AGENDA. Preview Corporate Governance of Companies Bill, Companies Bill 2009 & MCA Voluntary Guidelines 2009 on Corporate Governance & CSR

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1 Companies Bill 2009 & MCA Voluntary Guidelines 2009 on Corporate Governance & CSR CA. VIJAY RAJA AGENDA Preview Corporate Governance of Companies Bill, 2009 Companies Bill, 2009 vis-à-vis Corporate Governance and CSR Corporate Governance Voluntary Guidelines, 2009 issued by MCA CSR Voluntary Guidelines, 2009 issued by MCA

2 COMPANIES BILL, 2009 EVOLUTION OF COMPANIES BILL, 2009 Date August 2, 2004 December 2, 2004 May 31, 2005 October 23, 2008 August 4, 2009 Event Concept paper posted on the MCA website Expert Committee set-up with Dr. J.J.Irani as Chairman Report by the Expert Committee Introduced in the Lok Sabha as Companies Bill, 2008 Re-introduced in the Lok Sabha as Companies Bill, 2009

3 MACRO LEVEL CHANGES (1 OF 2) Objective Segregation of substantive law from procedural law Changes proposed Rule based - to facilitate ease and severability in amendment Compact statute Proposed reduction from 658 sections to 426 sections Clear understanding and interpretation Self-regulatory framework Flexibility in formation of smaller businesses Clear language and more logical flow of provisions More emphasis on special resolutions than on government approvals Introduction of One-person companies and small companies MACRO LEVEL CHANGES (2 OF 2) Objective Changes proposed Investor protection Modernization of corporate regulation Modernization of structuring mechanisms Flexibility in transition Simpler procedure for liquidations, winding-up Remedial action/suits, heavier penalties, removal of time bar over dividends Application of e-governance initiative recognition of electronic voting, video conferencing Recognition of cross-border mergers, holding-subsidiary merger etc. Easy transition from one type of Company to another Conversion Clause 13 Establishing single forums at NCLT/ NCLAT

4 Corporate Governance (CG) What is CG? Corporate Governance is the application of best management practices, Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. - The ICSI Purpose of corporate governance is to have a demonstrable IMPACT on a corporation s FINANCIAL PERFORMANCE.

5 Factors for emergence of CG in India Factors for Emergence of CG in India Corporate Scandals The stock market scandal (Harshad Mehta) in Ketan Parekh scandal in 2001 Accounting and financial reporting frauds Vanishing companies scam Satyam Scam In order for the Indian capital market and Indian companies to compete in the global market, India needs a set of good corporate governance doctrines

6 BACKGROUND OF CG BACKGROUND (1 of 4) Post-Satyam, much of the debate around corporate governance has centered around independent directors and auditors.

7 BACKGROUND (2 of 4) The Companies Bill and Voluntary Guidelines released by the Ministry of Corporate Affairs (MCA) are the key regulatory developments to strengthen corporate governance. BACKGROUND (3 of 4) Through the Voluntary Guidelines, the MCA is also experimenting whether corporate India is mature enough to transition to a Comply or Explain model.

8 BACKGROUND (4 of 4) FLIP SIDE The western model - 80 percent of the shares are held by large institutions such as pension funds. In India promoters own a majority of the stock. Absence of institutional activism - the stock prices are not influenced much by the standards of corporate governance Regulators for CG Indian Companies Act, 1956 SEBI Act, 1992 Stock Exchanges-Listing Agreement ICAI Act,1949 ICSI ICWAI

9 . Their eyes are on you. Waiting, watchful, they follow your every move. You begin to sweat as you realize that everything you do will affect your future Comprehensive law governing Corporate Governance Clause 49 is not the only legislation on governance. Further, environmental and other pieces of legislation also protect different stakeholders' interest, ensuring, in the process, good CG. Companies Act, 1956 & Companies Bill, 2009 also deal with CG (discussed in subsequent slides).

10 Company Law vis-à-vis Corporate Governance PARTICULARS COMPANIES ACT, 1956 COMPANIES BILL, 2009 Directors' responsibility statement in directors' report Audit committee Directors remuneration Section 217(2AA) Section 292A Schedule XIII Clause 120 Clause 158 Chapter XIII (Clause 174 to 178) Company Law vis-à-vis Corporate Governance PARTICULARS Remuneration committee Stakeholders Relationship Committee Oppression & mismanagement Independent directors Insider Trading COMPANIES ACT, 1956 No provision No provision Section 397 & 398 No definition No provision COMPANIES BILL, 2009 Clause 158 Clause 158 Clause 212 & 213 Clause 132(5) Clause 173

11 The Initiative During , the ICSI had decided to set up a Secretarial Standards Board (SSB) to integrate, harmonise and standardise various secretarial practices prevalent in the corporate sector The SSB comprises representatives of The Company Affairs Ministry, SEBI, ICAI, and Institute of Cost and Works Accountants of India, besides eminent members of the profession of Company Secretaries The Institute has so far issued four standards Secretarial Standards on Meetings of Board of Directors (SS-1), Secretarial Standards on General Meetings (SS-2), Secretarial Standards on Dividend (SS-3), and Secretarial Standards on Registers and Records (SS-4). Welcome Initiative Ministry of Company Affairs (MCA) and the Confederation of Indian Industry (CII) in partnership with the Institute of Company Secretaries of India (ICSI) and the Institute of Chartered Accountants of India (ICAI) has set up The National Foundation for Corporate Governance (NFCG).

