Clause 49 New challenges

1
Clause 49 - New challenges

• Presentation
• by
• Anil Sharma, FCA

2
CORPORATE GOVERNANCE

• Good governance- expectation of stakeholders
• Enhancing business performance and
  accountability
• Governance code for corporate
• A structure within specific legal, regulatory and
  institutional environment through which
• Objectives are set
• Means of attaining those objectives are
  determined
• performance monitoring is established
• Disclosure of timely and accurate information is
  ensured.

3
CORPORATE GOVERNANCE

• Historical perspective
• International
• OECD Task Force
• Sarbanes Oxley Act
• National
• Amendments in the Companies Act
• Accounting Standards by ICAI
• SEBI initiatives

4
CORPORATE GOVERNANCE- NEW CLAUSE 49

• based on SEBI circular dated Oct, 2004,
• clause 49 of the listing agreements revised by
  stock exchanges
• was to be implemented on or before 31st march
  2004
• Extended upto 31st December, 2005

5
Clause-49

• Board of Directors
• Audit committee
• Remuneration of directors
• Board Procedure
• Management
• Shareholders
• Report on Corporate Governance
• Compliance

6
1. Board of Directors

• Composition- Executive non-executive
• Not less than 50 to be non-executive
• Number of independent directors
• when there is non-executive chairman at least
  1/3rd
• When there is executive chairman
• at least ½ of the Board
• Independent director has to be an non-executive
  director

7
Independent director

• a) does not have any material pecuniary
  relationships or transactions with the company,
  its promoters, its senior management etc.
• b) not related to promoters/ management at board
  level or at one level below the board
• c) was not an executive of the company in the
  immediate three financial years.
• d) Was not a partner or an executive of audit
  firm/ legal firms or consulting firms for last
  three years.
• e) not a supplier, service provider customer or
  lessor- lessee.
• f) not a substantial shareholder of the company
  holding over 2 of the share capital.

8
NON-EXECUTIVE DIRECTOR- COMPENSATION AND
DISCLOSURES.

• Compensation/ stock options to independent
  directors to be approved by the board and prior
  approval of the shareholders is required
• A compensation philosophy and statement of
  entitled compensation in respect of independent
  directors shall be published in annual report/
  web site.
• Disclosure on annual basis regarding the shares
  held by non-executive directors
• non-executive directors to disclose their stock
  holding( both held by them or on beneficial
  basis) prior to their appointment

9
TERM OF NON-EXECUTIVE DIRECTORS

• shall not exceed nine years comprising of three
  terms of three years each running continuously.

10
CODE OF CONDUCT

• a code of conduct shall be prepared for board
  members and senior management which shall be
  posted on the website.
• board members/ senior management to affirm
  compliance of the code and the annual report
  should contain such a declaration signed by
  chairman.

11
Periodical Review by BOD

• Board to make periodical review of compliance
  report of all laws applicable to the company and
• Steps taken by the company to rectify instances
  of non-compliance

12
2. AUDIT COMMITTEE

• all members of the audit committee shall be
  financially literate with one member having
  accounting/ financial management expertise.
• the term financially literate and accounting
  knowledge defined.
• the related party transaction will have the
  same meaning as contained in AS-18.

13
ROLE OF AUDIT COMMITTEE

• oversight of the companys financial reporting
  processes and the disclosure of its financial
  information to ensure that the financial
  statement is correct, sufficient and credible.
• recommending the appointment and removal of
  external auditor, fixation of audit fee and also
  approval for payment for any other services.
• Review annual as well as quarterly financial
  statements with the management before submitting
  the same to BOD

14
ROLE OF AUDIT COMMITTEE

• discussion with external auditors before the
  audit commences about nature and scope of audit
  as well as post audit discussion to ascertain any
  area of concern.
• reviewing the companys financial and risk
  management policies.
• to look into the reasons for substantial defaults
  in the payment to the depositors, debenture
  holders, shareholders(in case of non payment of
  declared dividends) and creditors.
• Discussion with internal auditors any significant
  finding and follow up thereon

15
AUDIT COMMITTEE MANDATORY REVIEWS

• financial statement / audit report / quarterly /
  half- yearly financial information.
• MDA and results of operation
• legal compliance and risk management
• observations of statutory / internal auditors.
• appointment / removal of chief internal auditor.
• record of significant related party transactions

16
POWERS OF AUDIT COMMITTEE

• to investigate any activity within its terms of
  reference
• to seek information from any employee
• to obtain outside legal or other professional
  advice.
• to secure attendance of outsiders with relevant
  expertise, if it considers necessary.

17
3. WHISTLE BLOWER POLICY

• company to have an internal policy on access to
  audit committee by employees on unethical and
  improper practice.
• the policy to be communicated to employees and
  included in the HR manual.
• company shall affirm that it has not denied any
  personal access to audit committee and has
  provided protection to whistle blowers from
  unfair termination etc.
• the affirmation shall from part of the board
  report on corporate governance.

18
4. SUBSIDIARY COMPANIES

• one independent director of holding company to be
  on the board of non-listed subsidiary company.
• audit committee of the holding company shall
  review financial statements / investments of
  subsidiary company.
• board minutes of subsidiary company shall be
  placed for review by the board of holding
  company.
• directors report of the holding company shall
  confirm that the affairs of the subsidiary
  companies have been reviewed

19
5. DISCLOSURES ACCOUNTING TREATMENT

• management shall disclose justifying the
  different accounting treatment than the
  accounting standards as a foot note of financial
  statement.

20
DISCLOSURESCONTIGENT LIABILITY

• the management shall provide clear description of
  each material contingent liability and its risk
  alongwith auditors comments on managements views.
  this should be highlighted in significant
  accounting policy/ notes and accounts / auditors
  report.

21
DISCLOSURESRELATED PARTY TRANSACTIONS

• Summary of related party transactions, their
  basis bifurcating transactions in normal course
  of business and individual transactions not in
  normal course of business and
• Details and managements justification for any
  material transaction not on arms length basis

22
DISCLOSURESBY MANAGEMENT

• By senior management of all material financial
  and commercial transactions, where they have
  personal interest

23
DISCLOSURESRISK ASSESSMENT

• Risk management procedure to be laid down for the
  management and to be reviewed periodically
• A quarterly report certified by Compliance
  Officer on business risk and measures to minimise
  risks an limitations to the risk taking capacity
  of the company
• This document shall be formally approved by the
  Board.

24
6. CERTIFICATION BY CEO/CFO TO THE BOARD

• That they have reviewed the financial statements
  and cash low statement for the year and
• These do not contain any materially untrue
  statement or omit any material fact
• There were no fraudulent, illegal transactions
  violative of the cos Code of Conduct
• They accept responsibility for establishing and
  maintaining internal controls and have evaluated
  their effectiveness.

25
7. REPORT ON CORPORATE GOVERNANCE TO THE STOCK
EXCHANGES

• a compliance report within 15 days from the close
  of the quarter in the revised format.
• the report contains the entire provisions of the
  new corporate governance clause.
• a separate cell is being set up by the stock
  exchanges to monitor the compliance of the
  provisions.

26
Thank you.