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Companies Act, 2013 Bringing Paradigm Shift in Corporate Governance

Companies Act, 2013 Bringing Paradigm Shift in Corporate Governance. N K Jain B.Sc., LLB.,DCL,FCS,FCPS Corporate Advisor Former Council Member and Secretary & CEO, ICSI Cell: 09818348811 Landline: 0120 - 4263965 E-mail: nkjain1953@gmail.com. CG I ssues. Corporate Structure

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Companies Act, 2013 Bringing Paradigm Shift in Corporate Governance

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  1. Companies Act, 2013 Bringing Paradigm Shift in Corporate Governance N K Jain B.Sc., LLB.,DCL,FCS,FCPS Corporate Advisor Former Council Member and Secretary & CEO, ICSI Cell: 09818348811 Landline: 0120 - 4263965 E-mail: nkjain1953@gmail.com

  2. CG Issues • Corporate Structure • Board Composition • Board Committees • Directors • Duties of Directors • Board Evaluation • Vacation of Office of Directors • Management [MD/CEO/KMP] nkjain1953@gmail.com 9818348811

  3. CG Issues • Statutory Audit • Auditing Standards • Rotation of Auditor • Audit Committee & Vigil Mechanism • Secretarial Audit • Secretarial Standards • Duties of Company Secretary nkjain1953@gmail.com 9818348811

  4. CG Issues • Internal Audit • Related Party Transactions • Disclosure & Transparency • E-Governance • Investor Protection • Corporate Social Responsibility nkjain1953@gmail.com 9818348811

  5. Governance more than Board Processes & Procedures • To most of us CG is just a set of codes to be practised by companies to ensure changes in their Board structures & procedures to make company more accountable to shareholders. • However, governance is more than just board processes and procedures. It involves the full set of relationships between a company’s shareholders, its board, management and its other stakeholders. nkjain1953@gmail.com 9818348811

  6. Governance more than Board Processes & Procedures • In such a scheme of things governments play a crucial role in making the legal, institutional & regulatory framework within which governance systems are kept in place. • Its efficiency will depend on framework conditions, which would include legal rights of shareholders and how these were protected when violated by managements. nkjain1953@gmail.com 9818348811

  7. Governance more than Board Processes & Procedures • Poor governance, for instance, can wreck havoc on the performance of national economies and corporations. • Poor governance undermines investor confidence in the markets and holds the whole financial system hostage. It severely impacts flow of capital into poorly governed economies affecting their economic growth. nkjain1953@gmail.com 9818348811

  8. Corporate Governance Issues • CG has different meaning to different people. • But to all, CG is a means to an end, the end being long term stakeholder value. • Thus, all authorities are one in recognising the need for good CG practices to achieve the end for which corporates are formed. nkjain1953@gmail.com 9818348811

  9. Corporate Governance Issues • Separation of Ownership from Management: • Promoters/Shareholders should exercise their ownership rights in the general meetings of the company and ought not to throw their weight in the Board meetings. • Boards should be allowed to function and decide with complete freedom what is good for the company and its various stakeholders. nkjain1953@gmail.com 9818348811

  10. Corporate Governance Issues Distinguishing the roles of board and management: The business of a company is to be managed ‘by or under the direction of’ the board. The responsibility of managing the business is delegated by the board to the CEO, who in turn delegates the responsibility to other senior executives. Thus, the board occupies a key position between shareholders (owners) and company’s management. nkjain1953@gmail.com 9818348811

  11. Corporate Governance Composition of Board • Executive/non-executive chairman • Executive director • Non-executive director • Nominee director • Independent director/ Lead ID • Woman director- Gender diversity nkjain1953@gmail.com 9818348811

  12. Composition of Board • Minimum Number of Directors: • Public Company : 3 directors • Private Company : 2 directors • One Person Company : 1 director • Maximum number of directors restricted to 15 • Maximum directorships: 20 including 10 in public companies(including alternate directorship). • Number of directorships may be reduced by passing a special resolution by members. nkjain1953@gmail.com 9818348811

  13. Independent Directors • The purpose of induction of Independent Director on the board of a company is to improve objectivity, transparency and accountability in the governance of the company. nkjain1953@gmail.com 9818348811

