LAWS ON CORPORATE GOVERNANCE

THERE ARE PRIMARILY 2 RESPONSIBLE AUTHORITY FOR REGULATING CORPORATE GOVERNANCE NAMELY MINISTRY OF CORPORATE AFFAIRS(MCA) AND SECURITIES EXCHANGE BOARD OF INDIA(SEBI).MCA MANDATES ITS LEGISLATIONS THROUGH COMPANIES ACT,1956 AND SEBI BY VARIOUS ACTS

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Per the 2009 COMMITTEE ON FINANCIAL SECTOR ASSESMENT (CFSA) assessment, listed companies HAVE a legal obligation to comply with the provisions of the SEBI Act of 1992, the Securities Contract (Regulation) Act (SCRA) of 1956, the Securities Contract (Regulation) Rules of 1957, the Depositories Act of 1996, and the Listing Agreement (LA). Banking and Insurance sectors have their specific statutes i.e. the Banking Regulations Act of 1949, the Insurance Act of 1938, the IRDA Act of 1999, the LIC Act and the GIC Act.

COMPANIES ACT,1956 FOLLOWING MAIN LAWS (AND RECOMMENDATIONS) POINTS WERE INSERTED INTO THE COMPANIES ACT,1956 (WITH REGARD TO CORPORATE GOVERNANCE) 1) The Companies Act stipulates provisions such as mandatory Directors Responsibility Statement in the Directors Report, requirement of Audit Committees in companies exceeding a certain size, facilitating postal ballot in voting by shareholders etc., violation of which can attract prosecution by the Registrar of Companies (ROCs). ROCs which comes under the MCA requires all companies, incorporated in India, to file fundamental documents (such as by-laws, initial directors, shareholder registry) with them, while listed companies are

required to do the same with Stock Exchanges where they are listed. Clause 49 of the Listing Agreement has elaborate provisions pertaining to the Composition of the Board of Directors (BoD), Appointment of Independent Directors, Constitution of Audit Committee, Disclosures in Annual Reports, Subsidiary Companies, CEO/CFO certifications, Quarterly report on Corporate Governance etc. to ensure high quality of corporate governance. Listed banks also fall under Clause 49 as long as they do not violate the provisions of their respective statutes. Based on the recommendations of the Ganguly Committee Report, the RBI issued a circular (dated June 20, 2002) to scheduled commercial banks (excluding foreign banks, regional rural banks and local area banks) advising them to place the report of the Group and recommendations before the BoD of the bank for its adoption and implementation. A separate directive (dated June 25, 2004) on fit and proper status of directors of private banks and guidelines (in February 2005) on ownership and governance have also been issued to private sector banks.

The power relating to protection of minority shareholders is vested with the MCA that can file petition before the Company Law Board (CLB) (independent quasi-judicial body) in events of alleged oppression and mismanagement. For stock exchanges, regulatory roles are assigned to SEBI and the Central Government (which in turn delegates it to SEBI). The SEBI Act confers comprehensive investigation and enforcement powers to SEBI and transparency is maintained in enforcement by giving due opportunity for representation to the parties concerned. The MCA

has come up with an electronic compliance management system which enables registration, incorporation, filing of documents and annual returns online, in a 24x7 time frame. This helps the RoCs to monitor compliances and provide online access to the users of the information.

2)RIGHT OF SHAREHOLDERS AND THEIR ROLE

Shareholders seldom exercise their right to participate and vote at general meetings. They are entitled to share profits by way of dividend (which must be paid within 30 days of declaration) but have no say in the rate of dividend. SEBI's (Substantial Acquisition of Shares & Takeovers) regulations ensure protection of rights of minority shareholders. Shareholders have pre-emptive rights in case of capital increase. Further, reverse book building mechanism safeguards the interest of shareholders in case a company wants to get delisted. All complaints can be filed with the MCA and SEBI and penal provisions for non-redress are contained in the Companies Act and the SEBI Act.

