REPORTS OF IMPORTANT COMMITTEES

ON CORPORATE GOVERNANCE –

K.M. BIRLA COMMITTEE,

NARESH CHANDRA COMMITTEE,
N.R. NARAYAN MURTHY COMMITTEE,
J.J. IRANI COMMITTEE
Overview:
This session will cover the detailed
discussion on the contents of the
above reports. The instructor is
requested to discuss the gist of the
reports and its application in
corporate sector for good corporate
governance.
Kumar Mangalam Birla
Committee Report
Securities and Exchange Board of India
(SEBI) appointed a committee on corporate
governance on May 7, 1999 with eighteen
members under the chairmanship of Shri
Kumar Mangalam Birla to promote and raise
the standards of corporate governance. In
early 2000, the SEBI Board accepted and
ratified key recommendations of this
committee and these were incorporated into
Clause 49 of the Listing Agreement of the
Stock Exchanges.
Mandatory recommendations

1. Applicability: Applicable to all listed companies with paid

up share capital of Rs. 03 Crore and above.

2. Board of Directors: The Board of Directors of a

company must have an optimum combination of executive
and non-executive Directors with not less than 50 percent of
the Board comprising of non-executive Directors. The
number of independent Directors should be at least one third
in case the company has a non-executive Chairman and at
least half of the Board in case the company has an executive
Chairman.
Shri Kumar Mangalam Birla Committee defines independent
directors as directors who apart from receiving directors’
remuneration do not have any material pecuniary
relationship or transactions with the company, its
promoters, its management or its subsidiaries, which in
judgment of the Board may affect independence of
judgment of the director.
3. Audit Committee:
· A qualified and independent Audit Committee should be set up to
enhance the credibility of the financial disclosures and to promote
transparency.
· The Audit Committee should have minimum 3 members, all being
non-executive directors, with majority being independent, and at least one
Director having Financial and Accounting knowledge.
· The Chairman should be an independent Director and must be present
at the Annual General Meetings to answer shareholders queries.
· The Audit Committee to invite such of the executives, as it considers
appropriate (and particularly the head of the finance function). In addition
to head of internal audit, representative of the external auditor for the
meetings.
· Audit Committee to meet at least thrice a year with a gap of not more
than six months, with one meeting necessarily before the finalization of
annual accounts.
· The quorum should be either two members or one third, whichever is
higher with minimum of two independent directors.
· Audit Committee specifically function as the bridge between the
Board, the Statutory Auditors and the Internal Auditors.
4. Remuneration Committee of the Board:

· The Board of Directors to decide the remuneration of

non executive directors.
· Full disclosure of the Remuneration package of all the
directors covering salary, benefits, bonuses, stock options,
pension, fixed component, performance linked incentives
along with the performance criteria, service contracts, notice
period, severance fees etc. to be made in the section on
corporate governance of the annual report.
5. Board procedures:
The Board meetings to be held at least four times a year
with a maximum time gap of four months between any
two meetings. Minimum information on annual
operating plans and Capital Budgets, Quarterly Results,
Minutes of Meetings of Audit Committee and other
Committees, information on recruitment and
remuneration of senior officers, significant Labor
problems, material default in financial obligations,
statutory compliance etc. should be place before the
Board.
In order to ensure total commitment to the Board
Meetings, a Director should not be a member in more
than 10 Committees and act as Chairman of more than
3 Committees across all companies in which he is a
Director.
6. Management: Management Discussions and
Analysis (MDA) report covering industry structure,
opportunities and threats, segment wise or product
wise performance, outlook, risks, internal control
system etc. are to form part of Directors’ Report or
as an addition thereto. In addition, disclosure must
be made by the Management to the Board relating
to all material financial and commercial
transactions, where they have personal interest that
may have a potential conflict with the interest of
the company.
7. Shareholders: In case of appointment of a new
Director or re-appointment of existing Director,
information containing a brief resume, nature of
expertise in specific functional areas and Companies in
which the person holds Directorship/Committee
Membership must be provided.
There is also specific recommendation of sharing of
information like quarterly results, presentation made by
the companies to analysts through company’s website.
In addition, a Board committee under the chairmanship
of a non executive director is to be formed to specifically
look into the redressing of shareholder complaints like
transfer of shares, non-receipt of accounts, non receipt of
declared dividends etc.
