PROVISIONS RELATING TO CORPORATE GOVERNANCE

1. PROVISIONS UNDER COMPANIES ACT, 2013

1. Composition of Board of Directors

a. Compositions
• The Companies Act, 2013 provides that a public as well as a private company can have a
• Maximum of 15 directors on the Board and appointing more than 15 directors would
require approval of shareholders through a special resolution in the General Meeting.
• It also provides for appointment of at least 1 woman director on the Board for such class
or classes of companies as may be prescribed.
• The Act makes it mandatory for a company to have minimum 1 director who has stayed
in the country for a period of 182 days in the previous calendar year.

b. Quorum
• The quorum for a meeting of the Board of Directors of a company shall be 1/3 rd of its
total strength or two directors, whichever is higher.
• The continuing directors may act notwithstanding any vacancy in the Board.
• The number of directors who are not interested directors and present at the meeting,
being not less than two, shall be the quorum during such time.
• Where a meeting of the Board could not be held for want of quorum, then, shall
automatically stand adjourned to the same day at the same time and place in the next
week or if that day is a national holiday, till the next succeeding day.
c. Voting
• An affirmative vote of the majority of members present shall be necessary for the passage
of any motion.
• All voting shall be by voice or by show of hands.
• In an instance when a member is compelled to "recuse" himself from voting because of a
personal interest can "recuse" himself from voting.
• There shall be no representation by proxy of any member of the Board at any time.
• However, the President of the Board shall not cast a vote for the appointment to fill a
vacancy on the Board except in the case of a tie vote, in which case the President shall
cast a vote to break the tie.

d. Number of Meetings

Frequency of Meetings:

1. First Meeting: First Meeting of Board of Directors within 30 (Thirty) days from the date of
Incorporation of company.
2. Subsequent Meetings:
(a) One person Company, Small company and Dormant company:
• At least one meeting of Board of directors in each half of calendar year
• Minimum Gap B/W two meetings at least 90 days.
(b) Other than Companies mentioned above:
• Minimum No. of 4 meetings of Board of Director in a calendar year
• Maximum Gap B/W two meetings should not be more the 120 days.
e. Independent Directors

As per Clause 49 of the Listing Agreements an ‘Independent Director’ shall mean non-
executive director of the company who:

 Apart from receiving director’s remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its senior management or
its holding company, its subsidiaries and associated companies;

 Is not related to promoters or management at the board level or at one level below the
board;

 Has not been an executive of the company in the immediately preceding three financial
years;

 Is not a supplier, service provider or customer of the company. This should include
lessor-lessee type relationships also; and

 Is not a partner or an executive of the statutory audit firm or the internal audit firm that is
associated with the company, and has not been a partner or an executive of any such firm
for the last three years. This will also apply to legal firm(s) and consulting firm(s) that
have a material association with the entity.

 Is not a substantial shareholder of the company, i.e. owning two percent or more of the
block of voting shares.

Selection of an Independent Director:

• The selection and appointment of independent directors should be transparent and on
certain valued basis.
• Therefore, the companies should have an entirely independent nomination committee
which should determine the qualifications for Board membership and should identify and
evaluate candidates for nomination to the Board.
• It would be more appropriate that the code of Corporate Governance of a company
should specifically include the qualifications and attributes that the company seeks of an
independent director.
• A critical element of a director being independent is his independence to the management
both in fact and perception by the public.
• In considering the independence, it is necessary to focus not only on whether a director's
background and current activities qualify him as independent but also whether he can act
independently of the management.
 • In other words, the independent directors must not only be independent according to the
legislative and stock exchange listing standards but also independent in thought and
action i.e. qualitatively independent.
• Such qualitative independence will ensure that directors think and act independently
without regard to management's influence.

Roles and Responsibilities of Independent Directors

• The role and responsibility of an individual director, of course, would depend upon the
nature of his directorship.
Broadly, there are three types of directors.
• Full time, executive director who is normally a paid employee of a company having some
functional responsibility.
• Non-executive but non independent director who is normally a promoter of the company
or having high stakes in the company.
• And finally independent directors who are not full time directors. There is another class
of directors known as nominee directors representing some interests like lending
institutions etc.

Duties of Independent Directors

• To act in accordance with company’s articles;
• To act in good faith to promote the objects of the company for the benefit of the members
as a whole, and the best interest of the company, its employees, shareholders, community
and for protection of the environment;
• To exercise duties with reasonable care, skill and diligence, and exercise of independent
judgment.
The director shall not:
• Involve in a situation in which he may have direct or indirect interest that conflicts, or
may conflict, with the interest of the company (conflict of interest);
• Achieve or attempt to achieve any undue gain or advantage, either to himself or his
relatives, partners or associates.
• Assign his office and any assignment so made shall be void.
2. Committees

a. Audit Committee
The Board of directors of every listed company and the following classes of companies, as
prescribed under Rule 6 of Companies Rules,2014 shall constitute an Audit Committee.
• All public companies with a Paid-Up Capital of Rs.10 Crores or more.
• All public companies having a Turnover of Rs.100 Crores or more.

