Study Notes

Corporate Governance -
Regulatory Framework
Corporate Governance – Regulatory Framework

Regulatory Framework in India

RBI and Banking

The Companies Act, Other Professional Regulation Act
SEBI Guidelines
2013 Body's standards
(in case of banks)
•Board Constitution •regulates listed •Accounting •RBI guidelines
•Board Meetings companies standards by •Banking Companies
•Board Processes •rules and guidelines Institute of (Acquisition and
to protect investors Chartered Transfer of
•Board sub- Accountants of India
committees •SEBI (Listing undertakings) Act,
Obligations and (ICAI) 1969
•Independent •Secretarial standards
directors Disclosure •Banking Regulation
Requirements) by Institute of Act, 1949 (Sec 10 A)
•audit committee Regulations, 2015 Company Secretaries •various committee
•related party of India (ICSI) recommendations on
transactions (RPT) Corporate
•disclosures in Governance
financial reports, etc.

The Companies Act, 2013

 Composition of the Boards of Directors (BoD)

o Every company is required to appoint one resident director on its board.
o Nominee directors not independent directors
o Listed companies and specified classes of public companies are required to
appoint independent directors on their boards.
o Listed companies and certain other public companies shall be required to appoint
at least one woman director on its board.
 Mandatory committees to be constituted by the Board for prescribed class of companies:
o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee
 Shareholders’ legal rights
o Vote on every resolution placed before AGM (annual general meeting)
o To elect Directors who are responsible for specifying objectives and laying down
policies
o Determine remuneration of Directors and CEO
o Removal of Directors
o Take active part in AGM
 Corporate Social responsibility – Section 135 (For more details, refer to the note on
Corporate Governance – introduction)
o Constitute a CSR Committee
o spend at least 2% of the average net profits of three immediately preceding
years on CSR activities

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Corporate Governance – Regulatory Framework

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

(Listing Regulations; consolidates the provisions of Clause 49 of the Equity Listing
Agreement)

•Minimum 50% independent directors on Board

Board of •Where Chairman =non-executiv director, min. 1/3rd Board to be independent
Directors • Where Chairman=executive director, min. 50% Board to have independent
•Independent Director cannot be a relative of a promoter/executive director

Audit •minimum three directors as members,

Committee •2/3rd to beindependent.

•Periodical disclosures relating to the financial and commercial transactions,

Disclosure remuneration of directors, etc
Requirements
•disclosures to ensure transparency

CEO/CFO •To certify to the Board that they have reviewed the financial statements and the
Certification same are fair and in compliance with the laws/regulations
•accept responsibility for internal control systems

•A separate section in annual report on compliance with Corporate Governance

Report &
•quarterly compliance report to stock exchange signed by compliance officer/CEO
Compliance
•Disclose compliance with non-mandatory requirements in annual reports

Banking Companies (Acquisition and Transfer of undertakings) Act

 Responsibilities of the Board of Directors

o overseeing the risk profile of the bank,
o monitoring the integrity of its business and control mechanisms,
o ensuring the expert management
o maximising the interests of its stakeholders
 Role and responsibility of independent and non-executive directors
o Have a prominent role in inducting and sustaining a pro-active governance
framework in banks
 Training facilities for directors
o Need-based training programmes / seminars/ workshops may be designed by
banks to acquaint their directors with emerging developments/challenges facing
the banking sector
 Committees of the Board
o Shareholders' Redressal Committee

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Corporate Governance – Regulatory Framework

o Risk Management Committee

o Supervisory Committee - monitoring of exposures (both credit and investment)
o Audit Committee
o Customer Service Committee
o Compensation Committee
 “Fit & Proper” Criteria
 All the nationalized banks to constitute a "nomination committee" consisting of a
minimum of three directors (all independent/non-executive directors) from amongst
the Board of Directors
 Proper process of due diligence, obtaining necessary information and declaration to
be followed
 Minutes of the meeting of the committee's discussions to be formally recorded
 the nomination committee to scrutinise the candidature based on the criteria
 Criteria
 Educational qualification
 Experience and field of expertise
 Track record and integrity, etc.
 Any adverse notice of any authority/regulatory agency or insolvency or default of
any loan from any bank or financial institution would disqualify a candidate to be a
director on the Board of a bank
 the elected directors to execute the deed of covenants
 A declaration from all the elected directors to be furnished every year as on 31st
March