8. Manner of implementation: A separate section on
Corporate Governance in the Annual Reports to be
introduced covering brief statement on Company’s
philosophy on code of governance, Board of
Director, Audit Committee, Remuneration
Committee, Shareholders’ Committee, General
Body Meetings, Disclosures etc. Non compliance
of any of the mandatory recommendations with
reasons thereof and the extent of adoption on non-
mandatory recommendations highlighted to enable
the Shareholders and securities market to assess for
themselves the standards of Corporate Governance
followed by the company.
Non-Mandatory recommendations
Chairman of the Board:
The chairman’s role should in principle be different
from that of the chief executive, though the same
executive can perform both the roles. In view of the
importance of chairman’s role, a non-executive
chairman should be entitled to a chairman’s office at
the Company’s expense and also allowed
reimbursement of expenses incurred in the
performance of his duties, to enable him to discharge
his responsibilities effectively.
2.Remuneration Committee of the Board:
The company must have a credible and transparent policy in
determining and accounting for the remuneration of the
directors. The remuneration package should be good enough
to attract, retain and motivate the executive directors of the
quality required. The Board of Directors should set up a
remuneration committee, to determine on their behalf and on
behalf of the shareholders, with agreed terms of reference, the
Company’s policy on specific remuneration packages for
executive directors including pension rights and any
compensation payment. The committee should comprise of at
least three directors, all of whom should be non executive
directors, the Chairman being an independent director. All the
members must be present at the meetings for the purpose of
quorum as it is not necessary for the meeting to be held very
often. The Chairman should be present at the annual general
meeting, to answer the shareholders queries.
3.Shareholders’ Rights: Half yearly declaration of financial
performance including summary of the significant events in
the six months, should be sent to each household of
shareholders.
4.Postal Ballot: Currently, although the formality of holding the
general meeting is gone through, in actual practice only a
small fraction of the shareholders of that company do or can
really participate therein. This virtually makes the concept of
corporate democracy illusory. It is imperative that this
situation which has lasted too long needs an early correction.
In this context, for shareholders who are unable to attend the
meetings, there should be a requirement, which will enable
them to vote by postal ballot on key issues. Some of the
critical matters which should be decided by postal ballot are
given below:
· Matters relating to alteration in the memorandum of
association of the company like changes in name, objects,
address of registered office etc.
· Sale of whole or substantially the whole of the
undertaking,
· Sale of investments in the companies, where the
shareholding or the voting rights of the company exceeds 25
percent ,
· Making a further issue of shares through preferential
allotment or private placement basis,
· Corporate re-structuring,
· Entering a new business area not germane to the existing
business of the company,
· Variation in rights attached to class of securities,
Matters relating to change in management.
Shri Naresh Chandra
Committee Report
A high powered committee was constituted on
August 21, 2002 by the Ministry of Finance and
Company Affairs to address issues relating to
corporate Governance and to examine the Auditor
Company relationship and to regulate the role of
auditors. The trigger was the happenings in the US
and certain instances in India. In fact, the
spontaneity with which US responded to the high
profile corporate scams by enacting Sarbanes-Oxley
Act in a very short time, to take strong measures to
deter recurrences of such scams, made the Indian
regulators and authorities to come out with almost
similar response. It was rightly regarded that the
ongoing measures, already implemented or under
implementation were far too inadequate to combat
the deep-rooted weaknesses in the system.
The terms of reference to the committee were:
1. To examine the issues pertaining to the Auditor company
relationship to ensure the professional nature of relationship,
consider rotation of auditors/auditing partners, restriction on non
audit fee/work, procedures for appointment of auditors and
determination of audit fee etc.
2. to examine measures to ensure that the managements and
auditors actually present the true and fair statement of the affairs of
companies, to look into the measures such as personal certification
by directors, random scrutiny of accounts etc.
3. to examine the issues concerning the regulation of professions of
Chartered Accountant, Company Secretaries and Cost Accountants
in the context of serving the concerned share-holders, especially the
small investors.
