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A new era in Corporate Governance
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Foreword
The Companies Act, 2013 (‘2013 Act’),
enacted on 29 August 2013 on accord of
Hon’ble President’s assent, has the potential
to be a historic milestone, as it aims to
improve corporate governance, simplify
regulations, enhance the interests of minority
investors and for the first time legislates the
role of whistle-blowers. The new law will
replace the nearly 60-year-old Companies Act,
1956 (‘1956 Act’).
The 2013 Act provides an opportunity to
catch up and make our corporate regulations
more contemporary, as also potentially to
make our corporate regulatory framework a
model to emulate for other economies with
similar characteristics. The 2013 Act is more
of a rule-based legislation containing only 470
sections, which means that the substantial part
of the legislation will be in the form of rules.
There are over 180 sections in the 2013 Act
where rules have been prescribed.
Pallavi J Bakhru
Director
Grant Thornton Advisory Pvt. Ltd.
“The Companies Act, 2013 strives to
strengthen the corporate governance system
in dynamic Indian companies by significantly
enhancing the role and responsibilities of
the Board of directors and making them
more accountable for their actions. By
mandating a woman director on the board, it
intends to make the top deck in
organisations more gender diverse. This law
has set a new benchmark in corporate
governance for other economies to
emulate.”
To facilitate the ease of implementation, a
phased approach is being followed by the
Ministry of Corporate Affairs (‘MCA’).
Accordingly, 282 sections have been notified
and are in force as of 1 April 2014. Final Rules
for 21 chapters have also been released by the
MCA, and the rules for the remaining chapters
continue to be in draft stage. The final Rules
are also applicable w.e.f. 1 April 2014.
The 2013 Act contains a number of provisions
which have significant implications on
Governance of the companies. With the
revision of clause 49 of the Listing
Agreement, effective 01 October 2014, the
applicability of some of the compliances for
listed companies have been accelerated a bit
and have also become complex in some of the
cases. In this bulletin we analyse some of the
key provisions and have identified certain
action steps and challenges associated with the
implementation of these provisions for the
companies to consider.
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Foreword
The board of directors is the most important
decision making body of a company. Its
independence is indispensable in ensuring
high standards of corporate governance. The
Companies Act, 2013 has raised the bar for
the boards in India.
The New Act has made several significant
changes, which seek to redefine the board
governance in India. the new concepts have
been introduced such as women directors on
the boards to bring in gender diversity, small
shareholder director, performance evaluation,
corporate social responsibility and class
actions; the internal financial controls and risk
management oversight of the boards have
been strongly emphasised; disclosures have
been enhanced in board’s report to
shareholders, additional rigor has been added
to strengthen the Directors’ Responsibility
Statement; and the Independent Directors
have been entrusted with new responsibilities
to make their role more objective and
purposeful.
Overall, the New Act aims to raise the
governance profile of Indian companies and
their boards, at par with the roles and
responsibilities assumed by boards globally.
Corporate governance norms are dynamic in
nature and require reconfiguration periodically
to keep pace with the changing business
climate.
To provide the holistic outlook regarding
Independent Directors & Women Directors
under Companies Act 2013, ASSOCHAM, in
partnership with Grant Thornton India LLP
has come out with a study paper on “A new
era in Corporate Governance”.
I am sure this study will give a rich insight and
adequate knowledge to all the stakeholders.
We also wish to acknowledge the contribution
made by the expert research team of Grant
Thornton India LLP for their untiring
efforts in preparing an extensive in-depth
comprehensive report.
D. S Rawat
Secretary General
ASSOCHAM
Structure of the Board
Appointment of directors
The 1956 Act provided that the limit for
maximum number of directors be based on its
articles or twelve whichever is lower. The 2013
Act provides that the company shall have a
maximum of fifteen directors on the Board of
Directors (‘Board’) and appointing more than
fifteen directors would require approval of
shareholders through a special resolution.
The 1956 Act did not prescribe any academic
or professional qualifications for directors.
The 2013 Act provides that majority of
members of Audit Committee ('AC') including
its Chairperson shall be persons with ability to
read and understand the financial statements.
The 2013 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 transitional period of one year
has been prescribed to companies for
compliance with this provision.
The 2013 Act provides that a company should
have at least one director who has stayed in
India for a total period of not less than 182
days in the previous calendar year.
The 1956 Act required that a public company
can have one director elected by small
shareholders; however, as per the 2013 Act,
this provision is applicable for listed
companies only.
The 2013 Act required prescribed class of
companies to have whole-time KMP, including
MD, CEO, CS and CFO. This was not
required under the 1956 Act.
• Increasing the maximum limit of directors
would bring in more flexibility and enable
companies to get more experienced and
competent personnel at the Board level.
• Providing for the qualification of the AC
members would enable the company to have
quality people on the board to make the
board's functioning more effective.
• The prescribed minimum women
representation on company board, is a step
towards making the top deck more gender
sensitive. Companies must also bear in mind
that whilst women directors can be executive
they do not need to be independent.
• The 182 days limit, which shall be computed
on a proportional basis for calendar year
2014, is consistent with the Income Tax
(“IT”) Act for determining the residential
status of a person.
• Now, the unlisted public companies would
not be required to get a director appointed by
small shareholders.
• The OPC provision enables removing
nominee/ representative directors which
were appointed to meet the minimum
director limit and as such did not provide any
benefit to the company’s structure
• Similar requirements for woman directors
have been introduced under revised listing
agreement.
• However, the date of appointment of
woman director has been recently deferred
from 1 October 2014 to 1 April 2015.
Key provisions Impact analysis
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Structure of the Board
Appointment of directors (Contd.)
The 2013 Act introduces a new category of a
company, One Person Company (“OPC”),
which should have at least one director.
For the first time, duties of the directors are
defined under the 2013 Act.
