CORPORATE GOVERNANCE

Presented by:
Abhishek
Deshpande
Sandeep Bollineni
 PRESENTATION OUTLINE

 INDEPENDENT DIRECTORS

 AUDIT COMMITTEE

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 “Corporate”

 Corporate is a adjective meaning “of or relating to a corporation”

derived from the noun corporation.

 A corporation is an organisation created (incorporated) by a group

of shareholders who have ownership of the corporation.

 The elected Board of Directors appoint and oversee management

of corporation.

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 “Governance”
 Oxford English dictionary defines “Governance” as an act, manner,
fact or function of governing, sway, control.

 The word has Latin origin that suggest the notion of ‘steering’. It
deals with the processes and systems by which an organization or
society operates.

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 “CORPORATE GOVERNANCE”

 It is a broad concept and has been defined and understood

differently by different groups at different point of time.

 The Cadbury committee report defines it as “the system by which

companies are directed and controlled”.

 It is generally understood as the framework of rules, relationships,

systems and processes within and by which authority is exercised
and controlled in corporations.

 Good Corporate Governance is simply Good Business.

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 History of Corporate Governance
 Kautilya’s (Chanakya) Arthashastra is the oldest book (around 300
B.C) on management available to the world.
 This masterpiece covered a wide range of topics and also
recommended that:
 The king shall not consult with any advisor who had vested interest
in the outcome of a particular project.
 Establishment of an Ethical code of conduct - a topic which has
received a great deal of attention now during past few years after
corporate scandals.
 The codification of accounting rules into one uniform system to
prevent problems in translating financial data between disparate
methods of accounting.

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 Objectives of good Corporate Governance

1. Strengthen management oversight functions and accountability

2. Balance skills, experience and independence on the board

appropriate to the nature and extent of company operations

3. Establish a code to ensure integrity

4. Safeguard the integrity of company reporting

5. Risk management and internal control

6. Disclosure of all relevant and material matters

7. Recognition and preservation of needs of shareholders

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 Parties to Corporate Governance

1. Board of Directors

2. Managers

3. Workers

4. Shareholders/Owners

5. Regulators

6. Customers

7. Suppliers

8. Community (People affected by the actions of the Organisation)

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 Clause 49 in Listing Agreement
 This listing agreement was first introduced by Bombay Stock
Exchange and was later followed by other stock exchanges.

 SEBI, vide its circular dated February 21, 2000, specified principles
of corporate governance and introduced a new clause 49 in the
listing agreement of Stock Exchanges.

 The listing agreement contains 51 clauses.

 Listing means admission of the securities to dealings on a

recognised stock exchange. The securities may be of any public
limited company, Central or State Government, Quasi government

and other financial institutions/ corporations etc.

 Listing helps in free transferability, leads to transparency in

disclosure of information and ensures availability of official quotation.
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 SEBI Circulars on Clause 49

S.no Circular No Date

1 SMDRP/POLICY/CIR-10/2000 FEBRUARY 21, 2000

2 SMDRP/POLICY/CIR-13/2000 MARCH 09, 2000

3 SMDRP/POLICY/CIR-42/2000 SEPTEMBER 12, 2000

4 SMDRP/POLICY/CIR-03/01 JANUARY 22, 2001

5 SMDRP/POLICY/CIR-19/01 MARCH 16, 2001

6 SMDRP/POLICY/CIR-53/01 DECEMBER 31, 2001

7 SEBI/MRD/SE/31/2003/26/0 AUGUST 26, 2003

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 Recent Amendments to Clause 49

S. Circular No. Date

No
1 SEBI/CFD/DIL/CG/1/2004/12/10 OCTOBER 29, 2004

2 SEBI/CFD/DIL/CG/1/2005/29/3 MARCH 29, 2005

3 SEBI/CFD/DIL/CG/1/2006/13/1 JANUARY 13, 2006

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 Independent Directors

 SEBI mandated that all (over 9000) listed companies are required
by 31st December 2005, to have 50% of their Board’s comprised of
Independent Directors (ID’s), an estimate puts the requirement of
Independent Directors, at over 30000, under clause 49 of the listing
agreement. The concept of ID’s is not there in Companies Act,
1956.

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 Core Competencies & Qualifications of an ID

 An ID is a non-executive Director on the Board of a Company who

has Integrity, sense of Accountability, Track record of
Achievements, Financial Literacy, Experience and the
Independence to balance the interests of various Stakeholders,
ability to think strategically, degree of commitment, sense of
devotion.

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 Disqualifications of an ID
According to SEBI, some of the most important disqualifications of
ID’s are listed below:
 Having a ‘pecuniary’ relationship with the Company or any of it’s
arms, other than receiving the Directors remuneration will be
disqualified.
 An ID shouldn’t be related to the promoters or anyone in the Senior
Management position from one level below of the Board. He
shouldn’t have been an Executive of the Company or of it’s Audit,
consulting or legal Firms in the past 3 Financial years. Besides,
owning 2% or more of the block of voting shares or being a service
provider to the Company, would disqualify one from taking up an
Independent Directorship in a Listed Company.

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 Duties & responsibilities of ID’s

 ID’s play an active role in various committee’s to be set up by a

Company to ensure good Governance. Listed Companies are
required to set up Audit committee’s of minimum 3 Directors, on
which, 2/3rd should be ID’s. The Audit Committee chaired by a ID,
shall inspect the Company's Financial statements and can also
recommend replacement of statutory Auditors.