4. to examine the role of independent directors and how their
independence and effectiveness can be ensured, and
The committee’s recommendations are quite comprehensive. The
committee has recognized the independence of audit as one of
the key factors of governance and has recommended suitable
measures which are briefly stated below:
1. Prohibition of direct financial interest in the audit client
by the audit firms, its partners or members of the engagement
team as well as their direct relatives.
2. Prohibition of receiving any loan and/or guarantees from
or on behalf of the audit client by the audit firm, its partners or
any member of the engagement team and their direct relatives.
3. Prohibition of business relationship with the audit client
by the audit firm and other associated persons as mentioned
above.
4. Prohibition of audit partners and other associated
persons from joining an audit client or any key personnel of the
audit client wanting to join the audit firm, for a period of two
years from the time they were involved in the preparation of
accounts and audit of the client.
5. Prohibition of undue dependence on audit
client by ensuring that fee received by a firm from
any one client and its subsidiaries and affiliates
should not exceed 25 percent of the total revenue of
the audit firm, providing certain exceptions in case
of new or small audit firms.
6. Prohibition, restraining audit firms from
performing certain non audit services, as per the list
specified for this purpose, in line with similar
provisions contained in the Sarbanes-Oxley Act of
the US.
7. Rotation of the audit partners and at least 50
percent of the engagement team, responsible for the
audit every five years, suggesting rotation of
statutory auditors
The committee further recommended that………
Disclosures: With regard to disclosure requirements, the committee
recommended that the auditors should disclose implications of
contingent liabilities, so that the investors and shareholders have a
clear picture of a company’s contingent liabilities. The
management on its part should provide a clear description of each
material liability and its risks and the auditors should give their
comments on management’s views, in clear terms.
Qualifications in audit report: In addition to the existing provisions
in the Companies Act, regarding qualifications in audit reports, the
committee has made further recommendations to the effect that the
auditor should read out the qualifications with explanations, to the
shareholders at the company’s annual general meeting and the audit
firm is mandated to send separately a copy of the qualified report to
the Registrar of Companies, SEBI and the Principal Stock
Exchange, with a copy of the letter to the management of the
company.
• Replacement of auditors: In the event of an auditor being
appointed in the place of the retiring auditor, the committee
has recommended that section 225 of the Companies Act be
amended to require a special resolution for the purpose and
that the explanatory statement to give reasons for such
replacement. The outgoing auditor to have the right to
comment and the Audit Committee to rectify whether the
explanatory statement is true and fair.
• Certification of Accounts: A very significant
recommendation of the committee is to require a company to
furnish a certificate by the CEO and CFO stating that the
signing officers have reviewed and that the statements do not
contain any materially untrue or misleading statement, not
omitted any material fact and the statements present a true and
fair picture of the financial/operational state of the company,
the signing officers are responsible for establishing and
maintaining internal controls.
• Independent Director: A new definition has been offered by
the committee to include a non-executive director, who
further fulfills certain conditions to qualify to be an
independent director. Apart from receiving remuneration, the
director does not have any material pecuniary relationship
with the company and its promoters, the senior management
and holding, subsidiary and associate companies, not to be a
relative of promoters or management at the Board level or one
level below the Board, has not been an executive of the
company for the last three years, has not been a partner or
executive of the statutory audit firm, Internal audit firm of the
company for at least three years.
• Number of Independent Directors: The committee
recommended that in case of all listed companies, as well as
unlisted public limited companies with a paid up capital and
free reserves of Rs.10 crore and above, at least 50 percent of
the total number of directors shall be independent directors.
• Minimum number of Directors: The committee
recommended that the minimum number of directors for the
categories of companies referred to above shall be seven of
which at least four shall be independent directors.
• Board proceedings: The committee recommended that
proceedings of the Board reflected in minutes should clearly
disclose, apart from the members who are in attendance, the
duration of each meeting and the details of the proceedings
thereof. The committee has also recommended for holding
the board meeting through tele/video conferencing.
• Exemption from criminal and civil liabilities: The
recommendations include that non-executive/independent
directors be exempted in the definition of chapter of various
enactments from criminal and civil liabilities
• Training for independent directors: It has been
recommended that the independent directors should
compulsorily undergo at least one training course before
assuming responsibilities or within a year from the date of
becoming an independent director. Directors failing to
undergo such training would be disqualified under section
274 (1)(g) of the Companies Act after giving reasonable
notice.