As per final Rules:
• Listed companies and other public
companies having paid-up capital of Rs
100 crore or more or turnover of Rs 300
crore or more within six months from the
date of incorporation under the Act have
to appoint a woman director
• Listed company and every other public
company having a paid-up share capital of
Rs 10 crore or more to have whole-time
KMP.
• Listed company and every other company
having a paid-up share capital of Rs 5 crore
or more shall appoint a whole-time
company secretary.
• For calendar year 2014, number of days for
resident director shall be calculated on
proportionate basis.
Key provisions Impact analysis
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Way forward
Disqualification of directors
The 2013 Act includes the following additional
grounds of disqualification:
• A person who has been convicted of an
offence dealing with related party
transactions at any time during the past five
years
• Similar to the public companies under the
1956 Act, the directorship in private
companies has also been brought under the
ambit of disqualification on ground for
non-filing of annual financial statements or
annual returns for any continuous period
of three years, or failure to repay deposits
(or interest thereon) or redeem debentures
(or interest thereon) or pay declared
dividend and such failure continues for
more than one year
• Director to vacate office if he remains
absent from all the board meetings held
during 12 months
The 2013 Act makes directors’ disqualification
more stringent, including more scrutiny around
related party transactions.
The 2013 Act brings in more stringent
provisions to include such disqualification for
the private companies as well, thereby bringing
more discipline in the Board for private
companies.
02 | Disqualification of Directors
• Private companies to review the director's
disqualification and ensure compliance for
their existing directors
• Private companies to consider including
disqualification of directors as a part of its
articles of association
01 | Appointment of Directors
• Companies must put in place a
mechanism to assess and periodically
monitor foreign travel of its directors so as
to ensure that at least one director meets
the 182 days criterion for being considered
as a resident in India
• Companies should actively start looking
for a woman director considering they
have only a short period to comply with
this requirements of the 2013 Act
Structure of the Board
Key provisions Impact analysis
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Independent directors (‘ID’)
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. The 2013 Act proposes that the
Board of listed entities should comprise at
least one-third of the Board as ID.
Transitional Period
The 2013 Act also provides one year period
from the enactment to comply with this
requirement.
Other provisions with respect to IDs are
discussed in detail in the following paragraphs.
This provision brings in the ID requirements
and monitoring under the 2013 Act.
Structure of the Board
Key provisions Impact analysis
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Board functioning
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Way forward
Board functioning
Appointment of directors
The 1956 Act provided that notice of every Board
meeting should be given in writing. However, it
did not specify the period of notice. The 2013 Act
provides that a minimum of seven days notice to
the Board is required to call a Board meeting.
The company may give a shorter notice to transact
urgent businesses, provided at least one ID is
present at the meeting. In case of absence of ID
from such a meeting, decisions taken at the
meeting to be circulated to all the directors and to
be made final only on ratification by at least one
ID.
The 2013 Act intends to provide the Board sufficient
time to prepare for the meeting.
Appointment of directors
The 1956 Act required at least one Board meeting
to be conducted in every three calendar months
and four such meetings in a financial year. Further,
Listing Agreement requires at least four meetings
in a year with a maximum time gap of four months
between two meetings.
The 2013 Act, consistent with the Listing
Agreement requirement, provides that the
company should have at least four meetings in a
year with a maximum time gap of 120 days
between two meetings.
The 2013 Act also requires that the first Board
meeting of the company be held within thirty days
of incorporation of the company.
The provision makes the requirements for frequency
of Board meeting similar for public and listed
companies.
Companies may need to frame a policy as to what would qualify as an urgent business and
related time window for transacting such urgent business in order to comply with the seven-day
notice period requirement. For example, the items could include – completion of statutory audits
and reports thereon.
Key provisions Impact analysis
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Board functioning
Conduct of the Board meeting
Participation in the Board meeting through
prescribed video conferencing or other audio
visual means is recognised, provided such
participation is recorded and recognised.
However, the Central Government (‘CG’) may
prescribe matters to be discussed at a
physically convened Board meeting.
As per final Rules:
MCA has prescribed following items to be
discussed at a physically convened Board
meeting only:
• the approval of the annual financial
statements (including consolidated financial
statements);
• the approval of the Board’s report;
• the approval of the prospectus;
• the AC Meetings for consideration of
accounts; and
• the approval of the matter relating to
amalgamation, merger, demerger,
acquisition and takeover
The provision of conducting the Board
meetings through electronic means would bring
in more ease to the Board's functioning.
Key provisions Impact analysis
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Board functioning
Audit committee
The 1956 Act required public companies
having paid-up capital of more than Rs 5
crore to constitute AC, consisting of
minimum three directors and two-third of
total members to be directors other than
Managing Director (“MD”) or Whole Time
Director (“WTD”) of the company. Further,
similar to the 1956 Act, listed entities are
required to constitute AC with two-third of
the members to be IDs. Listing agreement
also states that all members of the AC should
be financially literate and at least one should
have accounting or financial management
expertise.
As per the 2013 Act, AC made mandatory for
listed companies and other prescribed classes
of companies.
Further, such prescribed class of public
companies, shall constitute AC within 1 year
from 1 April 2014 or appointment of IDs,
whichever is earlier.
The 2013 Act provides that AC should consist
of minimum of three directors with IDs
forming majority. Further, the chairperson and
the majority of the members of the AC
should have the ability to read and understand
the financial statements (referred as
“financially literate” under the Listing
Agreement).
The 2013 Act dispenses with the requirement of
constituting the audit committee of the Board
in case of certain unlisted public companies.
The roles and the activities of the audit
committee have been specifically provided
under the 2013 Act.
Pre-approval of all RPTs by the Audit
Committees is a significant change in the
current practice.
While on most matters, the committee has a monitoring/oversight role, on valuation of undertakings / assets, the primary responsibility seems to be that of the Audit Committee.
