1. COMPANIES ACT, 2013

Important provisions under the Co Act 2013 to further strengthen corporate governance:

1.1. Composition of the Board of Directors [Sections 149, 151]

# Intermittent vacancy to be filled up by the Board at the earliest but not later than:

• immediate next board meeting, or
• 3 months from the date of such vacancy, whichever is later.
  [Note: This provision w.r.t. ID is in conflict with provision VI (2) of Sch IV given below at 1.5.4]

1.2. Director's Responsibility Statement [Section 134(5)]

The Report of the BoD is required to include a DRS on the following aspects:

1. Applicable Accounting Standards have been followed in preparation of the annual accounts along with proper reasons/explanations for material departures.
2. Accounting policies as selected are consistently applied and judgments and estimates are made in a reasonable and prudent manner to ensure true and fair view of the state of affairs at the end of financial year and of the profit or loss for that period.
3. Adequate accounting records are maintained in accordance with the provisions of the new Act safeguarding the assets of the company and for preventing and detecting frauds and other irregularities.
4. Annual accounts have been prepared on a Going Concern basis.
5. Proper systems have been devised to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively.
6. In the case of a listed company, the directors, have laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

1.3. Additional Disclosures in the Report of the Board of Directors [Section 134(3)] – This should form part of BoD Report

In case of a listed company and every other public company having paid-up share capital ₹ 25 crores or more, calculated at the end of the preceding financial year, the Report of the Board of Directors is required to include, inter alia, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

1.4. Duties of the Directors [Section 166]

1.5. Independent Directors [Section 149]

1.5.1 Qualifications: An independent director means a director, who

1.5.2 Remuneration: approved by the members

• (sitting) fee provided under section 197(5),
• reimbursement of expenses for participation in the Board and other meetings and
• profit related commission.

not entitled to any stock option

1.5.3 Term

1.5.4 Code for Independent Directors

Sch IV lays down a detailed code of conduct for Independent Directors covering the following aspects:

1. Guidelines of Professional Conduct
   • uphold ethical standards of integrity and probity
   • act objectively and constructively while exercising his duties
   • exercise his responsibilities in a bona fide manner in the interest of the company
   • devote sufficient time and attention to his professional obligations for informed and balanced decision making
   • not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making
   • not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person
   • refrain from any action that would lead to loss of his independence
   • where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly
   • assist the company in implementing the best corporate governance practices
2. Roles and functions
   • help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct
   • bring an objective view in the evaluation of the performance of board and management
   • scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance
   • satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible
   • safeguard the interests of all stakeholders, particularly the minority shareholders
   • balance the conflicting interest of the stakeholders
   • determine appropriate levels of remuneration of executive directors, KMP and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, KMP and senior management;
   • moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest
3. Duties
   • undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company
   • seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company
   • strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member
   • participate constructively and actively in the committees of the Board in which they are chairpersons or members
   • strive to attend the general meetings of the company
   • where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting
   • keep themselves well informed about the company and the external environment in which it operates
   • not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board
   • pay sufficient attention and ensure that adequate deliberations are held before approving RPTs and assure themselves that the same are in the interest of the company
   • ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use
   • report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy
   • acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees
   • not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.
4. Manner of appointment
   • Appointment process → to be independent of the company management;
   • while selecting independent directors. the Board to ensure  → appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.
   • approved at the meeting of the shareholders
     • Explanatory statement to include statement that: “in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management”
   • Appointment to be formalised through a letter of appointment
   • Letter of appointment to set out:
     • term of appointment
     • expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks
     • fiduciary duties along with accompanying liabilities
     • provision for Directors and Officers (D and O) insurance, if any
     • Code of Business Ethics expected to be followed by Directors & employees
     • list of actions that a director should not do (Don’ts)
     • remuneration, (incl. periodic fees, reimbursement of expenses for attending meetings and profit related commission, if any)
   • terms and conditions:
     • open for inspection at the registered office of the company by any member during normal business hours
     • to be posted on the company's website
5. Reappointment  → on the basis of report of performance evaluation
6. Resignation or removal  → as per sections 168 and 169 of the Act.
   • Vacancy to be filled in within 180 days from the date of such resignation or removal. [see 1.1 above]
     • Not required  → if the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal
7. Separate meetings of independent directors
   • at least 1 meeting in a year, without the attendance of non-independent directors and members of management;
   • All the independent directors of the company have to strive to be present at such meeting;
   • The meeting is required to:
     • review the performance of NEDs and the BoD as a whole
     • review the performance of the Chairperson of the company, taking into account the views of EDs and NEDs
     • assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties
8. Evaluation Mechanism
   • The performance evaluation of IDs is required to be done by the entire BoD, excluding the director being evaluated.
   • On the basis of the report of performance evaluation, the BoD is required determine whether to extend or continue the term of appointment of the ID.