• Remuneration of non-executive directors: The committee,
in view of the enhanced responsibilities of non-
executive/independent directors, recommended reviewing the
statutory limit on the sitting fees and it should be resolved
between the management and shareholders.
– Audit committees: As per the report, the audit committee
should consist of only independent directors. However, this is
not to be mandatory for unlisted companies having 50 percent
or less shareholders, companies not having debts from
institutions and banks, and unlisted subsidiaries of listed
companies.
The chairman of the Audit committee must annually certify
whether and to what extent each of the functions listed in
audit committees charter was discharged in the course of the
year. This will serve as the committee’s action taken report to
the shareholders. It should also give a specific report on
adequacy of internal control system, perceptions of risks and
in the event of any qualifications, why the audit committee
accepted and recommended the financial statement with
qualifications.
• Setting up of a Corporate Serious Frauds Office: The
committee suggested setting up of a corporate serious frauds
office without taking away the powers of investigation and
prosecution from existing agencies for detecting the frauds
committed by companies.
• The Department of Company Affairs has accepted most of the
suggestions and many of the recommendations have been
included in the Companies (Amendment) Bill 2004.
 Shri Narayana Murthy Committee’s report
The SEBI, while analysing the financial statements of
companies and the reports on corporate governance,
observed that their quality was not uniform. It therefore
felt a need to review the existing code on corporate
governance as to the adequacy of the present practices
and to improve such practices. The committee on
corporate governance was, thus, set up by SEBI under
the chairmanship of Shri N.R. Narayana Murthy.
The terms of reference were:
1. to review the performance of corporate
governance and
2. to determine the role of companies in responding to
rumour and other price sensitive information circulating
in the market, in order to enhance the transparency and
integrity of the market.
The important mandatory and non-mandatory
recommendations of the committee are discussed
below:
Mandatory recommendations
Audit committee: The committee recommended that the
audit committee of public listed companies would be
required to review the following information mandatory:
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.
Management letter/s of internal control
weaknesses issued by statutory/internal auditors and
Records of related party transactions.
Continued…
Related party transactions: A statement of all transactions
with related parties including their bases should be placed
before the audit committee for formal approval/ratification
and that if any transaction is not on an arm‟s length basis,
management should provide explanation to the audit
committee justifying the same.
Proceeds from initial public offerings: The companies
raising money through initial public offering, should disclose
to the audit committee the uses/application of funds under
major heads on a quarterly basis. Each year the company
shall prepare a statement of funds utilised for the purposes
other than those stated in offer document/prospectus. This
statement shall be certified by the independent auditors of
the company. The audit committee should make appropriate
recommendations to the Board to take steps in the matter.
The suggestion enlarges the existing requirement in this
regard and is a response to manipulations perpetrated by
some corporate in this area.
Continued…
Risk Management: The committee has deemed
it necessary for the boards of the companies to
be fully aware of the risks involved in the
business and that it is also important for the
shareholders to know about the process by
which companies manage their business risks.
The mandatory recommendations in this regard
are:
“procedures should be in place to inform board
members about the risk assessment and
minimization procedures. These procedures
should be periodically reviewed to ensure that
executive management controls risks through
means of a properly defined frame work”
Continued…
Management should place a report before the entire board
of directors, every quarter, documenting the business
risks faced by the company, measures to address and
minimise such risks, and any limitations to the risk
taking capacity of the Corporation. This document
should be formally approved; by the board.
At present, in clause-49 of the Listing Agreement, there is
a stipulation that the management discussion and
analysis report forming part of the board‟s annual report
should include discussion on “risks and concerns”. The
suggestion contained in the Narayana Murthy
Committee‟s report is more elaborate and this would
encourage a meaningful discussion at the board level
periodically and the company will have the benefit of
advice from board members who are not in day-to-day
management.
Continued…
Code of conduct: The committee has recommended
making it obligatory for the board of a company to lay
down a code of conduct for all board members andd
senior management of the company and that this code
should be posted on the company‟s website and all
board members and senior management personnel
shall afirm compliance with the code on an annual
basis. The annual report of the company shall contain a
declaration to this effect, signed off by the CEO. This
suggestion is in line with the best practices adopted by
corporate in developed countries.