Key provisions Impact analysis
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Way forward
Board functioning
Audit committee
The role of the audit committee includes the
following activities as per the 2013 Act:
a)the recommendation for appointment,
remuneration and terms of appointment of
auditors of the company
b)review and monitor the auditor’s
independence and performance, and
effectiveness of audit process
c)examination of the financial statement and
the auditors’ report thereon
d)approval or any subsequent modification of
transactions of the company with related
parties
e)scrutiny of inter-corporate loans and
investments
f)valuation of undertakings or assets of the
company, wherever necessary
g)evaluation of internal financial controls and
risk management systems
h)monitoring the end use of funds raised
through public offers and related matters
The revised Listing Agreement enlarges the
role of the audit committee to now
additionally also include:
a.review and monitor the auditor's
independence and performance, and
effectiveness of audit process
b.approval of the appointment of the
CFO/equivalent review the functioning of
the Whistleblower policy
The audit committee shall have the authority
to investigate into any matter in relation to the
items specified above or any such matter
referred to it by the Board.
As per final Rules, the threshold for constituting audit committee is as follows:
•Every other public company:
-having paid up capital of Rs 10 crore or more;
or
-turnover of Rs 100 crore or more; or
-outstanding loans or borrowings or debentures;
or
-deposits exceeding Rs 50 crore or more,
as on the date of last audited financial
statement.
• Unlisted public companies to revisit the
need to continue with an audit committee
requirement
• Audit committees would need to devise a
mechanism to:
- form a policy for recommendation and
appointment of auditors of the company
- review and monitor the auditor’s
independence related matters
- approval and/ or modification of the
related party transactions
- valuation of undertakings or assets of
the company
- evaluation of internal financial controls
and risk management systems
• Audit committee may seek external expert
support to assist them in complying with
their responsibilities
Key provisions
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Board functioning
Nomination and Remuneration Committee
The 1956 Act did not provide for the
constitution of a Nomination and
Remuneration Committee.
Under the revised Listing Agreement, listed
entities shall constitute a Nomination and
Remuneration Committee and such committee
should consist of minimum of three directors,
all of whom should be non-executive directors
and at least half shall be independent
directors.
Further, the chairperson of a company could
be appointed as a member, but not a
chairperson of such committees.
The 2013 Act requires all listed companies and
other prescribed classes of companies to
constitute Nomination and Remuneration
Committee that formulates the criteria for
selection of the directors, a policy relating to
the remuneration for the directors, Key
Managerial Personnel (“KMP”) and other
employees. Such committee should consist of
three or more non-executive directors and at
least one-half of the members should be IDs.
As per final Rules:
Threshold for nomination and remuneration
committee
• Every other public company (i) having paid
up capital of Rs. 10 crore or more; or (ii)
turnover of Rs. 100 crore or more; or (iii)
outstanding loans or borrowings or
debentures or deposits exceeding Rs. 50
crore or more, as on the date of last
audited financial statement.
• Such prescribed public companies shall
constitute nomination and remuneration
committee within 1 year from 1 April 2014,
or appointment of IDs, whichever is earlier.
This provision will result in mandatory
requirement to constitute Nomination and
Remuneration Committee for prescribed class
of companies. This may result in change in
practice for several companies.
The 2013 Act does not provide any transitional
period for compliance with the constitution of a
Nomination and Remuneration Committee.
Key provisions Impact analysis
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Board functioning
Corporate Social Responsibility (CSR) Committee
The 1956 Act did not mandate a company to
spend on CSR activities and consequently,
there is no requirement to constitute a CSR
Committee.
The 2013 Act provides that a company
meeting certain conditions, should constitute a
CSR Committee of the Board, consisting of
minimum of three directors.
The CSR Committee should consist of a
minimum of one ID.
The CSR committee should formulate and
monitor CSR policies and discuss the same in
the Board’s report.
This new committee will frame and monitor the
CSR policy of the company and matters
incidental thereto.
The CSR policy would specify the projects and
programs to be undertaken and also their
execution modalities and implementation
schedules.
Key provisions Impact analysis
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Way forward
Board functioning
Corporate Social Responsibility (CSR) Committee
As per final Rules:
Criteria for constituting CSR committee is as
follows:
•net worth of Rs 5,000 crore or more, or
•turnover of Rs 1,000 crore or more or
•net profit of Rs 5 crore or more during any
financial year
The 2013 Act intends to provide the Board
sufficient time to prepare for the meeting.
Stakeholders Relationship Committee
The 1956 Act did not require the constitution
of Stakeholders Relationship Committee. The
revised Listing Agreement requires
constitution of the Stakeholders Relationship
Committee to consider and resolve the
grievances of the security holders of the
company.
The 2013 Act requires that a company with
more than 1000 shareholders, debenture
holders, deposit holders and other security
holders at any time during the financial year
shall constitute a Stakeholders Relationship
Committee to resolve their grievances.
The 2013 Act does not prescribe the number
of members of such committee consistent
with the Listing Agreement, however provides
that a non-executive director should be the
chairman of such committee.
The provisions are now same under the 2013
Act and revised Listing Agreement for listed
companies.
This provision applies to non-listed entities also,
meeting certain prescribed conditions and hence
will be a significant change in practice.
CSR Committee
All companies will need to determine the applicability of the CSR criteria and also the activities
that may constitute CSR activities under the 2013 Act, to ensure compliance.
Stakeholders Relationship Committee
A non-listed company with more than 1000 share/debenture or security holders to form
stakeholders relationship committee and include one non-executive director.