1.6. Board Committees

Note 1 – The terms of reference of the AC should include:

1. the recommendation for appointment, remuneration and terms of appointment of auditors of the company
2. review and monitor the auditor's independence and performance, and effectiveness of audit process
3. examination of the financial statement and the auditors' report thereon
4. approval or any subsequent modification of transactions of the company with related parties
5. scrutiny of inter-corporate loans and investments
6. valuation of undertakings or assets of the company, wherever it is necessary
7. evaluation of internal financial controls and risk management systems
8. monitoring the end use of funds raised through public offers and related matters

Note 2 – The NRC is required to:

1. identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the BoD their appointment and removal and shall carry out evaluation of every director's performance
2. formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the BoD a policy, relating to the remuneration for the directors, KMP and other employees
3. ensure that -

1. the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully
2. relationship of remuneration to performance is clear and meets appropriate performance benchmarks
3. remuneration to directors, KMP and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals

1. Co Amend Bill 2016: during the FY. For newly incorporated Co  → pro-rate for the year of incorporation

2. Co Amend Bill 2016: Listed public company

Abbreviations used in the topic ‘Corporate Governance’

Guiding principles under Listing Regulations

• Broad principles (in line with IOSCO Principles) for periodic disclosures - Principles governing disclosures and obligations

• Information to be prepared and disclosed in accordance with applicable standards of accounting and financial disclosure

• implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders

• ensure that, the annual audit is conducted by an independent, competent and qualified auditor

• refrain from misrepresentation

• adequate and timely information

• disseminations made are adequate, accurate, explicit, timely and presented in a simple language

• Channels for disseminating information to provide for equal, timely and cost efficient access to relevant information by investors

• abide by all the provisions of the applicable laws

• make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholde₹

• Filings, reports, statements, documents and information which are event based or are filed periodically to contain relevant information

• Periodic filings, reports, statements, documents and information reports to contain information to enable investors to track the performance of a listed entity over regular intervals of time and shall provide sufficient information to enable investors to assess the current status of a listed entity

• Principles of corporate governance (in line with OECD principles) - Compliance with corporate governance to achieve the objectives of the following principles:

• protect and facilitate the exercise of the rights of SH

• provide adequate and timely information to SH

• ensure equitable treatment of all SH, including minority and foreign SH

• recognise the rights of its stakeholders and encourage co-operation between listed entity and the stakeholders

• ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the listed entity,

• Responsibilities of the board of directors:

Key functions

• Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestments

• Monitoring the effectiveness of the listed entity’s governance practices and making changes as needed

• Selecting, compensating, monitoring and, when necessary, replacing KMP and overseeing succession planning.

• Aligning KMP and remuneration of BoD with the longer term interests of the listed entity and its shareholde₹

• Ensuring a transparent nomination process to BoD with the diversity of thought, experience, knowledge, perspective and gender in BoD.

• Monitoring and managing potential conflicts of interest of management, directors and shareholders, including misuse of corporate assets and abuse in related party transactions.

• Ensuring the integrity of the listed entity’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

• Overseeing the process of disclosure and communications.

• Monitoring and reviewing board of director’s evaluation framework.

Other responsibilities

Bod to:

• provide strategic guidance to ensure effective monitoring of the management

• accountable to the listed entity and the shareholde₹

• set a corporate culture and the values by which executives throughout a group shall behave.

• encourage continuing directors training to ensure that they are kept up to date.

• treat all SH fairly, where its decisions may affect different SH groups differently

• maintain high ethical standards and shall take into account the interests of stakeholde₹

• exercise objective independent judgement on corporate affai₹

• consider assigning a sufficient number of NEDs capable of exercising independent judgement to tasks where there is a potential for conflict of interest.

• ensure that, while rightly encouraging positive thinking, these do not result in over-optimism that either leads to significant risks not being recognised or exposes the listed entity to excessive risk.

• have ability to ‘step back’ to assist executive management by challenging the assumptions underlying: strategy, strategic initiatives (such as acquisitions), risk appetite, exposures and the key areas of the listed entity’s focus.

• well define and disclose mandate, composition and working procedures of committees of the board, when established.

Directors to:

• act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the listed entity and the shareholde₹

• be able to commit themselves effectively to their responsibilities.

• have access to accurate, relevant and timely information to fulfill their responsibilities

• In case of ambiguity or incongruity between the principles and relevant regulations è the principles specified in Ch II shall prevail

Role of Audit Committee as per Sch II of Listing Regulations includes:

1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

2. Recommending for the appointment, remuneration and terms of appointment of the auditors of the company.

3. Approval of payment to statutory auditors for any other services rendered by the statutory audito₹

4. Reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference specified particula₹

5. Reviewing, with the management, the quarterly financial statements before submission to the BoD for approval.

6. Reviewing, with the management, the statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilised for purposes other than those stated in the offer document/prospectus/ notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter.

7. Review and monitor the auditor’s independence and performance, and effectiveness of audit process.

8. Approval or any subsequent modification of RPTs

9. Scrutiny of inter-corporate loans and investments

10. Valuation of undertakings or assets of the company, wherever it is necessary.

11. Evaluation of internal financial controls and risk management systems.

12. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.

13. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.

14. Discussion with internal auditors, of any significant findings and follow-up thereon.

15. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.

16. 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.

17. 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 credito₹

18. To review the functioning of the Whistle Blower mechanism.

19. Approval of appointment of CFO after assessing the qualifications, experience and background, etc. of the candidate.

20. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

Review of information by AC (mandatory)

1. Management discussion and analysis of financial condition and results of operations;

2. Statement of significant RPTs (as defined by the AC), submitted by management;

3. Management letters/letters of internal control weaknesses issued by the statutory auditors;

4. Internal audit reports relating to internal control weaknesses; and

5. The appointment, removal and terms of remuneration of the Chief internal auditor.

6. Statement of deviations [referred to in para 2.1.17]:

1. Quarterly statement of deviation including report of monitoring agency, if applicable, submitted to SE in terms of Reg.32(1)

2. Annual statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice in terms of Reg.32(7)

Role of NRC as per Sch II of Listing Regulations, inter alia, includes:

1. Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the BoD a policy relating to the remuneration of the directors, key managerial personnel and other employees;

2. Formulation of criteria for evaluation of performance of IDs and the BoD;

3. Devising a policy on Board diversity;

4. Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the BoD their appointment and removal.

5. whether to extend or continue the term of appointment of the ID, on the basis of the report of performance evaluation of IDs