Audit Committee Requirements under Companies Act 2013:

• Shall have minimum three independent directors on the board along with the chairperson
who should be able to read and understand the financial statement.
• Chairman of the committee shall be an independent director
• To meet at least thrice a year
• Company Secretary to act as secretary to the committee
• The Audit Committees of the Companies Act, 2013 has undertaken both private and
public companies within its ambit to constitute audit committees.

Functions of Audit Committee:

• To give recommendations for appointment, remuneration and terms of appointment of
auditors of the company.
• Review and monitor the auditor’s independence and performance, and effectiveness of
audit process.
• Examination of the financial statement and the auditors’ report approval or any
subsequent modification of transactions of the company with related parties.
• Scrutiny of inter-corporate loans and investments; valuation of undertakings or assets of
the company, wherever necessary.
• Evaluation of internal financial controls and risk management systems.
• Monitoring the end use of funds raised through public offers and related matters; and
• Authority to investigate into any matter in relation to the items specified above or any
such matter referred to it by the Board.
b. Nomination and Remuneration Committee
 Committee should consist of three or more non-executive directors and at least one of the
members should be independent directors.

 It formulates :

 The criteria for selection of the directors,

 Policy relating to the remuneration for the directors, Key Managerial Personnel
and other employees. 

c. CSR Committee
• Consist of minimum of three directors with an independent Director
• The CSR committee should formulate, monitor and recommend the CSR policy to the
Board.
• Board has to approve CSR policy and recommend the amount of expenditure to be
incurred on the CSR activities and disclose the CSR contents in the board’s report and
place CSR Policy on the company website.

d. Stakeholder Relationship Committee

• The Act protects all security holders in addition to equity investors.
• It 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.
• It will be chaired by a non-executive director and consist of such other members as may
be decided by the board.
• The committee will consider and resolve the grievances of security holders of the
company.
e. Risk Management Committee
• The board of directors shall constitute a Risk Management Committee.
• The majority of members of the Risk Management Committee shall consist of members
of the board of directors.
• Every Company is required to develop and implement a Risk Management Policy for the
Company, including identification of elements of risk, which in the opinion of the Board
may threaten the existence of the Company.
• Board’s Report of the Company shall contain a statement in this regard.

3. Other Audits

a. Internal Audit

• Companies of certain class are required to appoint an internal auditor for internal auditing
of the functions and activities of the company.
• The board should either appoint Chartered Accountant or Cost Accountant or any other
professional for carrying out internal audit.
• The Central government has the authority to prescribe the manner and the time period in
which the audit will be conducted and the structure of reporting the same to the board.

b. Secretarial Audit
• A Public Company is required to appoint a Secretarial Auditor and is required to annex,
with its Board’s Report, a Secretarial Audit Report, given by a Company Secretary in
practice.
• Further, the Board of Directors are required to explain in full any qualification or
observation or other remarks made by the Secretarial Auditor in his Report.
c. Cost Audit
• Central government may direct to conduct cost audit in respect of companies engaged in
the production of such goods or providing such services and have a net worth or turnover
as may be prescribed.
• The Cost auditor shall be appointed by the Board and the remuneration of cost auditor
shall be ratified by the members in General Meeting.
• Cost audit shall be done by a cost accountant in practice.
• After receiving the cost audit report, the company shall furnish full information and
explanations on every reservations or qualifications to CG within 30 days of receipt of
the cost audit report.

4. Disclosure Requirements

a. Related Party Transaction

• Can be entered into only if it is approved by a special resolution at the general meeting.
• A member of the company, who is a related party, cannot vote on such special resolution 
• Every contract or arrangement entered into with a related party shall be mentioned in the
board's report along with the justification for entering into such contract or arrangement.
• The central government may prescribe additional conditions for entering into related
party transactions.
• Further, every RPT shall require the approval of audit committee and board of directors.
• Violations of these provisions would be punishable with fine or imprisonment or both.

b. Conflict of Interest
• A lawyer represents a client in a civil dispute while accepting fees from litigants who
hold the opposing point of view.
• A purchasing agent hires his brother-in-law to provide vending services to the company
lunch areas.
• An employee starts a company that provides similar services to similar clients as those of
his full-time employer. This is especially conflict of interest when an employer has had
his sign a non-compete agreement.
 • An employee who is a member of a company employee selection team fails to disclose
that he is related to a job candidate whom the company team is considering for a position.
• A manager provides paid consulting services on the weekend to a company customer or
supplier.
• A purchasing agent accepts trips and gifts from a vendor and then selects the vendor's
products for purchase by the company.
• An employee accepts free gifts and free products from a training and development
company and then recommends the purchase of these products without comparing them
to comparable products from other vendors.