Key provisions Impact analysis
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Board's Report
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Board's Report
Board’s report and responsibility statement
The 2013 Act seeks to make the board's
report more informative with extensive
additional disclosures like:
•Extracts of the annual return in prescribed
form
•Recommendations of the audit committee
that are not accepted by the Board and
reasons therefore
•A statement on declaration by the IDs on
their compliance being IDs
•Policy developed and implemented by the
company on CSR
•In case of a listed company, statement
indicating the manner in which annual
evaluation has been made by the Board of its
performance, its committee and individual
directors
•Development and implementation of risk
management policy
•Policy on director’s appointment and
remuneration, ratio of remuneration to each
director to the median employee’s
remuneration
•Material changes and commitments, affecting
company’s financial position subsequent to the
year end; to which the financial statements
relate and the date of the reports
•Related party transactions not in the ordinary
course of business and not at arm’s length
basis
The 2013 Act has included the following
additional matters in the Directors’
responsibility statement:
-in case of a listed company, the directors had
laid down internal financial controls to be
followed by the company and they are
adequate
and operating effectively
-the directors have devised proper systems to
ensure compliance with all applicable laws and
such systems are
The provision increases the responsibilities and
improves transparency of the functioning of the
Board.
The disclosures may also contain information that is
commercially sensitive and accordingly companies
will need to develop the disclosures carefully.
The requirements on internal financial controls:
- are similar to global requirements; and
- may require significant efforts and costs to
ensure compliance
- to ensure orderly and efficient conduct of
business) appear to be onerous, and can be
read to cover:
• not just financial reporting aspects, but also
operational areas
• looks at efficiency of operations
• requires conformation of operating
effectiveness
Key provisions Impact analysis
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Way forward
Board’s report and responsibility statement (Continued)
As per the final Rules:
•Every listed Company and every other public
company having a paid up capital ≥ 25 crore
at the end of the preceding financial year
shall include a statement on the annual
evaluation
•The Board report should contain the names
of Companies which have become or ceased
to be the subsidiaries, joint venture or
associate company
•The details relating to deposit accepted,
remained unpaid or where default in
repayment.
•The details in respect to internal financial
controls with reference to financial
statements
•For the financial year commencing on or
before 1 April 2014 , disclosures under the
board report shall continue to be governed
by the provisions of the 1956 Act.
The final Rules have introduced the
requirements of reporting on internal financial
controls with reference to financial statements.
The final Rules do not indicate its applicability
with respect to listed companies only (governed
by the 2103 Act though); therefore, this
requirement seems to be applicable to unlisted
companies only. Hence, the scope of reporting
seems to be narrower for unlisted, as compared
to listed companies.
• Companies to obtain additional information on transactions to be reported to and approved
by the Board
• The Board to devise a mechanism to evaluate its own annual evaluation and events
occurring post year end
• The "internal financial controls" and its monitoring by the board in the 2013 Act will require
companies to set up appropriate mechanism/ processes/ systems to be able to give such
declarations
Board's Report
Key provisions Impact analysis
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Independent Directors
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Qualification and composition of independent directors
The concept of ID has been introduced and
defined under the 2013 Act as a director
other than a managing director or a whole-
time director or a nominee director, who:
• is a person of integrity and possesses
relevant experience
• is not a promoter/a relative of a promoter
(or director) of the company or its
holding/subsidiary/associate company and
does not have pecuniary relationship with
the company/its
holding/subsidiary/associate company /
promoters/directors of the company
during the current financial year or during
the two immediately preceding financial
years
• whose relatives do/did not have pecuniary
relationship amounting to two percent or
more of the gross turnover or total income
or Rs 50 lakh or such higher as may be
prescribed, whichever is lower with the
company/its holding/subsidiary/associate
company / promoters/directors of the
company in the current financial year or
during the two immediately preceding years
• is not a KMP or whose relative is not a
KMP, of the company or its holding/
subsidiary/associate in the last three years
• has not been an employee or partner in a
firm of auditors or company secretaries or
cost auditors of the company/its
holding/subsidiary/associate company or
in a legal/consulting firm that has or had
any transaction with the company /its
holding /subsidiary/associate company
amounting to 10% or more of the gross
turnover of such firm
• does not hold more than 2% (individually
or with his relatives) of the total voting
power
The definition of the term "IDs" as given under
the 2013 Act is now same as that provided
under the revised Listing Agreement, except for
providing the age limit of more than 21 years as
mandated by the latter.
This difference may result in a director being
qualified as an ID under the 2013 Act, however
disqualified as per the Listing Agreement.
As per the revised listing agreement a director
will not be independent if he has any material
pecuniary relationships with the company and
others. This provision is different from the 2013
Act which prohibits all the pecuniary
relationships.
Wider relationships now covered in determining
independence of a director.
Other measures are aimed at mitigating actual or
perceived threats to independence and
objectivity of directors.
The fixed tenure is aimed at protecting the
tenure of IDs.
The Act also provides much needed clarity on
the liability of IDs, which is very welcome.
Independent Directors
Key provisions Impact analysis
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Qualification and composition of independent directors
Listed companies shall have at least one-third
of the total number of directors as IDs and
the CG may prescribe the minimum number
of IDs for any class of public companies.
This requirement is to be complied within 1
year:
•by existing listed companies from the date of
enactment of the 2013 Act ; and
•by the prescribed class of public companies
from the date Rules are notified.
As per Final Rules:
Threshold for public companies– (i) share
capital of Rs 10 crore or more or turnover of
(ii) Rs 100 crore or more or (iii) aggregate,
outstanding loans or borrowings or
debentures or deposits exceeding Rs 50 crore,
as per the latest audited financial statement
Independent Directors
Key provisions
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Independent Directors
Term of appointment and other requirements
The ID shall be appointed for a term of up to
five years and be eligible for re-appointment
subject to certain conditions for two such
terms. Thereafter, the ID shall be eligible for
appointment after a cooling off period of
three years, subject to certain conditions.
Tenure of an ID already served on the board
as on the date of commencement of the 2013
Act shall not be counted for calculating his
maximum tenure.
An ID can also be appointed for a period of
less than 5 years, however that period shall be
counted as one term.
Alternate director of an ID can be appointed
if such an alternate director is also an ID.