12 Corporate Governance Voluntary Guidelines, 2009 PROVISIONS Separation of Offices of Chairman and Chief Executive Officer (CEO): as per Guideline # A.2 Key requirements envisioned within the voluntary guidelines in regards to board and director independence (1 of 2) Clear demarcation of roles and responsibilities of the Chairman of the board and that of the Managing Director (MD) / CEO Indian Scenario: Promoters - substantial shareholding - directly involved with the business Segregation may potentially cause tension in the Board room Our recommendation: Companies to appoint a lead independent director Lead Independent Director to work with the promoters and oversee the functioning of the Board The Lead Independent Director should act as an advisor to the board Chairperson

13 Nomination Committee (NC): as per Guideline # A.3 NC comprising a majority of IDs and independent Chairman drives the selection of non-executive directors (NEDs) & EDs Disclosure in the Annual Report of guidelines followed by NC and roles and responsibilities of NC Indian Scenario: Smaller listed companies may find it difficult to constitute a NC due to resource constraints. Expertise needed on NC would differ from that required on the Board Availability of ID with relevant experience may also act as a constraint Our recommendation: Mandate only large, listed companies to establish a NC, requiring smaller organizations to have structured director appointment and evaluation processes overseen by the board. In case of smaller companies - regulators, institutions and stock exchanges should work together to develop a database of suitable IDs candidates to choose from.

14 Attributes and independence of independent directors (IDs): as per Guideline # B.1 Policy specifying attributes of independent directors and disclosure of this policy to shareholders Certificate of Independence to be obtained and posted on the company s website, as well as on the website of the stock exchange Attributes: such as integrity, experience, expertise, foresight, managerial qualities, ability to read and understand the financial statements Appointment of independent directors, tenure & no. of directorships held: as per Guideline # A.1 & B.2 Appointment of independent directors: Formal letter of appointment specifying roles and responsibilities of NEDs, including independent directors Should be disclosed to shareholders through company s website, as well as on the stock exchange Facilitating director education and training Tenure: Cap on tenure of independent director to six years Number of directorships: Limit the number of directorships to 7

15 Enabling powers for IDs & Remuneration of NEDs/IDs : as per Guideline # B.3 & C.1 Enabling powers for independent directors: Access to information, resources, company personnel and external advice Remuneration of NEDs/IDs: A choice of fixed and variable remuneration Restriction on stock options Indian Scenario: The Companies Act prescribes a ceiling on total remunerations paid to NEDs at 1% (or 3%) of the company s stand-alone net profits for the year Our recommendation: Significant proportion (up to 50%) of IDs compensation should be variable. Component should be determined based on attendance, time commitment, quality of advice and value added to company performance as measured by an objective board evaluation. INSTITUTION OF MECHANISM FOR WHISTLE BLOWING The companies should ensure the institution of a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct or ethics policy.

16 ICSI National Award for Excellence in Corporate Governance Best Governed Companies Corporate Social Responsibility

17 Corporate Social Responsibility (CSR) CSR - Concept No legal definition not a legal concept Not one common definition. Different definitions given by different authorities CSR is essentially a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment Idea of Tripple bottom line: 3 pillars to be integrated to measure a company s overall performance: Economic: contribution to economic prosperity Social: contribution to social capital Environmental: contribution to environmental quality Doing business in a socially responsible way An Enterprise s Triple Effect on Society Sustainable Development Equal Opportunities Waste Control Emissions Environment Business Impact Social Education & Culture Community Regeneration Energy Use Product Life-cycle Economic Product Wealth Productive Ethical Value Generation Employment Trading Human Rights Employee Volunteers

18 CSR VOLUNTARY GUIDELINES, 2009 CORE ELEMENTS OF CSR Care for all Stakeholders: Stakeholders include shareholders, employees, customers, suppliers, society at large CSR VOLUNTARY GUIDELINES, 2009 CORE ELEMENTS OF CSR Ethical Functioning: Transparency and accountability, not to engage in practices that are abusive, unfair, corrupt or anti-competitive

19 CSR VOLUNTARY GUIDELINES, 2009 CORE ELEMENTS OF CSR Respect for Workers Rights & Welfare: Work place environment, grievance redressal system CSR VOLUNTARY GUIDELINES, 2009 CORE ELEMENTS OF CSR Respect for Human Rights Avoid complicity with human rights abuse

20 CSR VOLUNTARY GUIDELINES, 2009 CORE ELEMENTS OF CSR Respect for Environment Pollution, recycle, waste management, utilization of natural resources, energy management CSR VOLUNTARY GUIDELINES, 2009 CORE ELEMENTS OF CSR Activities for Social and Inclusive Development Poverty eradication, health & education etc..

21 Implementation guidelines Partnership with local authorities, business associations and civil society/non-government organizations. Allocate specific amount in their budgets for CSR activities. Disseminate information on CSR policy, to all their stakeholders and the public at large through their website, annual reports, and other communication media. share experiences and network with other organizations WINNING WINNING EMPLOYEES EMPLOYEES GROWING GROWING INVESTORS INVESTORS DELIGHTED DELIGHTED CUSTOMERS CUSTOMERS HAPPY HAPPY SOCIETY SOCIETY TRUSTED TRUSTED SUPPLIERS SUPPLIERS SATISFIED SATISFIED GOVERNMENT GOVERNMENT & REGULATORS REGULATORS

22 Any Questions???