Nominee directors: The committee recommended doing
away with nominee directors. If an institution wishes to
appoint a director on the board, such appointment
should be made by the shareholders. Nominee of the
Government on public sector companies shall be
similarly elected and shall be subject to the same
responsibilities and liabilities as other directors.
Continued…
Other mandatory recommendations:
Compensation to non executive directors to
be approved by the shareholders in general meeting;
restrictions placed on grant of stock option,
requirement of proper disclosures of details of
compensation.
Whistle blower policy to be in place in a
company (freedom to company‟s personnel to
approach the audit committee without necessarily
informing the superiors if they observe an
unethical or improper practice, protection for the
complainant from retaliation etc.
The directors of the holding company are to be in
the picture; audit committee of the holding
company to review financial statements of
subsidiaries etc.
Continued…
Non-mandatory recommendations
The non-mandatory recommendations pertain to moving to a
regime providing for unqualified corporate financial
statements, training of board members and evaluation of
non-executive director‟s performance by a peer group
comprising the entire board of directors, excluding the
director being evaluated.
The SEBI has approved modifications in clause-49 of Listing
Agreement to give effect to the recommendations of Shri
N.R. Narayana Murthy Committee„s report on corporate
governance. SEBI issued a circular dated August 26,
2003 to all the stock exchanges in this regard. The
revised clause-49 contains the sub-clause as per the
existing clause-49m as well as new sub-clauses. All listed
entities having a paid up capital of Rs. 3 Crore and above
or net worth of Rs. 25 crore or more at any time in the
history of the entity, are required to comply with the
provisions of revised clause-49, effective from April 1,
2004.
Continued…
Shri J.J. Irani Committee’s report
The committee consisting of 13 members and 6 special
invitees drawn from various disciplines and fields was
constituted on 2nd December 2004 under the
chairmanship of Dr. J.J. Irani, Director, Tata Sons with
the task of advising the Government on the proposed
revisions to the Companies Act 1956. The objective of
this exercise was to have a simplified compact law that
will be able to address the changes taking place in the
national and international scenario, enable adoption of
internationally accepted best practices as well as
providing adequate flexibility for timely evolution of new
arrangements in response to the requirements of ever-
changing business models. The Committee presented
its report to Government in May 2005.
Continued…
 A summary of recommendations made by the
committee are as under :
1. Background
1.1 Legal framework for corporate entities is
essential to enable sustainable economic reform. Such
framework has to be in tune with emerging economic
scenario, encourage good corporate governance and enable
protection of the interests of the stakeholders, including
investors.
It is appropriate that comprehensive reviews of the Companies
Act 1956 has been taken up through a consultative process
initiated by Ministry of Company Affairs by exposing a
Concept Paper on Company Law through electronic media.
Such broad based consultation would enable working out an
appropriate legislative proposal to meet the requirements of
India’s growing economy and should form an integral part of
the law making exercise.
Continued…
2. Approach towards new Company Law
2.1 Company Law should comprise of the basic principles guiding the
operation and governance of different kinds of corporate entities in
India and be available in a single, comprehensive, centrally
administered framework. Such legal framework should provide a
smooth and seamless transition from one form of business entity to
another and be amenable to adaptation to new business models as
they emerge.
2.2 Company law should be compact. While essential principles should
be retained in the substantive Law, procedural and quantitative
aspects should be addressed in the Rules.
2.3 Law should enable self-regulation but impose greater accountability
through disclosures and speedy administration of reasonable legal
sanctions.
2.4 The new Company Law should enable harmonious operation of all
Government and regulatory agencies and dovetailing of various
governance codes and standards complementary with the principles
laid down in the law.
2.5 The law should enable development of institutional structures to
address new requirements dictated by changes in the economic
environment.
Continued…
3. Classification and Registration of Companies
3.1 The law should take into account the requirements of different
kinds of companies prescribing the essential requirements of their
corporate governance structure.
3.2 Small and Private Companies should be provided greater flexibility
and freedom of operation while enabling compliance at low cost. To
unleash the entrepreneurial talent of the people in the information
and technology driven environment, law should recognize One
Person Company (OPC). Such companies should be provided with
a simpler legal regime through exemptions.
3.3 Government Companies should be treated at par with other
companies and be subject to a similar compliance standards.