IDs should provide declaration at the date of
appointment and at the first meeting of the
Board in every FY confirming that he meets
the criteria of independence unless there are
changes in the circumstances since last
declaration. Currently, under the Listing
Agreement there is no such requirement to
provide any declaration.
In the 1956 Act, an ID may be remunerated
by way of grant of stock options in addition
to fees/ commissions. The 2013 Act and the
revised Listing Agreement provide that the ID
should not be remunerated by grant of stock
options.
The mandatory rotation period is a significant
change in practice and is aimed at improving
objectivity of the ID. The availability of
qualified personnel to act as ID could pose
challenges in implementation of these
provisions.
It is also noted that there is no requirement for
ID rotation in other developed countries.
The provision is aimed at addressing objectivity
of the IDs. However, the 2013 Act does not
specify the implication of outstanding stock
options granted previously to IDs.
With the prohibition of granting stock options
to IDs under the revised Listing Agreement also,
this appears to be consistent now with the 2013
Act.
The 2013 Act provides a guide to professional
conduct for IDs which will provide confidence
to the investor community, particularly minority
shareholders, regulators and companies in the
institution of the independent directors.
As per revised Listing Agreement, the
provisions for calculating the maximum tenure
of IDs, (including earlier served period) has
been made at par with all the provisions as per
the 2013 Act.
Key provisions Impact analysis
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Term of appointment and other requirements
The 1956 Act did not mandate laying down
the code of conduct. However, under the
Listing Agreement, listed companies are
required to have a code of conduct for all
Board members and senior management of
the company, which further mandates to
include the duties of IDs as laid down in the
2013 Act. The 2013 Act prescribes in a
separate schedule, on Code of conduct
applicable only for IDs.
The 2013 Act provides that CG is empowered
to notify any body or institute or association
to maintain a databank containing particulars
of the IDs such as name, address,
qualification.
The provision will improve the efficiency and
effectiveness in selecting qualified personnel.
The time frame during which the data bank has
to be prepared has not been defined.
Way forward
• Potentially, additional public companies may be identified for the requirement of inducting
IDs
• Companies to obtain information from IDs pertaining to them and their relatives to conclude
that the independence criteria is met annually
• Listed companies will need to assess how they would apply the stricter policy of
independence as per the 2013 Act and the requirements of the Listing Agreement
• Determine the course of action for directors that may not qualify as independent under the
2013 Act – such as nominee directors
• Companies will need to identify outstanding stock options previously granted to IDs and
determine the appropriate course of action
• The directors need to evaluate as to by when they need to get themselves registered with
the data bank
Independent Directors
Key provisions Impact analysis
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Code of Conduct for IDs.
The Schedule IV to the 2013 Act (Code of
Conduct for IDs), further provides for the
following:
Role of IDs
• Impartial judgment
• Strategic advisor to the company
• Watchdog for interest of stakeholders
• Moderate in the interest of the company in
conflict situations
• Transparency
• Innovative or creative suggestions for
better future prospects of the company
• Overview that the company is following
good governance policy.
Responsibilities of IDs
• Uphold ethical standards of integrity and
probity
• Act objectively and constructively
• Act in a bonafide manner
• Devoted and take balance decision
• Do not abuse the positions
• Refrain from any action that shall lead to
the loss of his independence
• Assist the company in implementing the
best corporate governance practices
Duties of IDs:
• To undertake appropriate induction and
regularly update and refresh their
knowledge, skills and familiarity
• Strive to attend all meetings of the board
of directors and board committees of
which he is a member.
• Participate constructively in the committee
of board of directors in which they are
chairperson or members
• Keep themselves best informed of the
workings of the company and the external
environment in which it operates
An ID of a listed company shall be governed by
the provisions of the 2013 Act (effective from 1
April 2014) and listing agreement (as amended
and effective from 1 October 2014), whichever
is more stricter in nature.
Independent Directors
Key provisions Impact analysis
25
Code of Conduct for IDs.
• Acting within his authority, assist in
protecting the legitimate interests of the
company, shareholders and its employees.
• Not to disclose confidential information,
including commercial secrets, technologies
and unpublished price sensitive
information etc. unless approved by board.
Manner of appointment:
• Appointment process of IDs shall be
independent of management;
• Appointment of IDs shall be approved by
shareholders.
• Appointment of IDs shall be formalised
through a letter of appointment.
• Terms and conditions of appointment shall
be open for inspection at the registered
office of the company and also posted on
company's website.
Reappointment:
• Reappointment of IDs shall be on the
basis of performance evaluation.
Resignation or removal:
• An independent director resigning from the
Board of the company shall be replaced by
a new independent director within a period
180 days from the date of such resignation.
• Where the company fulfills the requirement
of independent directors in its Board even
without filling the vacancy created by such
resignation or removal, as the case may be,
the requirement of replacement by a new
independent director shall not apply.
As per recent amendment in the listing
agreement:
• terms and conditions of appointment of an
ID shall be disclosed on company’s website.
• IDs shall familiarise themselves with the
company and other related aspects.
Independent Directors
Key provisions Impact analysis
26
Code of Conduct for IDs.
Separate Meetings:
Separate meetings of IDs should be held
without the presence of non-IDs and
members of management.
Meeting shall -
• Review the performance of the non-IDs
and board as a whole,
• Review performance of the chairperson of
the company
• Assess the quality, quantity and timeliness
flow of Information between the Company
Management and the Board.
Performance Evaluation:
• The performance evaluation of
independent directors 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 independent director.
Independent Directors
Key provisions
27
Emerging role of IDs
• An ID would be governed by the
provisions of both, the Act 2013 (effective
from 1 April 2014) and listing agreement
(as amended- effective from 1 October,
2014) (stricter of the two).
• Need for IDs aroused due to the need of
a strong framework of corporate
governance in the functioning of the
company.
