor involves non-audit work, etc.
 Enterprises should disclose the scope of work and responsibilities of the internal
audit function and the highest level within the leadership of the enterprise to
which the internal audit function reports. Enterprises with no internal audit
function should disclose the reasons for its absence.
 Disclosure should be made of the process for holding and voting at annual general
meetings and extraordinary general meetings, as well as all other information
necessary for shareholders to participate effectively in such meetings. Notification
of the agenda and proposed resolutions should be made in a timely fashion, and
be made available in the national language (or one of the official languages) of the
enterprise as well as, if appropriate, an internationally used business language.
The results of a general meeting should be communicated to all shareholders as
soon as possible.
 All material issues relating to corporate governance of the enterprise should be
disclosed in a timely fashion. The disclosure should be clear, concise, precise and
governed by the 'substance over form' principle. Some issues may require
continuous disclosure. Relevant information should be available for users in a cost
effective way, preferably through the websites of the relevant government
authority, the stock exchange on which the enterprise is listed (if applicable) and
the enterprise itself.
 Where there is a local code on corporate governance, enterprises should follow a
'comply or explain' rule whereby they disclose the extent to which they followed
the local code's recommendations and explain any deviations. Where there is no
local code on corporate governance, companies should follow recognized
international good practices. The enterprise should disclose awards or accolades
for its good corporate governance practices.

UNCTAD Guidance on Good Practices in Corporate Governance


Disclosure

The Combined Code on Corporate Governance (‘the Code’) is being published by the
Financial Reporting Council (FRC) to promote confidence in corporate reporting and
governance as well as to support its following outcomes, namely:- (i) contribution of
good corporate governance towards better performance of company by helping a board
discharge its duties in the best interests of shareholders; (ii) facilitation by good
governance for efficient, effective and entrepreneurial management that can deliver
shareholder value over the longer term; etc. The Code is not a rigid set of rules, rather it
is a guide to the components of good board practice distilled from consultation and
widespread experience over many years.

The 'Code on Corporate Governance' published in the year '2008' has provided several
principles relating to various sections like Board of Directors, Chairman and Chief
executive of Company; Remuneration Policy; Accountability and Auditing (Financial
Reporting and Internal Controls); as well as relations with shareholders; etc. These
principles majorly include:-

 Every company should be headed by an effective board, which is collectively


responsible for the success of the company. The board’s role is to provide
entrepreneurial leadership of the company within a framework of prudent and
effective controls which enables risk to be assessed and managed. It should set the
company’s strategic aims, ensure that the necessary financial and human
resources are in place for the company to meet its objectives as well as review
management performance. It should set the company’s values and standards and
ensure that its obligations to its shareholders and others are understood and met.
 All directors must take decisions objectively in the interests of the company. The
board should meet sufficiently regularly to discharge its duties effectively. There
should be a formal schedule of matters specifically reserved for its decision.
 The annual report should identify the chairman, the deputy chairman (where there
is one), the chief executive, the senior independent director and the chairmen and
members of the nomination, audit and remuneration committees. It should set out
the number of meetings of the board and those committees and individual
attendance by directors. It should include a statement of how the board operates,
including a high level statement of which types of decisions are to be taken by the
board and which are to be delegated to management.
 There should be a clear division of responsibilities at the head of the company
between the running of the board and the executive responsibility for the running
of the company’s business. No one individual should have unfettered powers of
decision.
 The board should include a balance of executive and non-executive directors (and
in particular independent non-executive directors) such that no individual or small
group of individuals can dominate the board’s decision taking.
 There should be a formal, rigorous and transparent procedure for the appointment
of new directors to the board. Appointments to the board should be made on merit
and against objective criteria. Care should be taken to ensure that appointees have
enough time available to devote to the job.
 The board should be supplied in a timely manner with information in a form and
of a quality appropriate to enable it to discharge its duties. All directors should
receive induction on joining the board and should regularly update and refresh
their skills and knowledge. They should have access to the advice and services of
the company secretary, who is responsible to the board for ensuring that board
procedures are complied with.
 The board should undertake a formal and rigorous annual evaluation of its own
performance and that of its committees and individual directors. The board should
state in the annual report how performance evaluation has been conducted.
 All directors should be subject to election by shareholders at the first annual
general meeting after their appointment, and to re-election thereafter at intervals
of no more than three years. The names of directors submitted for election or re-
election should be accompanied by sufficient biographical details and any other
relevant information to enable shareholders to take an informed decision on their
election.
 Levels of remuneration should be sufficient to attract, retain and motivate
directors of the quality required to run the company successfully, but a company
should avoid paying more than is necessary for this purpose. The performance-
related elements of remuneration should form a significant proportion of the total
remuneration package of executive directors and should be designed to align their
interests with those of shareholders and to give these directors keen incentives to
perform at the highest levels. Levels of remuneration for non-executive directors
should reflect the time commitment and responsibilities of the role.
 The board should, at least annually, conduct a review of the effectiveness of the
group’s system of internal controls and should report to shareholders that they
have done so. The review should cover all material controls, including financial,
operational and compliance controls and risk management systems.
 The board should establish formal and transparent arrangements for considering
how they should apply the financial reporting and internal control principles and
for maintaining an appropriate relationship with the company’s auditors.
 The chairman should ensure that the views of shareholders are communicated to
the board as a whole, as well as discuss governance and strategy with major
shareholders. The senior independent director should attend sufficient meetings
with a range of major shareholders to listen to their views in order to help develop
a balanced understanding of the issues and concerns of major shareholders. The
board should keep in touch with shareholder opinion in whatever ways are most
practical and efficient.
 The board should use the Annual General Meeting (AGM) to communicate with
investors and to encourage their participation.
 Institutional shareholders should enter into a dialogue with companies based on
the mutual understanding of objectives. When evaluating companies’ governance
arrangements, particularly those relating to board structure and composition,
institutional shareholders should give due weight to all relevant factors drawn to
their attention. Most importantly, they have a responsibility to make considered
use of their votes.