  14. Number of IDs • Every listed public company shall have at least 1/3rd of the total number of directors as IDs. • Following companies shall have at least 2 IDs:- • Public Companies having: • paid up share capital of ₹ 10 crs or more; or • in aggregate, outstanding loans,debentures and deposits exceeding ₹ 50 crs. • turnover of ₹ 100 crs or more; or • Nominee directors not to be treated as an ID. nkjain1953@gmail.com 9818348811

  15. Tenure of IDs • ID can hold office for 2 terms of up to 5 consecutive years each (total 10 years). • IDs shall be eligible for re-appointment after cooling period of 3 years. • ID shall not be associated with the company in any capacity during the cooling period. • Any tenure of an ID on the date of commencement of the Act not to be counted. • Every existing company to have IDs within one year from commencement of the Act or from the date of notification of Rules, as may be applicable. nkjain1953@gmail.com 9818348811

  16. IDs- Rewards & Liability • IDs may receive sitting fee, reimbursement of expenses for attending meetings & profit related commission but no stock option. • IDs shall abide by the Code of Conduct contained in Schedule 4 of the Act. • An ID shall be held liable only for such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board Processes, and with his consent or connivance or where he had not acted diligently. nkjain1953@gmail.com 9818348811

  17. Separate Meetings of IDs • IDs shall hold at least 1 meeting in a year without non-ids and management personnel. • All IDs shall strive to attend such meeting. • The meeting shall review the performance of: • Non-IDs and the Board as a whole; • Chairperson of the company, taking into account the views of EDs and non-EDs; • Asses the quality, quantity and timeliness of flow of information to the Board. nkjain1953@gmail.com 9818348811

  18. Performance Evaluation of IDs • Performance Evaluation of IDs shall be done by the entire Board of Directors excluding the director being evaluated. • On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the ID. • Nomination & Remuneration Committee shall carry out evaluation of every director’s performance(Sec.178). nkjain1953@gmail.com 9818348811

  19. Resident Director • Every company shall have at least one director who has stayed in India for a period of not less than 182 days in the previous calendar year. nkjain1953@gmail.com 9818348811

  20. Woman Director • The following companies shall appoint at least one WD :- • every listed company; • every other public company having: - • paid-up share capital of ₹100 crs or more; or • turnover of ₹ 300 crs or more. nkjain1953@gmail.com 9818348811

  21. Vacation of Office Director to vacate his office if he fails to attend all Board Meetings for a consecutive period of 12 months even when the leave of absence has been granted. If all directors have vacated the office, the promoter shall appoint minimum number of members.

  22. Directors’ Development Programmes • Schedule IV provides for the duties of IDs which includes that IDs shall undertake appropriate induction programmes and regularly update and refresh their skills, knowledge and familiarity with the company. nkjain1953@gmail.com 9818348811

  23. Duties of Directors Sec.166 • ..act in accordance with articles of company; • ..act in good faith to promote company’s objects in interest of company, employees, shareholders, community& environment; • ..exercise his duties with due and reasonable care, skill and diligence…; • .not to involve in conflict of interest with comp • .not to achieve any undue gain or advantage; • ..not to assign his office.. nkjain1953@gmail.com 9818348811

  24. Non cash transactions involving directors Sec. 192 • A company shall not enter into any arrangement by which a director of the company or of its holding company or any person connected with him can acquire company’s assets for consideration other than cash & vice versa without the approval of company in GBM. • Where the director or connected person is a director of its holding company, then resolution from holding company will also be required. nkjain1953@gmail.com 9818348811

  25. Prohibition on Forward Dealings Sec.194 • Sec.194(1) imposes a prohibition on forward dealings in securities of the company, or in its holding, subsidiary or associate companyby any director or KMP of a company. • A director/KMP shall be liable to surrender the securities acquired in contravention of Sec, 194(1) which shall continue to remain in the name of the transferor. • Punishment: Imprisonment up to 2 years or fine of ₹ 1lac to ₹ 5 lac or with both. nkjain1953@gmail.com 9818348811

  26. Prohibition on Insider Trading Sec.195 • No person including any director or KMP of a company shall enter into insider trading in respect of securities of the company. • Punishment for contravention: imprisonment up to 5 years or with fine of ₹ 5 lac to ₹ 25 crs or 3 times the amount of profit made out of insider trading, whichever is higher or with both. By: N K Jain

  27. Separation of the roles of Chairperson & CEO • The practice of combining role of Chairman with CEO leads to conflicts in decision making; too much concentration of power in 1 person results in unhealthy consequences. • In the UK & Australia, the CEO is prohibited from being the chairman of the company. • The role of the CEO is to lead the senior management team in managing the enterprise. nkjain1953@gmail.com 9818348811

