Corporate Law Project .docx

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW A Project on

Changing trends in Corporate Governance highlighting “Companies Act 2013”

SUBMITTED TO: - Ms. Priya Anuragini FACULTY, Corporate Law

SUBMITTED BY: -Shurbhi Yadav ROLL NO- 160101147 SEMESTER VI, Section B

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Table of Contents Introduction...................................................................................................................................... 3 Satyam Scandal – The Country's Biggest Corporate Governance Failure: ......................................................3 Post Satyam episode - Corporate Governance Reassessment: .....................................................................4

COMPANIES ACT, 2013-REDEFINING LEGISLATIVE FRAMEWORK ........................................................ 5 Independent Directors ...............................................................................................................................6 Board Functioning ......................................................................................................................................6 Committees of the board. ..........................................................................................................................7 Corporate Social Responsibility ..................................................................................................................7 Prohibition of Insider Trading .....................................................................................................................7 One Person Company (OPC) –Section 2(62).................................................................................................8

THE EVOLVING REGULATORY FRAMEWORK AND CHALLENGES .......................................................... 8 Regulatory Reforms ............................................................................... Error! Bookmark not defined. Board composition, leadership, and independence. ..........................................Error! Bookmark not defined. Board effectiveness..........................................................................................Error! Bookmark not defined.

CONCLUSION .................................................................................................................................. 10 BIBLIOGRAPHY ................................................................................................................................ 11

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Introduction

What Constitutes Good Governance? Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures:     

Adequate disclosures and effective decision making to achieve corporate objectives; Transparency in business transactions; Statutory and legal compliances; Protection of both shareholder and stakeholder interests; Commitment to values and ethical conduct of business.

The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Further, its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests.1 Ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization 2. Good governance is integral to the very existence of a company. It inspires and strengthens investor’s confidence by ensuring company’s commitment to higher growth and profits.3

Satyam Scandal – The Country's Biggest Corporate Governance Failure: Satyam Software services Ltd. confessed to colossal fraud of over 7000 crores. The Satyam episode brought to the fore a multiple of corporate governance flaws such as : Unethical conduct , Insider Trading, Fraudulent accounting, dubious role of auditors and Audit Committee, ineffective board handpicked by the promoter, failure of independent directors, non disclosure of promoter pledging of shares, unreliable credit rating system and so on

1

Corporate Governance In India : Theory & Practice : National Foundation for Corporate Governance (2004)

2

Pavan Kumar Vijay(2013), “Board Governance” Under The Companies Act, 2013

3

http://www.legalserviceindia.com/legal/article-209-introduction-to-corporate governance.html

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Post Satyam episode - Corporate Governance Reassessment: A number of measures were taken by the industry and regulators to address the corporate governance situation in the country post the Satyam episode. The National Association of Software and Services Companies (NASSCOM), also formed a Corporate Governance and Ethics Committee chaired by Mr. N. R.Narayana Murthy, a leading figure in Indian corporate governance reforms. The Committee issued its recommendations in mid-2010, focusing on stakeholders, audit committee, whistleblower policy and shareholders ‘rights In November 2009, SEBI announced that they would amend the Listing Agreement to address disclosure and accounting concerns. SEBI instituted these amendments in early 2010 . SEBI also made some policy changes for better governance of listed companies such as disclosure of promoters pledging of shares, peer reviewed auditor, appointment of CFO by audit committee, disclosure of voting rights, mandatory e-voting facility. In 2010, the Institute of Companies Secretaries of India came out with recommendations to strengthen corporate governance framework in the country. In September,2012 the Committee submitted its document, specifying seventeen guiding principles on corporate governance.4

4

https://blog.ipleaders.in/corporate-governance-india/

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COMPANIES ACT, 2013-REDEFINING LEGISLATIVE FRAMEWORK

With 9.5 lakh companies in 1956, to close to one million companies presently, India has come a long way. Indian economy is expanding, Indian companies are harnessing resources internationally and foreign investors are operating in the country keen to access its untapped potential. In order to strengthen the integrity of India's capital markets and make it an attractive investment destination, a strong regulatory framework was required. Objectives behind re-enacting the New Companies Law: The main objectives of the New Companies Act, 2013 can be highlighted as below: 1. Bringing Flexibility & Adoption of Internationally Accepted Practices 2. Effective protection for different sections of Society 3. Self Regulation with more disclosures 4. Stringent Punishment for violation 5. Efficient enforcement of law 6. Healthy Growth of Indian Economy5 The Act, amongst other things, focuses on good corporate governance practices by increasing the roles and responsibilities of the Board, protecting shareholders’ interest, bringing in a disclosure based regime and built in deterrence through self regulation.

