Corporate Governance

Corporate Governance is the system by which the corporate shall be managed more transparently and efficiently. Corporate governance is about promoting corporate fairness, accountability and should be best interest of stakeholders.

Corporate Governance is the plans, policies and procedures framed by management to achieve its objective and prevent the frauds. It will help to strengthen the existing anti-fraud control by raising the awareness across the Company. Corporate Governance create the healthy and fair Corporate Culture, spread awareness amongst employees and educate them on risks faced by the Company. Its promote an open and transparent communication culture, promote zero tolerance to fraud. The corporate governance describe the roles and responsibilities of the board, audit committee, or other appropriate board committee and management.

Corporate governance ensures that enterprises create maximum wealth and growth for providing maximum benefits to all stakeholders and enhancing its wealth creation to maintain sustainability.

Evidence of Corporate Governance from Arthashastra

kautilya describe the fourhold duty of a king -

Raksha , literally mean protection, in corporate world it can be equated risk management aspect, simply to say how to identify, evaluate and minimize the risk as well as implement the risk management decisions

Vriddhi, means growth, in the present day it can be equated to stakeholder value enhancement. 

Palana, means compliance it can be equated compliance of law.

Yogakshema, means well being, it can be equated to corporate social responsibility

Sarbanes Oxley Act has been passed in U.S to enhance corporate governance norms & prevent corporate frauds.

The provision of corporate governance  has to be comply by the listed  entities as follows:-

 The Board of Directors and composition of Board

(a) The board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and 50% of the board should be non-executive directors of the Company.

(b) where the chairman of the board is a non-executive, at least 1/3rd of the board should be independent director and in case he is an executive director, at least 50% of the board should be comprise of independent director.

Provided that where the non-executive chairman is the promoter of the company or related of the promoter or person occupying management position at the board level or one level below the board, at least half of the  board of the company should be independent directors.

 Audit Committee, Its Composition and frequency of its meeting - 

Audit Committee shall be reviewed the annual financial statement, quarterly financial statement before submission to the board for approval, with management, its review the internal audit function, performance of the internal and statutory auditor e.t.c.

(a) the audit committee should have at least 3 independent director as member and two-third of the members of the audit committee should be independent Directors.

(b) all members of audit committee should be financially literate and at least one member shall have accounting or related financial management expertise.

(c) the audit committee should meet at least four times in a year and not more than 4 months elapse between two meetings. The quorum shall be either two members or 1/3rd of the members of the audit committee whichever is greater, but there should be a minimum of 2 independent members present.

 Nomination and Remuneration Committee - 

the committee shall constitute with minimum three directors and all directors of the committee should be non-executive director with at least 50% of the directors should be independent directors.

 Stakeholder Relationship Committee - the listed entity shall be constitute the stakeholder committee for the redressal of grievances of the shareholders, debenture holders and other security holders.  

 Risk Management Committee -  Every listed entities should be constitute a risk management committee which shall comprise of the members of the board as its members.

Vigil machanism - The vigil machanism shall be established for directors and employees that they can easily report against any fraud or misconduct to the chairperson of the audit committee.

Related Party Transaction - All related party  transaction shall require prior approval of the audit committee. audit committee may grant the omnibus approval for related party transaction proposed to be entered into by listed company.

Subsidiary Companies - At least one independent director of the holding company should be a director of the board of the material non-listed Indian subsidiary company. 

Every listed entities are required to submit quarterly progress report within 15 days from the close of each quarter to respective administrative authority .

Contact

Simpal Singh

Email - cssimpalsingh@gmail.com

Section 188 - Related Party Transaction

Related Party Transaction is a transaction in which the Company shall enter into contract or arrangement with Related Party, subject to Board's Approval or Shareholder's Approval as the case may be.

188(1) Except with consent of the Board of directors given by resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with related party with respect to - 

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind ; 

(c) leasing of property of any kind ;

(d) availing or rendering of any services ;

(e) appointment of any agents for purchase or sale of goods, materials, services or property ;

(f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associates company ; and

(g)underwriting the subscription of any securities or derivatives thereof, of the Company.

Related party transaction shall not be entered into any contract or transaction without obtaining Board Resolution/shareholder's Resolution as the case may be, as mentioned below ;

Board's Approval : The Company is required to obtain Board's approval for entering into any contract or arrangement with related party, and company also require to comply certain conditions specified under rule 15 of Companies (meetings of Board and its Powers) Rules, 2014

Prior Shareholder's Approval : The Company is required to obtain prior approval of the shareholder through Resolution*, where transactions exceeds the limits prescribed under rule 15(3) of Companies (Meeting of Board and its Powers) Rules 2014 

*[the Resolution Substituted for the words "Special Resolution" by the Company (Amendment) Act, 2015 dated 26th May, 2015 w.e.f 29.05.2015

For the purpose obtaining approval of shareholders, check whether the limit of transactions exceed the threshold limits as mentioned below:- 