  28. Separation of the roles of Chairperson & CEO • The role of Chairperson is to lead the board. • The board evaluates the performance of senior executives including the CEO. • Combining the role of both the CEO and the Chairman removes an important check on senior management’s activities. • The Chairman should be an ID to provide the appropriate counterbalance and to check the power of the CEO. nkjain1953@gmail.com 9818348811

  29. Separation of the roles of Chairperson & CEO • Sec.203 provides that an individual shall not be appointed or re-appointed as Chairperson as well MD or CEO of the company at the same time after the date of commencement of the Act unless the:- • article of the company provide otherwise; or • company does not carry multiple businesses • Prescribed classes of companies engaged in multiple businesses with CEO for each such business may be exempted by Govt. nkjain1953@gmail.com 9818348811

  30. Key Managerial Personnel • “KMP” in relation to a company means:– • The Chief Executive Officer or the Managing Director or the Manager; • The Company Secretary; • The Whole Time Director; • The Chief Financial Officer; and • Such other officer as may be prescribed. nkjain1953@gmail.com 9818348811

  31. Key Managerial Personnel • Board of every listed company and every other public company having a paid-up share capital of ₹ 10 crs or more shall appoint the whole time (i) MD or CEO and in their absence a WTD (ii) a CS and (iii) a CFO. • A WT KMP not to hold office in more than one company except in its subsidiary company at the same time. • Vacancy of WT KMP to be filled up in 6 months. nkjain1953@gmail.com 9818348811

  32. Rotation of Auditors Sec.139 • No listed company or prescribed classes of companies excluding small and one person companies shall appoint/ re-appoint:- • an individual as an Auditor for more than 1 term of 5 consecutive years; and • an audit firm as an Auditor for more than 2 terms of 5 consecutive years. • A period of 3 years from the commencement of the Act has been provided to comply with this provision. nkjain1953@gmail.com 9818348811

  33. Rotation of Auditors- Class of Companies • Listed company; • Unlisted public companies having paid up share capital of ₹ 10 crs or more; • Private limited companies having paid up share capital of ₹ 20 crs or more; • Companies having paid up share capital of below threshold limit mentioned in (b) & (c) above, but having public borrowings from FIs, banks or public deposits of ₹ 50 crs or ^ nkjain1953@gmail.com 9818348811

  34. Rotation of Auditors Sec.139 • An auditor/ audit firm which has completed its term shall not be eligible for re-appointment as an Auditor in the same companyfor 5 years. • Freedom has been provided to the members of a company to resolve that:- • in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members, or • the audit shall be conducted by more than one auditor. nkjain1953@gmail.com 9818348811

  35. Auditor not to render certain services - Sec. 144 • An Auditor appointed under the new law shall provide to the company only such services as are approved by the BOD or the AC but which shall not include any of the following services:- • Auditing and book keeping services; • Internal audit; • Design & implementation of any financial information system; nkjain1953@gmail.com 9818348811

  36. Auditor not to render certain services - Sec. 144 • Actuarial services; • Investment advisory and banking services; • Outsourced financial services; and • Management services. • An Auditor or Audit Firm which has been performing any non-audit services shall comply with this provision before the closure of the 1st FY after commencement of the Act. nkjain1953@gmail.com 9818348811

  37. Secretarial Audit Sec. 204 • Every listed and every public company having a paid-up share capital of ₹ 50 crs or more or turnover of ₹ 250 crs or more :- • shall annex with its Board’s Report, a Secretarial Audit Report given by a PCS. • The company shall give all assistance and facilities to PCS, for auditing the secretarial records of the company. • The BOD in its report shall explain in full any qualification or observation or other remarks made by the PCS in his report. nkjain1953@gmail.com 9818348811

  38. Secretarial Audit Sec. 204 • The provisions of Sec.143(powers and duties of auditors..) shall mutatis mutandis apply to PCS conducting secretarial audit u/s 204. • If a company or any officer of the company or the PCS, contravenes the provisions of Sec. 204, the company ,every officer of the company or the PCS, who is in default, shall be punishable with fine which shall not be less than ₹ 1 lac but which may extend to ₹ 5 lac. nkjain1953@gmail.com 9818348811