5. CEO / CFO Certification

The CEO, i.e. the Managing Director or Manager (in their absence, a whole time director)
appointed in terms of the Companies Act, 2013, and the CFO, i.e. the whole-time Finance
Director or any other person heading the finance function discharging that function, to certify
to the Board specified particulars.

a. Directors’ Responsibility Statement

According to Section 134 (5) of the Companies Act 2013, the directors hereby confirm that:
• In the preparation of the annual accounts, the applicable accounting standards had been
followed along with proper explanation in relation to material disclosures.
• The directors had selected such accounting policies and applied them consistently and
made judgements and estimates that are reasonable so as to give a fair view of the state of
affairs of the company at the end of the financial year and of the profit and loss of the
company for that period.
• The director had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the act for safeguarding the
assets of the company and for preventing fraud and other irregularities.
• The directors had prepared the annual accounts on a going concern basis and
• The directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
6. Insider Trading
• No person, including any director of a company shall enter into insider trading.
• Insider trading by any director or key managerial personnel of a company is punishable
by imprisonment of up to 5 years and fine up to Rs. 25 crore or three times the amount of
profits made out of insider trading, whichever is higher, or both.
Insider trading means:
a. An act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal
in any securities, by any director or key managerial personnel or any other offices of the
company is reasonably expected to have access to any non-public price sensitive
information in respect of securities of company; or

b. An act of counselling about processing or communicating directly or indirectly any non-

public price sensitive information to any person.
• “Price-Sensitive information” means any information which relates directly or indirectly
to a company and which is published, is likely to materially affect the price of securities
of the company.

7. Whistle Blower Rights

• Whistle Blowing refers to the unauthorized disclosure of the unethical, illegal or corrupt
practices by an employee to protect the public interest.
• It is the act, for an employee or a former employee, of disclosing what he believes to be
unethical or illegal behavior to higher management (Internal Whistle Blowing) or to an
external authority or the public (External Whistle Blowing)
• Every listed company should establish a vigil mechanism.
• The Mechanism shall facilitate Directors and employees to report genuine concerns and
provide adequate safeguards against victimization of persons who use such mechanism
• Make provision for direct access to the chairperson of the Audit Committee in
appropriate and exceptional cases.
• The details of establishment of Vigil Mechanism shall be disclosed by the Company on
its website and in the Board’s Repo.
8. Serious Fraud Investigation Officer (SFIO)
• The central government may assign investigation into the affairs of a company to SFIO
• On receipt of a report of the registrar or inspector,
• On intimation of a special resolution passed by a company that its affairs are
required to be investigated,
• In public interest, or
• On request from any department of the central government or state government.
• SFIO will have the power to arrest in certain offences, which attract punishment for
fraud.
• If any case has been assigned by the Central government to SFIO for investigation, no
other investigating agency will proceed with investigation in such cases.
• Stringent penalties are prescribed for fraud related offences.

9. Reports of Compliance
A company which has been incorporated in India must ensure compliance with the
Companies Act, 2013 with respect to the following:
• Appointments, Qualification, Remuneration and Retirement of directors of the company.
• Aspects such as how to conduct Board Meetings and Shareholder Meetings.
• The preparation and presentation of annual accounts and the regular maintenance of
books of accounts.
Some important compliances post incorporation are as follows:
• Once the incorporation certificate is obtained, a separate legal entity for the company is
established.
• As soon as the company gets its incorporation certificate, within 30 days one of the
directors must issue the notice for the first board meeting of the company.
 2. The Narayanamurthy Committee (2003) Recommendations

Mandatory Recommendations
The committee on corporate governance headed by Shri Narayanamurthy was constituted by
SEBI, to evaluate the existing corporate governance practices and to improve the practices. The
committee’s recommendations are based on the relative importance, fairness, accountability,
transparency, ease of implementation, verifiability and enforceability related to Audit
Committee, audit reports, independent directors, related practices, risk management, director
compensation, codes of conduct and financial disclosures.

a. Audit Committee
Review of information by audit committee regarding:
• Having financial statements and draft audit reports including quarterly / half-yearly
information.
• Management discussion and analysis of financial condition and the results of operations.
• Report relating to compliance with laws and risk management.
• Financial literacy of members of Audit Committee
• Management letters of internal control weakness issued by statutory or internal auditors
and records of related party transactions.