Banking Regulation Act, 1949 (Sec 10 A)

 Not less than 51% of the total number of members of the Board of Directors of a bank shall
consist of persons who shall have special knowledge or practical experience in respect of
one or more of the following areas:
o Accountancy,
o Agriculture and Rural Economy,
o Banking,
o Co-operation,
o Economics,
o Finance,
o Law,
o Small Scale industry
 Out of the aforesaid 51% of directors, not less than 2 directors shall have special
knowledge or practical experience in respect of
o agriculture and rural economy,
o co-operation or
o small-scale industry
 Directors should not have substantial interest in a company or a firm, i.e. amount paid-up
exceeding Rs.5 lakh or 10% of the paid-up capital of the company, whichever is less

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Corporate Governance – Regulatory Framework

Various Committees on Corporate Governance in India

Uday Kotak Committee: (By SEBI – June 2017)

Propositions by the committee:

 Separation of Roles of CMD - Chairman and MD/CEO at listed firms should be

separate and chairmanship should be limited to only non-executive directors. (w.e.f. April
1, 2022 for top 500 listed companies)
 Minimum Board Length - 6 members and at least one woman as independent director.
At least five board meeting for listed firms. Board should at least once a year discuss
succession planning and risk management.
 Independent Directors – In listed companies number of independent directors to be
increased from 33% to 50%., while all directors must attend at least half of the meetings.
Age shall be max 75 years.
 Shareholder’s Meeting - Top 100 firms by market capitalization should webcast
shareholder meeting and all listed firms should have cash flow statement every six
months.
 Credit ratings - All credit ratings obtained by the listed entity must be made available at
one place.
 Remuneration - Independent directors must get minimum remuneration of Rs. 5 lakh
per annum and sitting fee of Rs 20,000-50,000 per meeting.
 Risk management and IT committee - Top-500 listed companies should have risk
management committee and IT committee of boards.
 Maximum directorship - Listed entities: a director should not hold directorship position
in more than
o eight listed entities by April 01, 2019
o seven listed entities by April 01, 2020

Also, a person shall not serve as an independent director in more than seven listed
entities
If a person is a MD/WTD in a listed co. then he can be independent director in max.
3 listed companies
 For government companies, the board have final say on the appointment of independent
directors and not the nodal ministry.
 Tweak the definition of a “material” subsidiary to one whose net worth or income
exceeds 10% (currently 20%) of the consolidated income, or net worth of the listed entity

The recommendations that were rejected by SEBI were:

 One of the 18 suggestions rejected by the board was that of sharing information with
promoters or other shareholders.
 Matrix organization.
 Companies not having to disclose meetings with institutional investors
 Enhanced disclosure on depositary receipts

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Corporate Governance – Regulatory Framework

Other Committees on Corporate Governance in India

Confederation of Kumar Mangalam Naresh Chandra

Indian Industry Birla Committee Committee by MCA
(1998) (2000) (2002)

Narayan Murthy Dr. R.H. Patil – Dr. Ganguly Group

Committee (2003) Advisory group Committee (2002)
(2001)

Details of each Committee report is given below for reference purpose.

Committee/Regulation Year Salient Features

CII (Confederation of Indian
Industry) for CG
Kumar Mangalam Birla
Committee Report
(w.r.t. Clause 49 of listing
agreement)
1998 Rahul Bajaj lead committee, proposed various
guidelines mostly emphasizing on disclosures and
transparency of company information.
2000 Revised Clause 49 of listing agreement as per
SEBI circular no CIR/CFD/POLICY CELL/2/2014
dated April 17, 2014:
1. At least 50% Board to be non-executive
members
2. For a company with Executive Chairman, at
least 50% Board to be independent directors or
at least 1/3rd
3. Atleast one woman director on the board
4. Max. Tenure of independent directors = 10 years
with re-election by a special resolution.
5. Max. of 10 Directorships and 5 Chairmanships
per person
6. Criteria for performance evaluation for
independent directors to be published in Annual
report
7. The details of training imparted to independent
directors to be disclosed in the Annual Report
8. The Code of Conduct to incorporate the duties of
Independent Directors
9. The independent directors of the company to
hold at least one meeting in a year
10. Audit committee to have min. 3 members
with 2/3 members being independent directors
11. Audit committee to have at least 3 meetings
in a year
12. Nomination and remuneration committee to
have atleast 3 members with all being non-
executive directors and chaired by independent
director
13. Chairman of Audit Committee and Chairman

