Developed by MET - Centre of Educational Technology

Developed by MET - Centre of Educational Technology
Content Outline
In this session you will learn about:
Meaning of Corporate Governance
Milestones of Corporate Governance
Schedule of Adherence
Constitution of Board of Directors and Audit Committee
Codes
Board duties of Internal and External Audit
Ideal structure for Corporate Governance

5/4/2014 2 Developed by MET - Centre of Educational Technology
Corporate Governance
Content Objectives
At the end of this session you will be able to:
Explain the meaning of Corporate Governance
Explain the milestones of Corporate Governance
Explain the schedule of adherence and the constitution of
Board of Directors and the Audit Committee
Discuss the need of codes
Examine the board duties of Internal and External Audits

Meaning
Governance
Act of ruling with authority, keeping under control,
influencing / directing etc.

About corporate behavior, ensuring checks and balances
in a dynamic environment with openness, integrity and
accountability; protecting interests of stake holders.
New market driven economy
Market capital Rs. 6,750 cr. in 1984 to Rs.187,50,000
cr. by 2005.
Scams, incompetent managements, fraud/siphoning
money, dissensions within management-impact on
profits and loss to shareholders.
Shareholder activism and democracy still a myth in
India.
Company Trustee of shareholders and accountable to
them.

Why Corporate Governance
Lockheed and many other scandals in US. (Foreign
corrupt practices Act)
Continental Europe Stakeholder Model
Treadway commission US
Cadbury commission UK
Asian Financial crisis Crony Capitalism
Liberalisation in India and FDI expectations
Success of Some Indian Cos and US stock exchange
Milestones
OECD principles India and China.
Involvement of FICCI and other Trade associations.
Company Law Revisions.
K. Birla Committee SEBI
Listing arrangements and relation to Corporate
Governance.
Corporate Governance code of Birla Committee enforced
by SEBI (Security Exchange Board of India) be adding
new clause 49 of listing arrangement.
OtherCommittees
Company Law 2013,New SEBI provisions
Milestones
Economic liberalization does not only mean less control
by Govt. but more control by shareholders.
CG to address issue of separation of ownership and
management.
Board of Directors to act as custodians of shareholders
and be accountable to them.
Executive management given operational autonomy for
day to day operation and is accountable to Board.

Meaning
Corporate Governance is the starting point for Board to
discharge its responsibility to shareholders and it forms
an umbrella under which internal control mechanism
would evolve and function.

Executive management derives authority and operating
policies from code.

Meaning
Meaning
Under Corporate Governance shareholder interest sought
to be protected through functions of an audit committee.

Board to consider and review significant business risks,
assess Internal Control system in managing such risks,
review scope and quality of managements on going
monitoring of risks.

Shareholders get an opportunity to monitor and evaluate
management.

Meaning
In short Corporate Governance is about
ethical corporate behaviour
ensuring checks and balances
need for openness
integrity and accountability
enhancing long-term shareholder value
protecting interest of other stakeholders
Meaning
Click on the image to view video
Post good behaviour (in majority cases) is a likely
predictor of future good behaviour.

Code provides a way to show a consistent pattern of
behaviour within and outside the company.

Wide and strategic partnership needed among industry,
SEBI, Govt., Credit rating agencies and Exchanges.

Best results can be achieved only when Cos treat CG
code as a way of life than only as a structure.
Why codes?
One possible structure provided by the Cadbury
Committee is followed in UK, under its
recommended code of conduct.(Clause 49 of
listing arrangementnow modified)
All boards should have a number of non-executive
directors.
No one person should hold two offices of Chairman
and executive officer.
There should be an Audit Committee composed
primarily of (confined to) non-executive directors.
Board Structure
A group companies by 31-03-2001.

10 cr. equity / Rs 25 cr. net worth by 31-03-2002

3 cr. or more equity by 31-03-2003

Annual Report to disclose adoption / non-adoption of
non-mandatory requirements.
Schedule for Adherence
as per SEBI clause 49-
now modified
Non-Executive Directors not less than 50%(NOW
MODIFIED)

Number of independent Director
At least 1/3rd in case Non-Executive Chairman.At least
1/2 in case of Executive Chairman.