3.4 There may not be any restriction to a company having any number
of subsidiaries or to such subsidiaries having further subsidiaries.
However, the Act should provide for a more elaborate regime of
corporate governance along with disclosures that reveal the nature of
the transaction truthfully. Transactions between holding and
subsidiary companies may be treated as related party transactions
and consolidation of financial statements should be mandatory for
such companies
Continued…
3.5 Special dispensations for Producer Companies and Public
Financial Institutions (PFIs) need not be provided through the
Companies Act. If need be a separate legislation may be
considered for such entities.
3.6 Law should recognize that joint ventures enable access to capital,
technology and markets and should provide legal recognition to
joint ventures ensuring that such arrangements do not become a
window for circumventing the essential provisions of the Law.
3.7 The e-Governance Project (MCA-21) taken up by the Government
promises significant efficiency and gains to companies in
compliance processes. All registration process and statutory filings
should be made compatible to the electronic medium. Such filings
should be kept secure and should be identifiable through digital
signatures.
3.8 Process of registration should be speedy, optimally priced and
compatible with e-Governance initiatives. Companies should be
required to make necessary declarations and disclosures about
promoters and directors at the time of incorporation. Stringent
consequences should follow if incorporation is done under false or
misleading information.
Continued…
3.9 Strong action should be taken under law against companies that
vanished with the investors‟ funds. Preventive action in respect of
such “vanishing companies” should begin with registration itself and
should be sustained through a regime that requires regular and
mandatory filing of statutory documents. This should be followed up
with clearly provided legal process for tracking and causing
disgorgement of ill-gotten gains. Corporate veil should be lifted to
enable access to the individuals responsible.
3.10 Regular filing should be made easy efficient and cost effective.
Non-filing of documents or incorrect disclosures should be dealt
with seriously. Delays in filing should be penalized through non-
discretionary late fee relatable to the period of default. There
should be a system of random scrutiny of filings of corporate to be
carried out by the registration authorities.
3.11 Limited liability partnerships should be facilitated through a
separate enactment. Companies Act need not prescribe limitations
on the number of members of other kinds of organisations.
3.12 Law should require transparency in functioning of charitable and
licensed companies.
Continued…
3.13 Procedures applicable for statutory
compliance should be made simpler and
declaration based. The requirement of obtaining
the certificate of Commencement of Business to
be dispensed with. The procedure for a company
seeking exit from the Companies Act should be
made equitable and fair to the stakeholders
enabling easy exit to companies that cease to
transact business. The procedure for shifting of
registered office from one State to another State
should also be made simpler, faster and easier.
Continued…
4. Management and Board Governance
4.1 Law should provide an appropriate framework of governance that
should be complied with by all companies without sacrificing the
basic requirement of exercise of discretion and business judgment
in the interests of company and its stakeholders.
4.2 There should be an obligation on the part of a company to
maintain a Board of Directors as per the provisions of the Law and
to disclose particulars of the directors through statutory filings of
information.
4.3 Law should provide for only the minimum number of directors
necessary for various classes of companies. There need not be any
limit to maximum number of directors. Government should not
intervene in the process of appointment and removal of directors in
non-Government companies. No age limit for directors need be
specified in the Act other than procedures for appointments to be
followed by prescribed companies for appointment of directors above
a particular age.
Continued…
4.4 Every company to have at least one director resident in India.
Requirement of obtaining approval of Central Govt under
Companies Act for appointment of non-resident managerial
persons should be done away with. Duty to inform the Registrar of
particulars regarding appointment/resignation/death etc. of directors
should be that of the company.
4.5 Presence of independent director on the boards of companies
having significant public interest would improve corporate
governance. Law should recognize the principle of independent
directors and spell out their attributes, role, qualifications, liability
and manner of appointment along with the criteria of independence.
However, prescription of the number and proportion of such
directors in the Board may vary depending on size and type of
company and may be prescribed through Rules.
4.6. Decision on remuneration of directors should not be based on a
“Government approval based system” but should be left to the
company. However, this should be transparent, based on principles
that ensure fairness, reasonableness and accountability and should be
properly disclosed. No limits need be prescribed. In case of
inadequacy of profits also the company to be allowed to pay
remuneration recommended by remuneration committee (wherever
applicable) and with the approval of shareholders.