  39. Secretarial Audit Sec. 143(12),(15) & 204 • If a PCS conducting SA, has reason to believe that an offence involving fraud is being or has been committed against the company by its officers/employees, he shall immediately report the matter to the Central Government. • If a PCS does not comply with the above provision, he shall be punishable with fine of minimum ₹1 lac and may extend to ₹ 25 lac. nkjain1953@gmail.com 9818348811

  40. Internal Audit • Section 138 of the Act provides that prescribed classes of companies shall be required to appoint an internal auditor, who shall either be CA/CMA/ other professional to conduct internal audit of the functions and activities of the company. • The central government may prescribe the manner and the intervals in which the internal audit shall be conducted & reported to board. nkjain1953@gmail.com 9818348811

  41. Internal Audit-Class of Companies to appoint IA • Every listed company; • Every unlisted public company having, during the preceding financial year, :- • paid up share capital of ₹50 crs or more; or • turnover of ₹ 200 crs or more; or • outstanding loan or borrowing from banks or public FIs exceeding ₹100 crs or more ; or • outstanding deposits of ₹ 25 crs or more. nkjain1953@gmail.com 9818348811

  42. Internal Audit-Class of Companies to appoint IA c) Every private company having:- • turnover of ₹ 200 crs or more during the preceding financial year; or • outstanding loans or borrowing from banks or public FIs exceeding ₹ 100 crs or more at any point of time during the preceding FY ; • Existing company covered under any of the above criteria shall comply with requirement within 6 months of commencement of se.138. nkjain1953@gmail.com 9818348811

  43. Audit Committee Sec.177 • The BOD of the following classes of companies shall constitute an AC:- • Every listed company; • All public companies having:- (i) paid up capital of ₹10 crs or more; (ii) turnover of ₹ 100 crs or more; (iii) in aggregate, outstanding loans or deposits or borrowings or debentures exceeding ₹50 crs or more. nkjain1953@gmail.com 9818348811

  44. Audit Committee Sec. 177 • AC shall consist of minimum 3 directors with ID forming majority. • Majority members of AC including its Chairman shall be persons with ability to read and understand financial statement. • KMPs shall have right to be heard before AC. • Every existing AC shall be reconstituted within 1 year of commencement of the new Act. nkjain1953@gmail.com 9818348811

  45. Nomination & Remuneration Committee • The BOD of the following classes of companies shall constitute a NRC:- • Every listed company; • All public companies having:- (i) paid up capital of ₹10 crs or more; (ii) turnover of ₹ 100 crs or more; (iii) in aggregate, outstanding loans or deposits or borrowings or debentures exceeding ₹ 50 crs or more. nkjain1953@gmail.com 9818348811

  46. Nomination & Remuneration Committee • Composition: at least 3 NEDs out of which not less than ½ shall be IDs. • Chairperson of the company may be a member but shall not chair the NRC. • The NRC shall formulate and recommend to Board a policy, relating to remuneration for the Directors/KMPs/other employees which shall be disclosed in the Board’s Report. • The Chairman of NRC shall attend General Meetings of the company. nkjain1953@gmail.com 9818348811

  47. Stakeholders Relationship Committee • BOD of a company which consists of more than 1000 shareholders, debenture-holders, deposit-holders and any other security holder at any time during a FY shall constitute SRC. • SRC shall consist of a chairperson who shall be a NED and such other members as may be decided by the Board. • SRC shall consider and resolve grievances of security holders of the company. nkjain1953@gmail.com 9818348811

  48. Functions of Company Secretary Sec. 205 • The functions of a CS shall include:- • To report to the Board about compliance with the provisions of the Act/Rules and other laws applicable to the company; • To ensure that the company complies with the applicable secretarial standards; • To discharge such other duties as may be prescribed. nkjain1953@gmail.com 9818348811

  49. Duties of Company Secretary 1) To guidethe directors, about their duties, responsibilities and powers; 2) To convene and attend board, committee and general meetings, and maintain their minutes; 3) To obtain approvals from the Board, general meeting, the government and such other authorities as required under the Act. nkjain1953@gmail.com 9818348811

  50. Duties of Company Secretary 4) to represent before various regulators and other authorities under the Act ; 5) to assist the Board in the conduct of the affairs of the company; 6) to assist and advise the Board in ensuring good corporate governance; 7) to discharge such duties as have been specified under the Act or Rules; and 8) duties as may be assigned by the Board.. nkjain1953@gmail.com 9818348811

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