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Constitution of Board of Directors
Other provisions are Board and Committees
Board to meet at least 4 times in a yr; max gap of 4
months

Director not a member in more than 10 committees, or
as chairman of more than 5 committees, inform
company about positions occupied in other companies
and notify changes as they occur

Board to review compliance report periodically

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Board of Directors
Non-executive directors compensation and disclosures:
All fees/compensation paid to non-executive directors
including independent directors, to be fixed by board of
Directors and require approval of shareholders

Shareholders resolution shall specify limits for number
of stock options to be granted to non-executive
directors including directors.
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Board of Directors
New SEBI provisions
Amendments proposed and to be
implemented effective Oct 1,2014 are to align
provisions of listing arrangement with the
provisions of newly enacted Companies Act
2013 and also to provide additional
requirements to strengthen CG framework for
listed companies
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New Revised SEBI Code

Applicable from Oct 1,2014
Mandate: Empower the Board
Five clear activities of empowered board
1 Ensuring legal and ethical conduct of
employees
2 Approving strategy and evaluating
implementation
3 Selecting,evaluating,rewarding/removing
CEO/senior management
4 Ensuring that succession plans are in place
5 Evaluating itself
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New provisions(Board of Directors)
Min 3 directors(Public Limited Company),2
private company,one in one person
company.Maximum 15
One woman director (must as per SEBI)
One Director appointed by small shareholders
At least one director to have stayed in India
for 182days
At least one third directors to be Independent
Independent director means a director other
than MD/Whole time director/nominee
director-

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Board---
Nominee director means a director nominated
by any financial institution in pursuance of
any law in force or appointed by any
Government

As per SEBI an executive/whole time director
in a listed company can be only on three
boards
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Board----Independent director
Who in the opinion of is a person of integrity
Who is not a promoter of
company/subsidiary/associate company
Who is not related to promoters/directors
Who has no pecuniary relationship with
company/holding/associate/subsidiary
/promoters/directors during current financial
year/during two immediately preceding
financial years
None of whose relatives has/had pecuniary

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Board---
Relationship/transaction with the
company/holding/subsidiary/associate
company;promoters/directors amounting to 2
% or more of its gross turnover or total
income of 50lacs or such amount as may be
prescribed,whichever is lower during the two
immediately preceding financial years or
current financial year
1Who neither himself nor any of his relatives-
holds/has held key managerial position of the
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Board--
Company/holding,subsidiary/associate company
in any of the three financial years immediately
preceding the financial year
2 is or has been an
employee/partner/proprietor in any of the
three financial year in which he is proposed to
be appointed of
a A firm of auditors/cost auditors/company
secretaries of company/associate/subsidiary
companies

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Board--
b any legal/consulting firm which has/ had a
transaction with the
company/associate/subsidiary company
amounting to 10%or more of the gross
turnover of such firm
Holds together with his relatives 2 % or
more of the total voting power of the
company
Is CEO/Director of any nonprofit organisation
that receives 25%or more of its receipts from
the company,any of its promotors/directors
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Board---
Or its holding/associate/subsidiary company or
that holds2@or more of total voting power of
the company
Independent Director to give an undertaking
that he meets necessary criteria
Independent Director shall not be entitled to
stock options and may receive reimbursement
of expenses for participation in meeting,fee
and profit related commissionm
Independent Director shall hold office for a
term

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Board---
Upto five consecutive years on the board,but
shall be eligible for reappointment after
disclosure of such appointment in the Boards
report
However,no independent director shall hold
office for more than two consecutive terms
Independent Director/non-excutive director
not being promoter or key managerial
personnel shall be held liaible,only in respect
of omission/commission by a company which
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Board---
Has ocurred with his knowledge,attributable
through Board process,and with his
consent/connivance/where he has not acted
diligently
Performance evaluation of independent
director will be done by the entire board
Independent Director shall follow prescribed
Code
As per SEBI a person cannot be independent
director in more than 7 companies
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Board---Independent Director
Roles and Functions
Scrutinise performance of management in
meeting agreed goals and monitor reporting
of performance
Satisfy themselves on the integrity of financial
information and that financial controls and
systems of risk management are robust and
defensible
Safeguard interest of all
stakeholders,particularly monority
shareholders
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Board---Independent Director
Determine appropriate levels of remuneration
of executive directors,key managerial
personnel and have a prime role in appointing
and where necessary removal of executive
directors and key managerial personnel
Moderate and arbitrate interest of company as
a whole,in situations of conflict between
management and shareholder interest
Report concerns about unethical
behaviour,acual/suspected fraud,violation of
company code
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Board---Independent director
SEPARATE MEETINGS
Shall hold at least one meeting per year
without the attendence of non-independent
directors and management, which shall
1 Review the performance of non-indepent
directors and board as a whole4
2 Review performance of Chairperson,taking
into account views of executive and non-
executive directors
3 Assess the quality,quantity and timeliness of
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BoardIndependent Director
flow of information between company
management and Board for effective
performance of Board