5

Desirable Corporate Governance- A code – Confederation of Indian Industries ( CII) available at www.ciionline.org

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Independent Directors Under 1956 Act, there was no requirement to have IDs. However, under the Listing Agreement, the Board of listed entities having non-executive chairman and executive chairman should comprise of at least one-third and one-half of the Board as ID respectively.6 Current Issue: Independent directors are appointed for a reason which does not seem to be fulfilled in the current scenario. Even after SEBI guidelines being issued to the corporates, for the appointment of an audit committee or giving of a comprehensive definition of the independent directors, the actual situation appears to be worse.

Board Functioning Appointment of Board The 2013 Act provides that the company shall have a maximum of 15 directors on the Board and appointing more would require approval of shareholders through a special resolution. The Act aims at ensuring effective functioning and wider perspectives on Board by bringing in diversity. The Act provides for appointment of at least one-woman director on the Board for such class or classes of companies as may be prescribed. A company should have at least one director who has stayed in India for a total period of not less than hundred and eighty-two days in the previous calendar year. The 1956 Act did not prescribe any academic or professional qualifications for directors. The 2013 Act provides that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statements. For the first time, duties of the directors are defined under the 2013 Act.7 The Board shall disclose the composition of an Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed along with the reasons.8

6

Companies Act – 2013 New Rules of The game, A Deloitte and ASSOCHAM Report

7

Understanding Companies Bill 2013: Analysis of Accounting, Auditing and Corporate Governance changes- Ernst & Young 8

ICWAI, “The Management Accountant, Student Edition”, July 07, Nov 07 & Dec 07

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Committees of the board. Audit Committee Clause 49 requires listed entities to constitute audit committee with two-third of the members to be IDs. The role of the audit committee includes the following activities as per the 2013 Act.     

The recommendation for appointment, remuneration and terms of appointment of auditors of the company. Review and monitor the auditor's independence and performance, and effectiveness of audit process; Examination of the financial statement and the auditors' report thereon; Valuation of undertakings or assets of the company, wherever necessary; Evaluation of internal financial controls and risk management systems, etc.

Corporate Social Responsibility India has become the first country in the world to make CSR a statutory requirement by mandating specified companies to spend at least two percent of its average net profits made in the preceding three financial years on government approved categories of CSR.The 2013 Act provides that every company having net worth Rs. 500 crore or more, or a turnover of Rs. 1000 crore or more or a net profit of rupees five crore or more during any financial year should constitute a CSR Committee of the Board, consisting of minimum of three directors (at least one independent director) that will devise, recommend, and monitor CSR activities, and the amounts spent on such activities, to the rest of the board. The details of on corporate social responsibility is mentioned in the Section 135 of the Companies Act, 2013.

Prohibition of Insider Trading This is a step towards harmonization between the 2013 Act and the SEBI Act; more specifically for listed companies; Any person who violates the clause will be punished with a cash fine or imprisonment or both.9

9

ICWAI, “The Management Accountant, Student Edition”, July 07, Nov 07 & Dec 07

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One Person Company (OPC) –Section 2(62) The concept of One Person Company [OPC] is a new vehicle/form of business, introduced by The Companies Act, 2013 [No.18 of 2013], thereby enabling Entrepreneur(s) carrying on the business in the Sole-Proprietor form of business to enter into a corporate framework. One Person Company is a hybrid of Sole-Proprietor and Company form of business, and has been provided with concessional/relaxed requirements under the Act10.