• The 2013 Act provides a guide to
professional conduct for IDs which will
provide confidence to the investor
community, particularly minority
shareholders, regulators and companies in
the institution of the IDs.
• The Act 2013 makes the role of IDs very
different from that of other directors.
• The role IDs play in a company broadly
includes improving corporate governance
and the risk management of the company.
• Role of IDs is to take unbiased decisions
and to checks various decisions taken by
the management and majority stakeholders.
• An ID brings the accountability and
credibility to the board process.
• The Schedule IV to the Act 2013 (Code of
Conduct for IDs) states the detailed roles,
duties and responsibilities of IDs.
• Schedule IV requires separate meetings of
IDs which shall review the performance of
Non IDs, board, review the performance
of chairperson of the company.
• Schedule IV also laid down the manner of
performance evaluation of IDs.
Independent Directors
Key provisions
28
Other provisions
29
Other provisions
Number of directorships
The 1956 Act provided for maximum
directorship of not more than fifteen
companies. Private companies, Unlimited
companies, Associations not carrying on
business for profit or which prohibit payment
of dividend, Alternate directorships and
Foreign companies were not considered for
this purpose.
The 2013 Act provides that a person cannot
have directorships (including alternate
directorships) in more than twenty companies,
including ten public companies. For this
purpose, directorship in private companies
that are either holding or subsidiary company
of a public company shall be regarded as a
public company.
The 2013 Act provides for one year period
from the enactment to comply with this
requirement.
The provision increases the number of
directorships from 15 to 20. However, it may
result in many directors already exceeding the
prescribed limits as the directorship in more
companies (excluding foreign companies) and
alternate directorships are counted for this
purpose now.
Increasing the maximum limit of directors
would bring in more flexibility and enable the
companies to get more experience and
competent personnel on the Board level.
Revised Clause 49 is more restrictive on the limit
at number of directorships for IDs i.e.
maximum 7 listed companies. Also, a whole time
director in any listed company can serve as an
ID in maximum of 3 listed companies.
Number of directorships
As per the 2013 Act, restriction on power of
Board to exercise specified powers with
general meeting approval extended to private
companies. In all cases, approval of
shareholders by a special resolution made
necessary. As per the 1956 Act, it was
applicable for the public companies and the
private companies being the subsidiary of the
public company and there was no mention for
the type of the resolution to be passed at the
general meeting.
The Board can act on certain prescribed matters
only after obtaining the consent of the members
by a special resolution.
Private companies would also require to ensure
and enlist the matters that could be transacted
by passing a special resolution.
Key provisions Impact analysis
30
Way forward
Other provisions
Resignation
Provisions with respect to resignation of a
director have been specifically provided under
the 2013 Act.
It is also mandated for a director to forward a
copy of his resignation along with detailed
reasons for the same to the Registrar in the
prescribed manner.
As per revised Listing Agreement, disclosure
which were required to be given on company’s
website or in annual report with respect to the
letter of resignation of directors is now done
away with for listing companies.
The shareholders and the regulatory bodies can
use this as a tool to assess the issues in
governance by monitoring the reasons for
resignation as provided by the directors.
• Companies and their directors will be required to identify their directorships and transition out
over the year if they exceed the limit
• Companies will also need to identify replacement directors – including IDs
• The companies need to consider updating their charter documents for incorporating the
provisions with respect to duties and resignation of the directors
Key provisions Impact analysis
31
Other provisions
Prohibition of insider trading
New clauses have been introduced with
respect to prohibition of insider trading of
securities and the definition of price sensitive
information.
No person including any director or KMP of
a company shall enter into insider trading
except any communication required in the
ordinary course of business or profession or
employment or under any law.
While the 1956 Act was silent on insider trading,
the 2013 Act on the other hand, lays down
provisions relating to prohibition of insider
trading with respect to all companies This is a
step towards harmonisation 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.
Whistle Blower Mechanism
Every listed company and prescribed
companies need to establish a vigil mechanism
for directors and employees to report genuine
concerns.
As per final Rules, the companies accepting
public deposits and with borrowed money
from banks etc. exceeding Rs 50 crore are
covered for this purpose.
As per the revised Listing Agreement,
disclosure which were required to be given on
company’s website or in annual report with
respect to details of vigil mechanism is now
done away with.
Whistleblower mechanism accompanied by anti-
abuse mechanisms would be a step towards
better corporate governance.
Penalties
The 2013 Act proposes significant penalties
for directors for defaults in discharging their
duties. The instances for levying penalties have
increased substantially too. Concept and penal
provisions relating to officer in default is also
strengthened. Penalties and fine provided
under the 2013 Act are upto 3 times of the
amount involved and imprisonment for a term
upto 10 years.
This will help to make Company and it officers
in default more liable for their action.
Strengthening the provisions for officers in
default and further making the penal provisions
more rigorous are aimed at protecting the
stakeholders’ interest.
Key provisions Impact analysis
32
Way forward
Other provisions
Class Action (not yet notified)
Unlike the 1956 Act, the 2013 Act provides
for class action suits, allowing certain
members/depositors with common interest,
to file an application in the National Company
Law Tribunal against the company/its
management/its auditors or a section of its
shareholders for damages or compensation if
they are of the opinion that the management
or conduct of the affairs of the company are
being conducted in a manner prejudicial to
their interest
Class Action suit provides empowerment to
minority stakeholders to come together and seek
action against the management, advisors and
auditors of the company for any oppression or
mismanagement. However, in the absence of
significant anti-abuse provisions in the
implementation rules, this can be misused. The
new risks and liabilities will enforce more
responsibility into the role of a director.