Performance of Independent directors shall be
done by the entire Board,excluding the
director being evaluated
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i. Audit Committee
ii. External Audit
iii. Internal Audit
Internal Audit Programme Key
What is Internal Audit?
Fraud detection?
MAOCARO Provisions in Company Law 70 and 80s.
3 pillars of Corporate Governance
Basically to go through financial books and certify that
the financial position is true and fair (as on a given
date), Laws are adhered to etc., based on the
information available to them.
External Audit
A staff function to assist Management in internal controls,
suggest improvements in all aspects of organizational
working control over:
1. Assets
2. Integrity of Information
3. Compliance: Laws and Acts, Company Policies, Rules
and Regulations.
4. Efficient and Economic use of Resources
5. Achievement of Goals / Objectives

Broad Duties of Internal Audit
1. Assets
o Financial: Verification , Insurance etc.
o Managerial: Proper use of assets.
2. Integrity of Information
o Financial: Accounting based
o Managerial: All activities
3. Compliance: Laws and Acts, Company Policies, Rules
and Regulations.
4. Efficient and Economic use of Resources
5. Achievement of Goals / Objectives
Board Duties of Internal Audit
Post Naresh Chandra, Narayan Murthy committee i.e.
29/10/2004

Paid up Capital of Rs. 3cr or net worth Rs. 25 any time
April 1, 2005
Compliance report Quarterly from June 30, 2005
Not applicable to MFs
Stock Exchange to set up monitoring cell and report
compliance to SEBI
LATER Suggestions(Not
relevant)
Qualified and Independent Audit Committee
Min 3 directors as members,(Majority) 2/3
rd
of members
to be independent directors

Majority to be financially literate, Chairperson to have
accounting or related financial management expertise.

Chairman to be independent director(not prescribed in
company Law)

Chairman to be present at all AGM to answer
shareholder queries(removed in company law)

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Audit Committee(now modified)
Qualified and Independent Audit Committee
Audit committee may invite executives to be present at
their meetings, on occasions may also meet without the
presence of any executives (Also has power to obtain
professional advice from external sources)

Finance director, head of internal and representative of
the statutory auditor may be present for meetings

Company secretary to act as secretary to the committee

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Audit Committee
Meetings of Audit Committee
Audit committee to meet at least 4 times in a year, gap
of not more than 4 months

Quorum either 2 members or 1/3
rd
of members
whichever is greater, should be minimum of 2
independent members present

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Audit Committee
Review of Information by Audit Committee (modified)
Management discussion

Analysis of financial condition

Results of operations

Statement of significant party transactions

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Audit Committee
Review of Information by Audit Committee (modified)
Management letters/letters of internal control
weaknesses issued by the statutory auditors

Internal audit reports relating to internal control
weaknesses

Appointment, removal, terms or remuneration of the
chief internal auditor subject to review by Audit
Committee

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Audit Committee
Audit Committee (New Provisions)
Board of every listed company shall constitute
Audit Committee
Audit Committee shall consist of a minimum
of three directors with independent directors
forming a majority
Majority of members of Audit Committee
including its chairpersons shall be persons
with ability to read and understand financial
statement
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Audit Committee-New provisions
Every Audit Committee shall act in accordance
with the terms of reference specified in
writing by the Board which shall include
Recommendation for
appointment,remuneration and terms of
appointment of(external) auditors
Review an monitor (external)auditors
performance,effectiveness of audit process
Examination of financial statement and
auditors report
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Audit---
Approval or any subsequent modification of
transactions with related parties(Defined
below)
Scrutiny of inter-corporate loans and
investments
Valuation of undertakings or assets of
company
Evaluation of internal financial controls and
risk management systems
Monitoring the end use of funds raised
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Audit----
Audit committee may call for auditors
comments about internal control
systems,scope of audit,observationd of
auditors and review of financial system before
their submission to board and may discuss
any related issues with internal and statutory
auditors and management
Auditors shall have right to be heard in the
audit meetings when it considers
auditorsreport but not have voting rights

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Audit---
Board to report audit committee composition
and where audit committee recommendations
have not accepted with reasons
Vigil mechanism for directors and employees
to report genuine concerns
Vigil mechanism shall provide adequate
safeguards against victimisation of persons
who use such mechanism and make
provisions for direct access to the chairperson
of audit committee in appropriateor
exceptional cases
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Audit Committee
Related Party means
A director or his relative
A key managerial personnel or his relative
A firm in which a Director,Manager or his
relative is a partner
A private company in which a Director or
Manager is a member or Director
A Director or Manager who holds 2%or more
of paidup capital
Any body Corporate whoseBoard,MD,manager
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Audit committee
Is accustomed to act in accordance with the
advice,directions,instructions of a director or
manager
A holding,subsidiary,associate company.A
subsidiary of a holding company to which it is
also a subsidiary
Prior approval of audit committee for all
material interrelated transaction shall be
taken(SEBI)