THE EVOLVING REGULATORY FRAMEWORK AND CHALLENGES

As a step towards bringing transparency and sustainability of doing business, the Companies Act, 2013 provides for a major overhaul in the corporate governance norms for all companies registered in India. For example, while listed companies already maintained internal audit departments (as per requirement of Clause 41 of the Listing Agreement), the Companies Act, 2013 has extended the coverage to unlisted public companies and private companies meeting specified criteria. The Act also requires the Audit Committee or Board to formulate the scope, functioning, periodicity and methodology for conducting internal audit. Under the revised regulatory environment, responsibility and liability of Directors have also been elevated to an unprecedented level. For example, section 134 (5) requires the directors of a listed entity to state in the Director's Responsibility Statement about the adequacy and effectiveness of internal financial controls. The term internal financial controls has been further explained to include policies and procedures, safeguarding of assets, prevention and detection of frauds, accuracy and completeness of accounting records, and timely preparation of reliable financial information. The auditors are also required to provide their opinion on internal financial controls as part of their reporting requirements under section 143 of the said Act. The Act also requires the Directors to comment upon the compliance with the provisions of applicable laws and regulations. Further, section 134(3) (n) requires a statement indicating development and implementation of a risk management policy for the company including identification therein of the risk elements, if any, which in the opinion of the Board may threaten the existence of the company. India has faced some challenges in terms of aligning corporate governance with an evolving business environment. Following several public and high-profile governance lapses, the Securities and Exchange Board of India (SEBI) appointed the “Kotak Committee” to review corporate governance principles. The

10

ICAI, “The Chartered Accountant, Student’s Journal”, December 2013 Vol SJ4 Issue 12.

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committee recently proposed a set of tougher corporate governance norms aimed at increasing transparency, strengthening board independence and board composition, and enhancing disclosures. It may take some time for the Ministry of Finance and SEBI to finalize the changes, but boards can still expect pressure to implement fully the spirit of the Companies Act 2013 and existing SEBI regulations in order to further align with international best practices.11 If the Kotak Committee recommendations are accepted, there will be a greater demand for qualified board members in 2018, as the committee calls on,   

all listed companies to have at least six directors on the board. Independence is a major concern in India and among minority shareholders, so the committee proposes that half the board be independent, rather than one-third as is required now. Related independence disclosures, such as what standard of independence is being utilized, are also proposed to help boost investor confidence.

In the spring of 2018, much to the surprise of many, the Securities and Exchange Board of India (SEBI) adopted many of the 81 provisions put forward by the Kotak Committee12The adoption of these governance reforms is staggered, with most companies striving to reach compliance between April 2019 and April 2020.13

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11

https://autotechreview.com/opinion/guest-commentary/emerging-trends-in-corporate-governance-landscape

12

https://corpgov.law.harvard.edu/2018/12/30/2019-global-regional-trends-in-corporate-governance https://corpgov.law.harvard.edu/2018/12/30/2019-global-regional-trends-in-corporate-governance/

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CONCLUSION

“Great performances, higher profits, expanded reach; nothing would act as safeguards for a company when governance and ethics take a back seat.” The more the level of corporate governance, the stronger is the company in the eyes of the shareholders of the company. The independent and the active directors are the ones who infuse and contribute towards displaying the corporate as that of having a positive outlook. When it comes to investment, the investors also seek to find the companies with stronger corporate governance in them. The corporate governance requirements in India deliberate the companies to audit their working culture and give the shareholders community a more positive outlook as their actions have moral and legal implications. The new norms after the Companies Act 2013 came into the picture, are very balanced and innovative. They have helped reformed the growth of Indian companies as per international standards. Shareholders are involved in the decision making of the companies and various safeguards have been put in order so that the interests of the shareholders and the society as a whole is not sidelined. Corporate Governance imbibes the much-required transparency in the corporates. Therefore, it pushes India ahead in the race of emerging economies of the world.

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BIBLIOGRAPHY             

Companies Act, 2013 Irani Committee Report,"Report of the Expert Committee on Company Law" Companies Act – 2013 New Rules of The game, A Deloitte and ASSOCHAM Report Companies Act, 2013 available at mca.gov.in Sharma, J.P , Corporate Governance, Business Ethics & CSR ( Anne Publications, 2011) Understanding Companies Bill 2013: Analysis of Accounting, Auditing and Corporate Governance changes- Ernst & Young Companies Bill 2011 – Independent Directors available at www.mondaq.com Analysis of Companies Bill, 2011 – Corporate Law Update, Dec 2012 Desirable Corporate Governance- A code – Confederation of Indian Industries ( CII) available at www.ciionline.org “A Board culture of Corporate Governance”, corporate Governance International Journal, Vol-6, Issue-3 (2003). ICWAI, “The Management Accountant, Student Edition”, July 07, Nov 07 & Dec 07 ICAI, “The Chartered Accountant, Student’s Journal”, December 2013 Vol SJ4 Issue 12. Companies Act 2013-Raising the bar on Governance, A KPMG Advisory Report.

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