In my blog post titled "Corporate Governance: Regulatory Frameworks under Consideration" I mentioned that some of the provisions related to corporate governance and voluntary guideline on corporate governance issued by Ministry of Corporate Governance has been incorporated into new Companies Bill, 2012. In this post, I will examine these provisions and their effect on corporate governance.
National Financial Reporting Authority (Section 132)
Introduction of National Financial Reporting Authority is not a new thing as such. Institute of Chartered Accountants of India earlier had many of these powers. This authority shall be responsible for accounting and auditing standards in India. This authority shall be responsible for monitoring and enforce compliance of these standards and for that purpose oversee the quality of professions associated with ensuring compliances. The authority shall investigate professional and other misconducts committed by members and firms of chartered accountants. There is also a provision for appellate authority.
Audits and Auditors (Section 139, 142, 143, 144)
Every company shall appoint an individual or a firm as auditor in its first annual general meeting till conclusion of sixth annual general meeting and thereafter till the conclusion of every sixth annual general meeting. No listed or other company as prescribed shall appoint an individual for more than one term of five years and a firm for more than two consecutive terms of five years. Any firm having a same partner or partners shall not be appointed in its place.
The remuneration of auditors shall be fixed by company in its general meeting.
Section 143 decide power and duties that every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor. This section lists some matters which are to inquire specially and to report.
Sub – section (12) cast very important duty; if an auditor, Company Secretary in practice or Cost Accountant of a company, in the course of the performance of his duties has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
Further, Section 144 list nine services which an auditor cannot provided directly or indirectly to the company.
Directors (Sections 149, 150, 151, 163, 166 and Schedule IV)
There shall be at least one women director in companies of prescribed class or classes. There shall be at least one director who stayed in India for not less than 182 days in previous calendar year as per sub – section (3).
Every listed company and companies of prescribed classes shall have at least one – third of total number of directors as independent directors. First time in companies act, independent director has been defined. Every independent director has to give an annual declaration of independence to Board. Independent Director shall not be entitle to receive stock option but may receive remuneration and reimbursement of expenses. An independent director shall hold office for as term of five consecutive years but shall not hold office for more than two consecutive terms. Such independent director shall be eligible for appointment after expiration of three years of ceasing and any other association with company thereafter.
The company and independent directors shall abide by provision of Schedule IV.
Independent directors shall not be subject to the provision of retirement by rotation.
Under Section 150, the central government may prescribe manner and procedure for appointment of independent director. His appointment shall be approved in general meeting. In notice for such meeting an explanatory statement shall indicate justification for choosing the appointee. For benefit of companies, a data bank shall be maintained containing name, address and qualification of eligible and willing persons.
As per Section 151, a listed company may have one director elected by such small shareholders.
Under section 163, the articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company in accordance with the principle of proportional representation.
Section 166 of the bill defines duties of directors. These duties include good faith, due and reasonable care, skill and diligence, independent judgment, no direct or indirect conflict of interest. Any contravention to this section is an offence punishable with a fine from one lakh to five lakh rupees.
Committees of the Board of Directors (Sections 177, 178)
Section 177 deals with Audit committee of board of directors. Every listed companies and some other class of companies shall constitute an audit committee. Audit committee shall be constituted with minimum three independent directors with majority of financially literate persons. The chairperson should also be a person with ability to read and understand financial statement. Terms of reference of an audit committee shall include matters.
The audit committee shall have power to investigate into these matters. The auditors and key managerial personnel have right to be heard in the meetings of audit committee. Where Board does not accept any recommendation of the committee, same shall be disclosed.
This section also provide for vigil mechanism for directors and employees to report genuine concerns in prescribed manner. Any person who uses such vigil mechanism shall have direct access to chairperson of the audit committee.
Section 178 deals with "Nomination and Remuneration Committee" and "Stakeholders Relationship Committee". The Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management. The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee.
Related Party Transactions (Section 188):
No company shall enter into any contract or arrangement with a related party without consent of board of directors given by a resolution passed in a meeting with respect to certain matters. The section also prescribed when a transaction exceeds a certain prescribed threshold limit shall be entered only after prior approval of the company in general meeting by a special resolution. No interest member shall vote on such special resolution. However, there is no such requirement of any approval when transaction is on an arm's length price. Every related party transaction shall be reported in Board's report to shareholders.
There is also a provision of register of contracts and arrangements in which directors are interested.
Secretarial Audit (Sections 204, 205)
Every listed company and such other companies shall annex a secretarial audit report given by a company secretary in practice to its Board's report. The secretarial auditor shall audit secretarial and other record. Secretarial auditor will report compliance of companies law and other laws applicable to the company and compliance with secretarial standard.
Class Action (Section 245)
Section 245 of the bill introduce concept of class action first time in India. Where members, Depositors or any class of them are of the opinion that conduct of affair of company are being conducted in a manner prejudicial to the interest of company, its members or depositors; they may file an application before tribunal. The class action may be against auditors as well. The number of members or depositors may be 100 or such other number as may be prescribed.
These are major footstep of corporate governance under proposed Companies Bill 2012. This certainly may improve status of corporate governance in Indian companies which are out of present corporate governance structure which majorly target listed companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.