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Another Board Structure for Corporate Governance
Executive
Board
Shareholders
Supervisory
Board
Stakeholders
Advisory
Board
Outside Experts
Another Board Structure
This is followed in W.Germany and most other
continental European companies
These include:
executive board which is appointed by shareholders
to run the company.
the supervisory board appointed by stakeholders
including employees, banks etc
the advisory board consisting of independent experts
brought in the company to provide technical and
external expertise to the company.
Under this structure, the job of Corporate
Governance is undertaken by the Supervisory
Board by
Appraising the executive boards performance
Overseeing compliance
Overseeing and controlling superannuation and
pension funds etc.
This structure is being followed in W. Europe
(except UK)
Nomination and Remuneration and
stakeholder Relationship
Committee(NRC)
Every listed company shall constitute such
committee consisting of three or more non-
executive directors out of which not less than
half shall be independent
directors.(Chairperson may be a member but
shall not chair such committee)
NRC shall identify persons who are qualified to
become directors and who may be appointed
in senior management according to laid down
criteria,recommend to board their
appointment and removal.And shall carry out

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NRC---
evaluation of every directors performance
NRC shall formulate criteria for determining
qualifications, positive attributes and
independence of a director and shall carry out
evaluation of every directors performance
NRC shall formulate criteria for determining
qualifications,positive attributes and
independence of a director and recommend
to the Board a policy relating to the
remuneration for the directors,key managerial
personnel and other employees
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NRC----
NRC shall,while formulating policy ensure that
1 level and composition of remuneration is
reasonable and sufficient to attract,retain and
motivate directors of the quality required to
run the company successfully
2 relationship of remuneration to performance
is clear and meets appropriate performance
benchmarks and
3 Remuneration to directors,key managerial
personnel and senior management involves

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NRC------
a balance between fixed and incentive pay
reflecting short and long term performance
objectives appropriate to the working and
goals of the company
Such Policy shall be disclosed in the Boards
report
Board of a company which consists of more
than one thousand shareholders,debenture-
holders,deposit-holders and other security
holders at any time during a financial year
shall constitute a StakeholderRelationship
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NRC----
Committee(SRC) consisting of a chairperson
who shall be a non-executive director and
such other members as may be decided by
the Board
SRC shall consider and resolve grievances of
security holders
Chairperson or any member of SRC authorised
by him shall attend the general meetings of
the company
In case of contravention of provisions relating

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SRC---
Audit Committee and SRC the company shall be
punishable with fine not less than one to five
lacs of rupees and every officer who is in
default shall be punishable with imprisonment
upto one year and a fine not less than Rs
25000
(non-consideration of resolution of any
grivenance by SRC in good faith shall not
constitute contravention)
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At least 1 independent director on the Board of
Directors of the holding company shall be a director on
the Board of Directors of a material non-listed Indian
subsidiary company.

Audit committee to also review the financial statements,
in particular investments made by unlisted subsidiary
company.

Minutes to be placed at board meetings, management
to bring attention to the BOD of the listed holding
company
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Subsidiary Companies
Minutes to be placed at board meetings

Management to bring attention to the BOD of the listed
holding company the below actions of the unlisted
subsidiary company:
Statements of all significant transactions
Arrangements entered into
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Subsidiary Companies

A statement of summary of related party
transactions.
Minority shareholders to approve related party transactions
through vote on special resolution
Mandatory disclosure of CEO compensation
Succession plan for Board and Senior Management personnel
Whistleblower Policy(Mandatory)
Details of material individual transactions that which are not
in normal course of business to be placed before audit
committee

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Disclosures
Family Managed---
Responsibility of independent Directors to
ensure succession plans

General:e Voting for top 500(by market cap)
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Basis of Accounting Treatment
Where in preparation of financial statements, a treatment
different from that prescribed in an Accounting Standard
has been followed, the fact shall be disclosed in the
financial statements, together with the managements
explanation as to why it believes such alternative
treatment is more representative of the true and fair view
of the underlying business transaction in the Corporate
Governance Report.
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Disclosures
Board Disclosures Risk Management
The company to lay down procedures to inform Board
members about the risk assessment and minimization
procedures.