• The companies need to develop a mechanism for insider trading and price sensitive
information
• The prescribed companies also need to establish and monitor the whistle blower mechanism
• The companies need to prepare a strong mechanism to ensure adherence to the rules and
regulations as per the 2013 Act so as to avoid the rigorous penalties laid down under the
2013 Act
Key provisions Impact analysis
33
Related parties
34
Related parties
Related party transactions
As against the term “relative” defined under
the 1956 Act, the 2013 Act defines the term
“related party” for the first time. The term
''related party" under the revised Listing
Agreement has been recently amended to
refer to the definition as provided under the
2013 Act and the applicable accounting
standards.
The 1956 Act does not mandate specific
approval of the related party transactions
('RPTs') by the Board/ shareholders.
However, revised Listing Agreement requires
that all material RPTs shall also require
approval of the shareholders through special
resolution.
The 2013 Act proposes that all RPTs which
are not in the ordinary course of business or
not at arm’s length basis should be approved
by the Board.
The 2013 Act also proposes that for the
companies with the prescribed share capital,
no contract or arrangement or transactions
exceeding prescribed amount, shall be entered
into with its related party, unless, approved by
the shareholders of the company by way of a
special resolution. However, the related party
shareholders are not permitted to exercise
their voting rights, in such special resolution.
The 2013 Act and the revised listing
agreement further mandates that all related
party transactions shall require prior approval
of the AC.
However, the listing agreement provides a
relief by way of a conditional provision for
omnibus approval of related party
transactions instead of separate prior
approvals for individual related party
transactions.
In addition to the related parties identified under
the existing notified accounting standards, the
2013 Act proposes to include more related
parties than what has been considered for
disclosures in the financial statement.
Based on the size of capital or the size of
transactions, certain additional companies may
require prior approval of members for related
party transactions.
Company to demonstrate what's arm's length.
This would need to be in sync with domestic
transfer pricing requirements, as well.
For transactions involving promoter related
parties, only non-promoter shareholders can
vote.
Ordinary course of business not defined.
No transition period has been provided by the
2013 Act for existing loans and investments
through more than two layers of subsidiaries.
However, interpretation is to apply this
requirement only prospectively.
Key provisions Impact analysis
35
Related parties
Related party transactions (Continued)
The 2013 Act also proposes that a company
shall not make investments through more than
two layers of investment companies, unless
the investments are in an overseas company
and the company has overseas subsidiaries and
such layers are permitted under the local law
of the company being acquired or under the
law of the acquiring company.
Every contract or arrangement entered into
with a related party shall be referred to in the
Board's report along with the justification for
entering into such contract or arrangement.
MCA has clarified that contracts entered into
by the companies under the provisions of the
Act 1956 would not require fresh approval till
the expiry of original term of such contracts.
However, any modification made in those
contracts would require fresh approval under
the provisions of the 2013 Act.
Transactions arising out of compromises,
arrangements and amalgamations whether
dealt under 1956 Act/2013 Act will not attract
requirements of the new provisions under the
2013 Act.
As per the 2013 Act, a related party cannot
vote on the special resolutions in which such
related party is an interested party. However,
as per the recently amended provisions of the
revised Listing Agreement, all related parties
shall abstain from voting on any transaction,
irrespective of whether they are interested in
the transaction or not.
Key provisions Impact analysis
36
Way forward
Related party transactions
As per final Rules:
• The term 'relatives' include step
relationships and exclude second
generation lineal ascendants and
descendants
• Threshold for approval of RPTs by
shareholders through special resolution:
- Transaction or transactions to be entered
into: i. threshold amount determined as percentage
of turnover /net worth per last audited
financial statements, threshold varies
depending on the nature of related party
transactions
ii. relates to appointment to any office or place of
profit at a monthly remuneration exceeding Rs
2.5 lakh
iii. is for a remuneration for underwriting the
subscription of any securities or derivatives
thereof of the company exceeding 1% of the
net worth
• Turnover or net worth shall be on the basis
of the Audited Financial Statement of the
previous Financial Year
• In case of wholly owned subsidiary, special
resolution passed by the holding company
for entering into transactions between
wholly owned subsidiary & holding
company would be sufficient compliance
of these provisions
• Explanatory statement annexed to the
notice of General Meeting shall contain the
particulars regarding related party &
transactions
• Register for recording the contracts &
arrangements with related party in Form
MBP 4, shall be preserved permanently
'Related party' does not include independent
directors.
A director, other than independent directors or
KMP of the holding company or his relative
with reference to a company, shall be deemed
to be a related party.
Related parties
• Companies to identify all related parties
since the scope of such parties has been
expanded
• Companies need to identify whether the
expanded list of related parties is
consistent with the application requirement
of the accounting standard
• Companies to assess whether they are
covered in the expanded list as identified
by the 2013 Act to require member's
approval
• Resolutions requiring the approval of the
members would not have the voting of the
concerned related party voting on such
transaction
Key provisions Impact analysis
37
Corporate Social Responsibility
38
Corporate Social Responsibility
CSR Policies, implementation & Assessment
CSR Policy:
Applicability-
The companies fulfilling any of the following
criteria, during any financial year (means any
of the three preceding financial years):
• Net profit is Rs. 5 Cr. or more; or
• Net worth of Rs. 500 Cr. or more; or
• Annual turnover of Rs. 1000 Cr. or more.
Amount of Contribution
• At least 2% of the average net profit of the
past 3 financial years needs to be spent on
CSR activities as specified in Schedule VII.
Implementation:
The companies shall constitute CSR
committee of the board with 3 or more
directors, including at least 1 ID.
The mandate of the said CSR committee shall
be:
• to formulate and recommend to the board,
a CSR policy, which shall indicate the
activities to be undertaken by the company
as specified in Schedule VII;
• to recommend the amount of expenditure
to be incurred on the activities referred to
above;
• to monitor the CSR policy of the company
from time to time;
• to institute a transparent monitoring
mechanism for implementation of the CSR
projects or programs or activities taken by
the company.
• CSR being a voluntary contribution so far has
now been included in law.
• There may be reluctance in compliance,
especially in case of companies which are not
profitable, but fall under the designated
category.