b. Related Party Transactions

• An entity to be considered as related party it is a related party under section 2(76) of the
Companies Act 2013 or a related party under applicable Accounting Standard.
• The company is required to formulate a policy on materiality of related party transactions
and also on dealing with Related Party Transactions. A transaction with a related party is
considered material if the transaction/transactions to be entered into individually or taken
together with previous transactions during a financial year, > 10% of the annual
consolidated turnover of the company as per the last audited financial statements of the
company.
 • All Related Party Transactions require prior approval of the Audit Committee. However,
Audit Committee may grant omnibus approval for Related Party Transactions proposed
to be entered into by the Company subject to specified conditions.
• All material Related Party Transactions require approval of the shareholders through
special resolution and all the entities falling within the definition of related parties shall
abstain from voting on such resolutions, whether the entity is a party to the particular
transaction or not.
• The provision mentioned at 3 and 4 above are not applicable to the following:
• Transaction entered into between 2 government companies;
• Transactions entered into between a holding company and its wholly owned
subsidiary whose accounts are consolidated with such holding company and
placed before the shareholders at the general meeting for approval.

c. Proceeds from Initial Public Offerings

• Companies raising money through an initial public offering (IPO), should disclose to the
Audit Committee the uses / applications of funds by major categories on a quarterly
basis.
• On an annual basis, the company shall prepare a statement of funds used for purposes
other than those stated in the prospectus.
• The Audit Committee shall make appropriate recommendations to the boards to take up
steps in this matter.

d. Risk Management
• The company is required to lay down procedures to inform Board members about the risk
assessment and minimization procedures.
• The Board is responsible for framing, implementing and monitoring the risk management
plan for the company.
• The company through its Board is required to also constitute a Risk Management
Committee and define the roles and responsibilities of the Risk Management Committee
and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit.
• Majority of this committee to consist of the Board members.
 • Senior executives of the company may be the members of this committee; chairman of
this committee to be a Board member.

e. Code of Conduct
• The Board is required to lay down a code of conduct for all Board members and senior
management of the company and post the same on the website of the company.
• All Board members and senior management personnel are required to affirm compliance
with the code on an annual basis. The Annual Report of the company to contain a
declaration to this effect signed by the CEO.
• The Code of Conduct is required to suitably incorporate the duties of independent
directors as laid down in the Companies Act, 2013.
• An independent director will be held liable, only in respect of such acts of omission or
commission by a company which had occurred with his knowledge, attributable through
Board processes, and with his consent or connivance or where he had not acted diligently
with respect of the provisions contained in the Listing Agreement.

f. Nominee Directors
• While the Listing Agreement stated that the nominee directors appointed by an institution
that has invested in or lent to the company are deemed to be independent directors, CA
2013 states that a nominee director cannot be an independent director. However, the
SEBI Circular in line with the provisions of CA 2013 has excluded nominee directors
from being considered as independent directors.
• CA 2013 defines nominee director as a director nominated by any financial institution in
pursuance of the provisions of any law for the time being in force, or of any agreement,
or appointed by the Government or any other person to represent its interests.

g. Compensation to Non-Executive Directors

Compensation to non-executive directors to be approved by the in the general meeting:
• Restrictions placed on grant of stock option.
• Requirement of proper disclosures of details of compensation.
h. Whistle Blower Policy
• The company is required to establish a vigil mechanism for directors and employees to
report concerns about unethical behavior, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy.
• This mechanism should also provide for adequate safeguards against victimization of
director(s)/ employee(s) who avail of the mechanism and also provide for direct access to
the Chairman of the Audit Committee in exceptional cases.
• The details of establishment of such mechanism are required to be disclosed by the
company on its website and in the Board’s report.

Non-Mandatory Recommendations
• The non-mandatory requirements given in Annexure XII may be implemented as per the
discretion of the company. However, the disclosures of the compliance with mandatory
requirements and adoption (and compliance)/non-adoption of the non-mandatory
requirements to be made in the section on corporate governance of the Annual Report.
• The non-mandatory requirements as specified in Annexure XII to the listing agreement
are:
• A non-executive Chairman may be entitled to maintain a Chairman’s office at the
company’s expense and also allowed reimbursement of expenses incurred in
performance of his duties.
• A half-yearly declaration of financial performance including summary of the
significant events in last 6 months, may be sent to each household of
shareholders.
• Company may move towards a regime of unqualified financial statements.
• The company may appoint separate persons to the post of Chairman and
Managing Director / CEO.
• The Internal auditor may report directly to the Audit Committee.