Beruflich Dokumente
Kultur Dokumente
2010
FRIDAY
http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm
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.
# To conduct research work in which the parent company is engaged provided the
results of the research work are made available to Indian 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.
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.
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
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):
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
One copy has to be submitted along with a forwarding letter addressed to the
concerned Registrar of Companies.
Enclosures
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
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 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.
Presented by
Managerial Remuneration
# Whereas private companies are free to pay any remuneration to its directors,
public companies can remunerate their directors only within the specified limits.
# 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. 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.
# 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.
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.
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
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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
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.
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.
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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.
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.
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:-
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.
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.
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.
(1) (2)
Indian Company Foreign Company
(Incorporated in India) (Company incorporated outside
India but having place of
business in India)
(1) (2)
(Holding Company) (Subsidiary Company)
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).
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.
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.
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.
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)
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.
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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 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.
http://business.gov.in/legal_aspects/index.php
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.
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.
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 horizontal agreements are the agreements between those enterprises which are at the
same stage of production,services,etc. It includes, any collusive agreement which :-
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;
• Refusal to deal;
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;
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.
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 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 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.
• 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.
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:-
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
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.
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:
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:
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.
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.
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:-
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:
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.
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.
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.
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:-
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.
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.
Audit Committee
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:
4. Reviewing with the management, external and internal auditors, and the
adequacy of internal control systems.
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.
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
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.
Management
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
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.
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 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.
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.
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 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 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.
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.
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:-
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.
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.
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.
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".
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.
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.
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.
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:-
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.
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.
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
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:-
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:-