Continued…
4.7 Certain committees to be constituted with participation of
independent directors should be mandated for certain categories of
companies where the requirement of independent directors is
mandated. In other cases constitution of such committees should
be at the option of the company. Law should specify the manner
and composition of various committees of the Board like (i) Audit
Committee (ii) Stake-holder‟s Relationship Committee and (iii)
Remuneration Committee along with obligation on the part of the
company to consult them in certain matters.
4.8 Certain basic duties of directors should be specified in the Act in
an inclusive manner.
4.9 The conditions for disqualification of directors should also be
prescribed in the Act. Directors should be required to disclose to the
Board their previous disqualification, if any. Failure to attend board
meetings for a continuous period of one year to be made a ground for
vacation of office regardless of whether or not leave of absence was
granted to such director. Specific provisions to be made in the Law to
regulate the process of resignation by a director.
Continued…
4.10 Board meetings to be held every three months with a
minimum of four meetings to be held in a year. The gap
between two meetings not to exceed four months.
Meetings by electronic means to be allowed. In the case
of companies where Independent Directors are prescribed,
notice period of 7 days has been recommended for Board
Meetings with provisions for holding emergency meetings
at a shorter notice. Consent of shareholders by way of
special resolution should be mandatory for certain
important matters.
4.11 Use of postal ballot during meetings of members should be
allowed to be more widely used by companies. Law should
provide for voting through electronic mode. AGMs may be
held at a place other than place of registered office (in India),
provided at least 10% members in number reside at such
place. Small Companies to be given an option to dispense
with holding of AGM. Demand for poll to be limited with
due regard for minority interests.
Continued…
4.12 Managing Director (MD)/Whole Time Directors
(WTD)/ Executive Director (ED) should be in the whole-
time employment of only one company at a time.
Provisions relating to options for appointment of
directors though proportionate representation to be
continued. Limit of paid up capital under existing section
269 for mandatory appointment of MD/WTD to be
enhanced to Rs. 10 crore.
4.13 Every company should be required to appoint, a
Chief Executive Officer, Chief Finance Office and
Company Secretary as its Key Managerial Personnel
whose appointment and removal shall be by the Board of
Directors. Special exemptions may be provided for small
companies, who may obtain such services, as may be
required from qualified professionals in practice.
Continued…
5 Related Party Transactions
5.1 Law should impose a duty on every director to disclose
to the company the contracts in which he has any interest
or concern. Transactions in which directors are interested
should take place subject to approval of Board of directors
and beyond a limit subject to approval of shareholders.
Details of transactions of company with its holding,
subsidiary and associate companies to be placed
periodically before the Board through the Audit
Committee, if any and those not in the ordinary course or
not on an arms length basis to be placed along with
management justification thereof. Loans to directors and
the facility of holding of office or place of profit by
relative of a director should be regulated through
shareholders approval. There need not be any
requirement of Government approvals for such
transactions.
Continued…
6. Minority Interests
6.1 „Minority‟ and „Minority Interest‟ should be defined in the
substantive Law. Law must balance the need for effective decision
making on corporate matters through consensus without permitting
persons in control to stifle action for redressal arising out of their
own wrong doing.
6.2 Law should prescribe a regime in which minority rights are fairly
protected without enabling any interest group to obstruct corporate
processes. There should be recognition of principle of valuation of
shares through an independent valuer whenever company causes
an exercise of merger/ restructuring etc.
6.3 The procedure for enabling/giving an effective hearing in company
meetings to minority shareholders should be prescribed. In order to
object a scheme of amalgamation by investors, a limit should be
determined either according to minimum number of members or
according to minimum percentage of shareholding.
6.4 Law should recognize “Class suits’ and “Derivative Actions”.
Continued…
7. Investor Education and Protection
7.1 Investors should be enabled to exercise their choice in an
informed manner while making investment decisions.
However, interests of small investors and depositors
should be specifically safeguarded.
7.2 A separate enactment for investor protection is not
required. Corporate processes should recognize the
investors as a stakeholder. There is a need to bring about
coordination in the role and actions of various regulatory
agencies on the matter relating to protection of interests of
small investors.