These procedures to be periodically reviewed to ensure
that executive management controls risk through
means of properly defined framework.
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Disclosures
Proceeds from public issues, rights issues, preferential
issues etc.
When money is raised through an issue it shall disclose
to Audit Committee, the uses/applications of funds by
major category on a quarterly basis as a part of their
quarterly declaration of financial results.

On an annual basis, the company shall prepare a
statement of funds utilized for purposes other than
those stated in the offer document/prospectus/notice
and place it before the audit committee.
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Disclosures
Proceeds from public issues, rights issues, preferential
issues etc.
Such discloser to be made only till such time that the
full money raised through the issue has been spent.

This statement to be certified by statutory auditors of
the company

Audit committee to make appropriate recommendations
to the Board in the said matter
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Disclosures
As part of the directors report or as an addition thereto,
a management discussion and analysis report should
form part of the annual report to the shareholders.

This management discussion and analysis should include
discussion on the following matters Within the limits set
by the companies competitive position
Management
1. Industry structure and developments
2. Opportunities and threats
3. Segment wise or product wise performance
4. Outlook
5. Risk and concern
6. Internal control systems and their adequacy
7. Discussion on financial performance with respect to
operational performance
8. Material developments in human resources/ industrial
relations front, including number of people employed

Management
Senior management shall make disclosures to the board
relating to all material financial and commercial
transactions, where they have personal interest , that
may have a potential conflict with the interest of the
company at large (for e.g. dealing in company shares,
commercial dealings with bodies, which have share
holding of management and their relatives etc.)
Management
CEO/CFO Certification
Have reviewed financial statements and cash flow
statement for the year and that to the best of their
knowledge and belief:
Statements do not contain any material untrue, omit any
material fact or any statement that might be untrue.

Statements present a true and fair view of the companys
affairs and are in compliance with existing accounting
standards, applicable laws and regulations.
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Disclosures
There are, to the best of their knowledge and belief no
transactions entered into by the company during the
year which are fraudulent, illegal or violative of the
companys code of conduct
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Disclosures
Accept responsibility for establishing and maintaining
internal controls

Have evaluated the effectiveness of internal control
systems of the company

Have disclosed to the auditors and the Audit Committee,
deficiencies in the design or operation of internal
controls, if any, of which they are aware and the steps
they have taken or propose to take to rectify these
deficiencies
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Disclosures
Have indicated to the auditors and the Audit Committee:
significant changes in internal control during the year

significant changes in accounting policies during the year
and that the same have been disclosed in the notes to the
financial statements

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Disclosures
Have indicated to the auditors and the Audit Committee:

instances of significant fraud of which they have become
aware and the involvement therein, if any, of the
management or an employee having a significant role in
the companys internal control system

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Disclosures
Information to be placed before Board of Directors
1. Annual operating plans and budgets and any updates.

2. Capital budgets and any other updates.

3. Quarterly results of the company and its operating
divisions or business segments.

4. Minutes of meetings of audit committees of the board.

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Annexure IA
5. The information on recruitment and remuneration of
seniors just below that board level, including
appointment or removal of Chief Financial Officer and
the Company Secretary.

6. Show cause, demand, prosecution notices and penalty
notices which are materially important.

7. Fatal or serious accidents, dangerous occurrences, any
material effluent or pollution problems.

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Annexure IA
8. Any material default in financial obligations to and by
the company, or substantial non-payment for goods
sold by the company.

9. Any issue, which involves possible public or product
liability claims of substantial nature, including any
judgment or order which, may have passed strictures
on the conduct of the company or taken an adverse
view regarding another enterprise that can have
negative implications on the company.

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Annexure IA

10. Details of any joint venture or collaboration agreement.

11. Transactions that involve substantial payment towards
goodwill, brand equity, or intellectual Property.

12. Significant labour problems and their proposed solutions.
Any significant development in Human Resources/Industrial
Relations front like signing of wage agreement,
implementation of Voluntary Retirement Scheme etc.

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Annexure IA

13. Sale of material nature, of investments, subsidiaries, assets,
which is not in normal course of business.

14. Quarterly details of foreign exchange rate movement, if
material.

15. Non-compliance of any regulatory, statutory or listing
requirements and shareholders service such as non-payment
of dividend, delay in share transfer etc.

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Annexure IA
Suggested List of Items to be included in the Report on
Corporate Governance in the Annual Report of Companies

1. A brief statement on companys philosophy on code of
governance

2. Board of Directors

3. Audit Committee

4. Remuneration Committee

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Annexure IC
Suggested List of Items to be included in the Report on
Corporate Governance in the Annual Report of Companies

5. Shareholders Committee

6. General Body meetings

7. Disclosures

8. Means of communication

9. General Shareholder information

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Annexure IC

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