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Corporate Governance – Regulatory Framework
Committee/Regulation
Naresh Chandra Committee
Report by MCA (Ministry of
Corporate Affairs)
Narayan Murthy Committee
report
(to revise Clause 49 of
Listing Agreement with Stock
exchanges)
7
Year Salient Features
of Nomination and remuneration committee must
be present in the AGM
14. Chairman and Managing Director to be
separate (voluntary clause)
15. Whistleblower policy
2002 Focussed on disclosures (financial and non-
financial) and Independent Audit and Board
oversight
1. Auditors to act as fiduciaries of shareholders and
not the management
2. Detailed Auditor Report as part of Annual
Financial statements.
3. Prohibition on audit firms to provide the non-
audit services
4. Prohibition on any business/ personal
relationship with Auditing firm
5. Compulsory Audit Partner Rotation every 5
years
6. Auditor’s disclosure of qualifications
7. Setting up of nomination& remuneration
committee
8. Chairman and Managing Director be separate
9. Whistleblower policy
10. Minimum 4 directors should be on the board
of any listed company
11. Only Independent directors should be the
member of the Audit Committees
12. Disclosure of Remuneration of nonexecutive
directors
2003 Mandatory clauses
1. Financial statements to be reviewed by Audit
committee
2. All audit committee members to be financially
literate& at-least one member to have
accounting/ financial management expertise
3. All transactions with related parties to be
disclosed
4. Board to be informed every quarter regarding
business risk and risk management strategies
5. The uses / applications of funds raised through
an IPO, to be disclosed to the Audit Committee
6. Board to have access to minutes of subsidiaries’
board meetings
7. Code of conduct for all Board members & senior
management
8. Responsibilities and liabilities of Nominee
Director of the GoI (Govt. of India) to be same as
Corporate Governance – Regulatory Framework
Committee/Regulation
Dr. R.H. Patil – Advisory
group (formed by The
Standing Committee on
International Financial
Standards and Codes on
Corporate Governance)
Dr. Ganguly Group
Committee report
(issued by RBI)
RBI Circulars with respect to
guidelines on corporate
governance for NBFCs
(RBI/201314/44 DNBS (PD)
CC No.342 / 03.10.001 /
2013-14 dated July 01, 2013)
Year Salient Features
other directors
9. Approval of shareholders required for
compensation of non-executive directors
Voluntary Clauses
1. Move towards a regime of unqualified financial
statements
2. Training of Board Members
3. Whistleblower policy
4. Performance evaluation of nonexecutive
directors
2001 1. Chairman and Managing Director be separate
2. Selection of directors by nomination committee
3. Min. 10 board members with half of the board
being non-executive members
4. At-least 6 Board meetings in a year
5. Max Age limit of whole-time directors – 65 and
part-time directors - 75
6. Access of information to the board
7. Proper functioning of audit committee
8. Setting up of Nomination, Remuneration and
Shareholder Grievances Committee
9. AGM must be held in the city where Head Office
is situated
10. Consolidated financial statements must be
presented
2002 Voluntary clauses for Banks
1. Submission of routine information to
management committee and only summary to
the Board
2. Draft minutes should be sent to the board within
48 hrs
3. Summary of key observations made by the
directors to be submitted in next Board meeting
4. Training of Board Members
5. Setting up of Shareholder Grievances, risk
management and supervisory/management
Committee
6. Detailed minutes of meetings
7. Appointment of Company Secretary
2013 1. Setting up of audit committee
2. Setting up of nomination committee
3. Setting up of risk management committee
4. NBFCs must frame internal guidelines on
corporate governance
5. Rotation of auditors