08.12.2010-CPE presentation on CG & CSR · – Vanishing companies scam ... the business Segregation may ... violation of the company's code of conduct or ethics policy. Best Governed

CA. VIJAY [email protected]

Companies Bill 2009 & MCA Voluntary Guidelines 2009 on Corporate Governance & CSR

AGENDA

• Corporate Governance Preview 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

COMPANIES BILL, 2009

EVOLUTION OF COMPANIES BILL, 2009

Date Event

August 2, 2004 Concept paper posted on the MCA website

December 2, 2004

Expert Committee set-up – with Dr. J.J.Iranias Chairman

May 31, 2005 Report by the Expert Committee

October 23, 2008

Introduced in the Lok Sabha as Companies Bill, 2008

August 4, 2009 Re-introduced in the Lok Sabha as Companies Bill, 2009

MACRO LEVEL CHANGES (1 OF 2)

Objective Changes proposed

Segregation of substantive law from procedural law

Rule based - to facilitate ease and severability in amendment

Compact statute Proposed reduction from 658 sections to 426 sections

Clear understanding and interpretation

Clear language and more logical flow of provisions

Self-regulatory framework More emphasis on special resolutions than on government approvals

Flexibility in formation of smaller businesses

Introduction of ‘One-person companies’ and ‘small companies’

Objective Changes proposed

Investor protection Remedial action/suits, heavier penalties, removal of time bar over dividends

Modernization of corporate regulation

Application of e-governance initiative – recognition of electronic voting, video conferencing

Modernization of structuring mechanisms

Recognition of cross-border mergers, holding-subsidiary merger etc.

Flexibility in transition Easy transition from one type of Company to another – Conversion – Clause 13

Simpler procedure for liquidations, winding-up

Establishing single forums at NCLT/ NCLAT

MACRO LEVEL CHANGES (2 OF 2)

Corporate Governance (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.

What is CG?

Factors for emergence of CG in India

Factors for Emergence of CG in India

• Corporate Scandals– The stock market scandal (Harshad Mehta) in 1992.– 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

BACKGROUND OF CG

BACKGROUND (1 of 4)

• Post-Satyam, much of the debate around corporate governance has centered around independent directors and auditors.

• The Companies Bill and Voluntary Guidelines released by the Ministry of Corporate Affairs (MCA) are the key regulatory developments to strengthen corporate governance.

BACKGROUND (2 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.

BACKGROUND (3 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

BACKGROUND (4 of 4)

Regulators for CG

• Indian Companies Act, 1956

• SEBI Act, 1992

• Stock Exchanges-Listing Agreement

• ICAI Act,1949

• ICSI

• ICWAI

.

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).

PARTICULARS COMPANIES ACT, 1956


Directors' responsibility statement in directors' reportAudit committeeDirectors 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 COMPANIES ACT, 1956


Remuneration committee

Stakeholders Relationship Committee

Oppression & mismanagement

Independent directors

Insider Trading

No provision

No provision

Section 397 & 398

No definition

No provision

Clause 158

Clause 158

Clause 212 & 213

Clause 132(5)

Clause 173

Company Law vis-à-vis Corporate Governance

The Initiative

• During 2000-01, 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).

“ PROVISIONS”

Corporate Governance – Voluntary Guidelines, 2009

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 businessSegregation may potentially cause tension in the Board room•Our recommendation:Companies to appoint a lead independent directorLead Independent Director to work with the promoters and oversee the functioning of the BoardThe Lead Independent Director should act as an advisor to the board Chairperson

Separation of Offices of Chairman and Chief Executive Officer (CEO): as per Guideline # A.2

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 BoardAvailability 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.

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

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 adviceRemuneration of NEDs/IDs:•A choice of fixed and variable remuneration•Restriction on stock optionsIndian 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 FORWHISTLE 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.

Best Governed Companies

ICSI National Award for Excellence in Corporate Governance

Corporate Social Responsibility

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”

Environment Social

Economic

An Enterprise’s Triple Effect on Society

BusinessImpact

Sustainable Development Equal Opportunities

Waste Control Education &Culture

Emissions CommunityRegeneration

Energy Use Human Rights

Product EmployeeLife-cycle Volunteers

Product Wealth Productive EthicalValue Generation Employment Trading

CSR VOLUNTARY GUIDELINES, 2009

CORE ELEMENTS OF CSR

• Care for all Stakeholders:

Stakeholders include shareholders, employees, customers, suppliers, society at large



• Ethical Functioning:

Transparency and accountability, not to engage in practices that are abusive, unfair, corrupt or anti-competitive



• Respect for Workers Rights & Welfare:

Work place environment, grievance redressalsystem



• Respect for Human Rights

Avoid complicity with human rights abuse



• Respect for Environment

Pollution, recycle, waste management, utilization of natural resources, energy management



• Activities for Social and Inclusive Development

Poverty eradication, health & education etc..

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

WINNINGEMPLOYEES

WINNINGEMPLOYEES

GROWINGINVESTORS

GROWINGINVESTORS

DELIGHTEDCUSTOMERS

DELIGHTEDCUSTOMERS

TRUSTEDSUPPLIERS

TRUSTEDSUPPLIERS

SATISFIEDGOVERNMENT &

REGULATORS

SATISFIEDGOVERNMENT &

REGULATORS

HAPPYSOCIETY

HAPPYSOCIETY

Any Questions ???

08.12.2010-CPE presentation on CG & CSR · – Vanishing companies scam ... the business Segregation may ... violation of the company's code of conduct or ethics policy. Best Governed

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