• Every company including its holding or
subsidiary and a foreign company fulfilling
the criteria, to contribute to CSR activities
based on the net profits of their Indian
operations.
• If a company ceases to be covered under the
eligibility criteria for three consecutive
financial years, it shall not be required to
comply with the said requirements till it again
meets the mentioned criteria. However, it is
advisable to continue with the CSR
Committee and Policy to help once the
company becomes eligible again.
• For two consecutive years if the company has
been in loss, but if the average net profit for
three years is positive, then the company is
required to spend 2% of the same. This
seems to be a demotivating factor for such
companies as they may not drive the CSR
programs religiously
Key provisions Impact analysis
39
Corporate Social Responsibility
CSR Policies, implementation & Assessment
CSR activities:
The company shall give preference to the local
areas around where it operates, for spending
the amount earmarked for CSR activities.
CSR activities include (listed in schedule
VII)
• eradicating extreme hunger and poverty
• promotion of education
• promoting gender equality and empowering
women
• reducing child mortality and improving
maternal health
• combating HIV, malaria and other diseases
• ensuring environmental sustainability
• social business projects
• contribution to the PM National Relief
Fund, etc.
• Slum area development
CSR activities shall not include activities:
• undertaken in pursuance of the normal
course of business of a company;
• activities that benefit only the employees
and their families;
• contribution of any amount directly or
indirectly to a political party; and
• CSR activities undertaken outside India.
The activities of CSR mentions the words
"means and includes but not limited to".
Therefore, the definition seems to be inclusive
and not exhaustive.
There shall not be any reverse flow of income
to the Company on account of the 2% of
average net profit spent.
There is a high probability that companies could
pick up CSR programs based on their interest
and not on the actual needs/requirements of
the stakeholders of the local vicinity within
which the Company operates – this may lead to
implementing CSR projects which are of no
need to the community
Certain specified expenditure incurred towards
administration of CSR activities including CSR
capacity building etc. are allowed to be counted
for the purpose of computation of CSR spent
of 5%.
Key provisions Impact analysis
40
Corporate Social Responsibility
CSR Policies, implementation & Assessment
Assessment:
CSR committee to identify the CSR activities
and prepare a draft CSR policy which shall be
presented to the board for approval.
Disclosures to be made by the Board in its
annual report w.r.t CSR:
• the CSR policy formulated and
composition of the CSR committee.
• average net profit of the last 3 years and
the contribution towards CSR in
percentage, on account of activities related
to Schedule VII.
• the name, nature of the CSR
projects/programs undertaken in line with
the amended schedule VII of the act
• locations where such programs/projects
are being executed/undertaken.
• manner in which the amount has been
spent by the company for every CSR
project defined in Schedule VII.
• amount outlay/budget of the project.
• amount spent on the project- direct
expenditure, overheads, cumulative
expenditure upto the reporting period and
amount spent directly or through
implementing agency.
• a responsibility statement- implementation
and monitoring of CSR policy is in
compliance with CSR objectives and policy
of the company.
• CSR project executed in collaboration -
separate reporting on the projects and
programs, attribution of the CSR based
investment and impacts.
• reasons for not spending 2% on CSR.
CSR Committee to identify the CSR activities,
and prepare a draft CSR policy which shall be
presented to the Board for approval.
The Board Report pertaining to the financial
year 2013-14 shall not include any disclosure
with respect to CSR.
Key provisions Impact analysis
41
42
The Associated Chambers of Commerce and Industry of India (ASSOCHAM)
5 Sardar Patel Marg, Chankyapuri, New Delhi – 110021
T: +91 11 4655 0555 (Hunting Line); F: +91 11 2301 7008/ 9; W: www.assocham.org
Southern Regional Office
D-13, D-14, D Block, Brigade MM,
1st Floor, 7th Block, Jayanagar,
K R Road, Bangalore – 560070
T: 080 4094 3251-53
F: +91 80 4125 6629
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4th Floor, Heritage Tower,
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T: + 91 79 2754 1728/ 29, 2754 1867
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F 4, "Maurya Centre" 48,
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T: +91 33 4005 3845/41
F: +91 33 4000 1149
ASSOCHAM Regional Office - Ranchi
503/D, Mandir Marg-C
Ashok Nagar
Ranchi - 834 002
M: +91 9835 040255
About ASSOCHAM
The Associated Chambers of Commerce and
Industry of India (ASSOCHAM), India's premier
apex chamber, covers a membership of over 4
lakh companies and professionals across the
country. ASSOCHAM, which started in 1920, is
one of the oldest Chambers of Commerce.
ASSOCHAM is known as the “knowledge
chamber” for its ability to gather and disseminate
knowledge. Its vision is to empower the industry
with knowledge so that they become strong and
powerful global competitors with world-class
management, technology and quality standards.
ASSOCHAM is also a “pillar of democracy” as it
reflects diverse views and sometimes opposing
ideas in industry group. This important facet puts
us ahead of countries like China and will
strengthen our foundations of a democratic
debate and better solution for the future.
ASSOCHAM is also the “voice of industry” – it
reflects the “pain” of industry as well as its
“success” to the government.
The Chamber is a “change agent” that helps to
create the environment for positive and
constructive policy changes and solutions by the
government for the progress of India.
As an apex industry body, ASSOCHAM represents
the interests of industry and trade, interfaces with
Government on policy issues and interacts with
counterpart international organisations to promote
bilateral economic issues. ASSOCHAM is
represented on all national and local bodies and is,
thus, able to proactively convey industry
viewpoints, and also communicate and debate
issues relating to public-private partnerships for
economic development.
The road is long. It has many hills and valleys – yet
the vision before us of a new resurgent India is
strong and powerful. The light of knowledge and
banishment of ignorance and poverty beckons us,
calling each member of the Chamber to serve the
nation and make a difference.
About Grant Thornton India LLP
43
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