CGVE/U1 Topic 2 Code of Corporate Practices
To promote good corporate governance, SEBI (Securities and Exchange Board of India) constituted a committee on corporate governance under the chairmanship of Kumar Mangalam Birla. On the basis of the recommendations of this committee, SEBI issued certain guidelines on corporate governance; which are required to be incorporated in the listing agreement between the company and the stock exchange.
An overview of SEBI guidelines on corporate governance is given below, under appropriate heads:
(a) Board of Directors:
Some points in this regard are as follows:
(i) The Board of Directors of the company shall have an optimum combination of executive and non-executive directors.
(ii) The number of independent directors would depend on whether the chairman is executive or non-executive.
In case of non-executive chairman, at least, one third of the Board should comprise of independent directors; and in case of executive chairman, at least, half of the Board should comprise of independent directors.
The expression ‘independent directors’ means directors, who apart from receiving director’s remuneration, do not have any other material pecuniary relationship with the company.
(b) Audit Committee:
Some points in this regard are as follows:
(1) The company shall form an independent audit committee whose constitution would be as follows:
(i) It shall have minimum three members, all being non-executive directors, with the majority of them being independent, and at least one director having financial and accounting knowledge.
(ii)The Chairman of the committee will be an independent director.
(iii)The Chairman shall be present at the Annual General Meeting to answer shareholders’ queries.
(2) The audit committee shall have powers which should include the following:
1.To investigate any activity within its terms of reference
2.To seek information from any employee
- To obtain outside legal or other professional advice
- To secure attendance of outsiders with relevant expertise, if considered necessary.
(3) The role of audit committee should include the following:
(i) Overseeing 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.
(ii) Recommending the appointment and removal of external auditor.
(iii) Reviewing the adequacy of internal audit function
(iv) Discussing with external auditors, before the audit commences, the nature and scope of audit; as well as to have post-audit discussion to ascertain any area of concern.
(v) Reviewing the company’s financial and risk management policies.
(c) Remuneration of Directors:
The following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report:
(i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock options, pension etc.
(ii) Details of fixed component and performance linked incentives, along with performance criteria.
(d) Board Procedure Some Points in this Regards are:
(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4 months between any two meetings.
(ii) A director shall not be a member of more than 10 committees or act as chairman of more than five committees, across all companies, in which he is a director.
A Management Discussion and Analysis Report should form part of the annual report to the shareholders; containing discussion on the following matters (within the limits set by the company’s competitive position).
(i) Opportunities and threats
(ii) Segment-wise or product-wise performance
(iii) Risks and concerns
(iv) Discussion on financial performance with respect to operational performance
(v) Material development in human resource/industrial relations front.
Some points in this regard are:
(i) In case of appointment of a new director or reappointment of a director, shareholders must be provided with the following information:
1.A brief resume (summary) of the director
2.Nature of his expertise
- Number of companies in which he holds the directorship and membership of committees of the Board.
(ii) A Board Committee under the chairmanship of non-executive director shall be formed to specifically look into the redressing of shareholders and investors’ complaints like transfer of shares, non-receipt of Balance Sheet or declared dividends etc. This committee shall be designated as ‘Shareholders / Investors Grievance Committee’.
(g) Report on Corporate Governance:
There shall be a separate section on corporate governance in the Annual Report of the company, with a detailed report on corporate governance.
The company shall obtain a certificate from the auditors of the company regarding the compliance of conditions of corporate governance. This certificate shall be annexed with the Directors’ Report sent to shareholders and also sent to the stock exchange.