The Companies Act stipulates holding of Annual General Meeting every year at or near companys registered office. Notice of the meeting specifying time, place and agenda is sent to shareholders at least 21 days before the meeting. In case of special business, an explanatory note is attached to the notice. Shareholders can pose questions at the meeting and propose new resolution to the board

subject to certain limitations. They can vote in person or through proxy or send their votes for certain fundamental decisions through post. The Companies Act of 1956, requires the companies to disclose disproportionate voting rights in their Memorandum and Articles of Association. Listing agreement requires detailed shareholding pattern to be submitted to the Stock Exchanges on a quarterly basis, with the same being disseminated on their website. Change in shareholding pattern of 1 percent or above is to be disclosed. Joint venture arrangement or private equity investments that allow certain shareholders to exercise control, which is disproportionate, must be disclosed. In general, the disclosure norms need to be strengthened to ensure transparency in capital structures/shareholding patterns and stringent penal action needs to be enforced for non compliance.

3)EQUANIMITY TO SHAREHOLDERS The Companies Act of 1956 requires the members of the Board and key executives to disclose to the Board whether they, directly or indirectly or on behalf of third parties, have a material interest in any transaction directly affecting the corporation, and the Directors are required to disclose their interest, if any, in the proposals being considered by the Board. Directors are also required to disclose their directorships in other companies (Section 303). Listing agreement stipulates strict disclosure requirements in this respect. Shareholders are prohibited from getting loan from the company, while the Directors have to seek approval of the Central Government for the same. Section 16 of the Banking Regulation Act stipulates that no banking company

incorporated in India shall have as a director in its Board any person who is a director of any other banking company, to avoid any Conflict of Interest. Further, Section 20 of the same act prohibits loans and advances to Director or firm in which he has any interest. The 2009 CFSA report states that insurance companies are governed by the provisions in the Companies Act of 1956 to provide for shareholders rights. They are required to comply with the Accounting Standards (AS) issued by ICAI. Accordingly, related party transactions are required to be disclosed under AS 18. (NOW AS ISSUED BY ICAI OVERRIDES COMPANIES ACT 1956 AS PER THE LATEST DEVELOPMENT IN 2011) 4)REPONSIBILITY OF MGT In its 2009 assessment, the CFSA points out that provisions of the Companies Act and Clause 41 and 49 of the Listing Agreement place greater responsibility on the Board and on independent directors to protect the interests of the stakeholders, and provide for effective management by the Board. Recent amendments in Clause 41 ensure greater accountability of the Board to the company and its shareholders The Institute of Company Secretaries of India (ICSI) has brought out a Secretarial Guide on Boardroom practices. Amendments in the Listing Agreement brought about by SEBI pursuant to the Narayana murthy report on Corporate Governance, has enhanced and crystallized Boards' responsibilities, but its implementation by companies across the Board needs to be evaluated.

SEBI LAWS REGULATING CORPORATE GOVERNANCE 1. Securities Contracts (Regulation) Act, 1956

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

Every recognised stock exchange shall furnish the Central Government with a copy of the annual report, and such annual report shall contain such particulars as may be prescribed. It may make rules or amend any rules made by it to provide for all or any

of the following matters, namely:- (i) the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting; (ii) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital of the stock exchange; (iii) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange; etc.

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

Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in order to further amend the Securities Contracts (Regulation) Act, 1956, with a view to include securitisation instruments under the definition of 'securities' and provide for disclosure based regulation for issue of the securitised instruments and the procedure thereof. This has been done keeping in view that there is considerable potential in the securities market for the certificates or instruments under

securitisation transactions. Further, replication of the securities markets framework for these instruments would facilitate trading on stock exchanges and, in turn, help development of the market in terms of depth and liquidity.

2. Securities and Exchange Board of India Act, 1992

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

No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.

No depository, participant, custodian of securities, foreign institutional investor, credit rating agency, or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.

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