 ID’s are responsible for formulating and implementing Business

strategies on behalf of Shareholders and have to ensure that
Business activities of the Company are compatible with all Legal
requirements. They have to perform crucial Governance functions.

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 AUDIT COMMITTEE
 Section 292A of the Companies Act, 1956

 Clause 49 II

A. Qualified and Independent Audit Committee

B. Meeting of Audit Committee

C. Powers of Audit Committee

D. Role of Audit Committee

E. Review of information by Audit Committee

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 Section 292A Companies Act, 1956
 Provision of this section came into effect on 13th December 2000.
 Applicability to every Public Limited Company having a paid up
capital 5 Cr or more.
 Three Directors should be the members of the audit committee (2
should be non executive)
 Chairman can be any Director.
 Default in compliance shall be punishable with imprisonment for a
term which may extend to one year, or with fine which may extend
to 50,000 rupees or both.

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 49 II (A) Qualified and Independent
Audit Committee
i. Minimum 3 Directors. Two-thirds of the members of the Audit
Committee shall be Independent Directors.
ii. All members should be financially literate and at least one
member shall have accounting or related financial management
expertise.
iii. Chairman can be any one of the member apart from MD.
iv. Chairman of the Audit Committee shall be present at AGM to
answer Shareholder queries.
v. Finance Director, Head of the Internal Audit and a representative
of the statutory auditor may be present as invitees for the
meetings of Audit Committee.
vi. The Company Secretary shall act as Committee Secretary.

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 49 II (B) Meeting of Audit Committee

 The Audit Committee should meet at-least four times in a year with
a gap of not more than four months.

 The quorum shall be either two members or 1/3rd of the members of

the Audit Committee which ever is greater, but there should be a
minimum of two Independent members present.

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 49 II (C) Powers of Audit Committee

 To investigate any activities within the terms of Reference.

 To seek Information from any Employee.

 To obtain outside legal and other professional advice.

 To secure attendance of outsiders with relevant expertise, if

necessary.

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 49 II (D) Role of Audit Committee

1. Oversight of Company’s financial reporting process.

2. Recommending to the Board, the appointment, re-appointment

and, if required, the replacement or removal of the statutory
Auditor and the fixation of Audit fees.

3. Approval of payment to the statutory Auditors for any other

services rendered by them.

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 4. Reviewing, with the management, the annual financial statements
before submission to the board for approval, with particular
reference to:

a) Matters required to be included in the Directors responsibility

statement to be included in the Board’s report in terms of clause
(2AA) of Section-217 of the Companies Act, 1956.

b) Changes, if any, in accounting policies and practices and reasons

for the same.

c) Major accounting entries involving estimates based on the

exercise of judgement by management.

d) Significant adjustments made in the financial statements arising

out of Audit findings.

e) Compliance with listing and other legal requirements relating to

financial statements.

f) Disclosure of any related party transactions.

g)
12/7/21 Qualifications in the draft auditABHISHEK
SANDEEP, report. 22
 5. Reviewing, with the management , the Quarterly financial
statements before submission to the Board for approval.

6. Reviewing, with the management, performance of statutory and

Internal Auditors, adequacy of the internal control systems.

7. Reviewing the adequacy of Internal audit function, if any, including

the structure of the Internal Audit Department, staffing and seniority
of the official Head of the Department, reporting structure coverage
and frequency of the Internal Audit.

8. Discussion with Internal Auditors about any significant findings and

follow ups there on.

9. Reviewing the findings of any internal investigations by the Internal

Auditors into matters where there is a suspected fraud or irregularity
or a failure of the internal control system and reporting the same to
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10. Discussion with Statutory Auditors before the audit commences,
about the nature and scope of audit as well as post-audit
discussion to ascertain any area of concern.

11. To look into the reasons for substantial defaults in the payment
to the depositors, debenture holders, shareholders (in case of
non- payment of declared dividends) and creditors.

12. To review the functioning of “Whistleblower” mechanism, in case

the same is existing.

13. Carrying out any other function as is mentioned in the terms of

reference of the Audit Committee.

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 49 II (E) Review of Information by Audit
Committee
The Audit Committee shall mandatorily review the following
information:
 Management discussion and analysis of financial condition and
results of operations.
 Statement of significant related party transactions (as defined by
the Audit Committee), submitted by the management.
 Management letters/letters of internal control weaknesses issued
by the Statutory Auditors.
 Internal Audit reports relating to internal control weaknesses.
 The appointment, removal and terms of remuneration of the Chief
Internal Auditor shall be subject to review by Audit Committee.

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 49 III Subsidiary Companies

 49 III (ii) The Audit Committee of the listed holding company shall
also review the financial statements, in particular, the investments
made by the unlisted Subsidiary company.

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 References

 http://www.authorstream.com/Presentation/tharayameen-129
200-corporate-governance-entertainment-ppt-powerpoint/
 http://www.indianmba.com/Faculty_Column/FC216/fc216.ht
ml
 http://www.vakilno1.com/bareacts/companiesact/s292A.htm
 http://www.rediff.com/money/2006/jan/31rules.htm
 http://www.asialaw.com/Article/1989101/Channel/16958/Cor
porate-Governance-under-the-Indian-Companies-Act-1956.h
tml
 http://www.companylawonline.com/search/articles/

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 Thank You

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