(a) as contract or arrangements with respect to clauses (a) to (e) of section 188(1), with criteria as mentioned below -
Rules	Transactions	Limits
15(3)(a)(i)	sale, purchase or supply of any goods or materials, directly or through appointment of agent as mentioned in clause (a) and clause (e) respectively of section 188(1);	exceeding  10% of the turnover of the company OR rupees  100 crore, whichever is lower
15(3)(a)(ii)	selling or otherwise disposing of or buying property of any kind, directly  or through appointment of agent. As mentioned in clause (b) and clause (e) respectively of section 188(1)	exceeding  10% of the net worth of the company OR rupees  100 crore, whichever is lower
15(3)(a)(iii)	leasing of property of any kind, as mentioned in clause (c)  of section 188(1)	exceeding  10%  of the net worth of the company OR rupees  100 crore, whichever is lower
15(3)(a)(iv)	availing or rendering of any services, directly or through appointment of agent, as mentioned in clause (d) and clause (e) respectively of section 188(1)	exceeding  10%  of the turnover of the company or rupees 100 crore, whichever is lower
15(3)(b)	such related party’s appointment to any office or place of profit in the company, its subsidiary company or associates  company, as mentioned in clause (f) of section 188(1)	at a monthly remuneration exceeding    2.5 lakhs rupees
15(3)(c)	remuneration for underwriting the subscription of any securities or derivatives thereof, of the company, as mentioned in clause of (g) of section 188(1)	Exceeding  1% of the networth

Explanation -

1. It is hereby clarified that the limits specified in sub clause (i) to (iv) shall apply for transaction or transactions to be entered either individually or taken together with the previous transactions during a financial year.

2. The Net worth or Turnover referred in the above sub - rules shall be computed on the basis of the Audited Financial Statement of the Preceding Financial Year

Exemption from shareholder's approval: The following transactions are not required to obtain shareholder's approval, where the transaction made - 

(i) in the ordinary course of business and on arm's length basis 

(ii) transactions  between holding Company and its wholly owned subsidiaries whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval [vide Companies (Amendment) Act, 2015] 

Explanations - 

1. The phrase "Ordinary course of business" is not defined under Companies Act, 2013 or rules made thereunder. It seems that ordinary course of business will cover the usual transactions in which the company regularly deals and the company repeatedly enter into such transactions for the purpose of its business or the transaction is necessary, normal and incidental to business. The assessment of whether a transaction is in ordinary course of business is very subjective, judgmental and can vary on case to case basis giving consideration to nature of business and objects of the entity.

2. Arm's Length basis means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Prior Audit Committee approval : A Company require approval of the audit committee on all relates party transactions and subsequent modifications thereto. This is irrespective of whether they are in the ordinary course of business and consummated at arm's length price or they are below prescribed thresholds.

Exemption to a Private Company : Sub-clause (viii) of clause (76) of section 2, i.e.

(viii) any company which is-

(a) a holding, subsidiary or an associates company of such company OR

(b) a subsidiary of a holding company to which it is also a subsidiary 

shall not apply with respect to section 188 dealing with related party transactions [Notification dated 5th June, 2015]

Voting Power : No member of the company shall vote on such a resolution in which they are interested, to approve any related party transaction, if such member is a related party.

Private companies exempted from above provisions of section 188(1): 

if a private company enters into any contract or arrangement with a related party requiring prior approval of the company, the related parties are now allowed to vote on such resolution [Notification dated 5th June, 2015]

with regard to listed entities, SEBI has notified SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 which requires passing of ordinary resolution instead of special resolution in case of all material related party transactions subject to related parties abstaining from voting on such resolutions, in line with the provisions of the Companies Act, 2013 [Reg 23 of Listing Obligations Regulations, 2015]

Reference in Board's Report: Every contract or arrangement entered into with a related party will be referred to in the Board's report to shareholders, along with justification for entering into such transactions.

Contract Voidable if approval of Board/Members is not taken: 

Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution and if it is not ratified by the Board/shareholders within 3 months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board.

Disqualification : Any violation of section 188 can lead to disqualification for appointment as a director under section 164 of the Companies Act, 2013

Required to Make the Entry in the the MBP-4 : Company is required to make entries in the register maintain under format MBP-4, pursuant to section 189(1) read with rule 16(1) of companies (Meeting of Board and its Powers) Rules, 2014

Offence & Penalty

Any director or other employee of a Company, who had entered into or authorized the contract or arrangement in violation of the provisions of this section shall, 

1. in case of listed company, be punishable with imprisonment which extend to 1 year or with fine which shall not be less than 25000 but which may extend 5 lakh rupees, or with both; and

2. in case of any other company, be punishable with fine which shall not be less than 25000 rupees but which may extend to 5 lakh rupees.

References ; Companies Act, 2013

Contact

Simpal Singh

Mailid ; cssimpalsingh@gmail.com

Mob. 8510844867