7.3 Monitoring the end use of funds collected from public
should be the responsibility of the shareholders of the
company. There should be transparency through disclosures
of financial operations of the company. The insurance option
should be explored for deposits with the companies. Credit
rating need not be mandated except for companies seeking
deposits.
Continued..
7.4 There is a need to enable exit options by investors in a
reasonable and equitable environment. No provision of
compensation except in cases of fraud. Law should enable
ill-gotten gains acquired through cheating of investors to
be accessed and disgorged.
7.5 An effective investors grievance redressal mechanism by
way of recourse to consumer courts and capital markets
ombudsman should be provided for safeguarding interests
of investors.
7.6 Rights of investors in respect of unclaimed dividends etc.
to be recognized even after 7 years period. IEPF should not
be based solely on expropriated unclaimed returns but
should be in the form of a corpus in which funds may be
parked to be managed and utilize for investors education.
Contributions to IEPF not to be deposited in Consolidated
fund but directly to IEPF, to be managed by an
Administrator. Schemes initiated by Central Government
under IEPF should be made more comprehensive.
Continued…
8. Access to Capital
8.1 There is a need for flexibility to manage capital
dynamically and to enable reallocation of capital
between businesses.
8.2 The basic framework for governance issues relating to
maintenance and management of capital, the rights
flowing from ownerships of such capital and regulation
of various stakeholders in a corporate entity with regard
to capital should be addressed in the Companies Act.
8.3 Simultaneous to the harmonious regulatory approach
providing for space to each regulator to operate effectively
in their domain, provisions in the Companies Act allowing
multiple jurisdiction may be done away with. There is
however, need for different regulatory agencies to interact
with each other more comprehensively in operational
matters.
Continued…
8.4 Timeframes prescribed for processes of issue of capital be
rationalized to be at par with international practices.
Processes should be made time bound with the introduction
of concept of Deemed Approval. Corporate issuers of capital
should also be allowed to use electronic media for
communication of information in the process of issue of
capital.
8.5 Concept of Shelf Prospectus may be extended to other
class(es) of companies who access capital market more
frequently as Well Known Seasoned Issuers (WKSI), in a
manner to be prescribed by the capital market regulator. In
reckoning numbers of persons to whom offer is made, the
offers made to Qualified Institutional Buyers (QIBs) should be
excluded.
8.6 Enabling provisions for Tracking Stock and Treasury Stocks
could be made in the new Law. Actual introduction of these
stocks should however be preceded by certain preparatory
actions to be taken. Targeted Buyback need not be introduced
at this stage.
Continued…
8.7 Companies should be permitted to issue
perpetual/longer duration preference shares.
Regulatory framework for payment of dividend to
preference shares, particularly when they are
cumulative should be reviewed.
8.8 Institutional mechanism such as Courts/NCLT should
decide on issues relating to capital reduction in a time
bound manner with due safeguards for interests of
creditors.
8.9 The regime of acceptance and invitation of Public
Deposits should be made stricter.
8.10. Registration of charges to be enabled by the
lender if the borrower does not register the charge
within a fixed time.
Continued…
8.11 Non-cash consideration for allotment of shares should be valued
through independent valuers. Provisions relating to inter-corporate
loans and investments should be strengthened to ensure that there
is no mis-use of these provisions for price rigging or by diversion of
funds. Penalties to be increased in case of non-compliance.
Detailed disclosures to be given, in case of loan transactions, in the
annual reports of the lending company about the end use of loans
and advances by recipient.
8.12 In case of unlisted public companies, preferential allotment
should be made on the basis of valuation by an independent valuer.
8.13 Penalties for fraudulently inducing any person to invest money
should be made more stringent
8.14 Law may allow, subject to adequate disclosures and fulfillment of
conditions, to retain subscription received in Public Offer,
notwithstanding non receipt of amount of minimum subscription.
8.15 Nidhi Companies to be regulated by RBI. The norms relating to
limits of DRR in case of NBFCs should be prescribed by RBI.
Continued…
9. Accounts and Audit
9.1 Accounting Standards should be notified under the Companies
Act early.
9.2 Consolidation of financial statements should be made mandatory.
Requirement of attaching financial statements of subsidiary
company(ies) with the holding company to be done away with.
9.3 Format of financial statements should be prescribed in the
Act/Rules. Cash Flow Statement to be made part of mandatory
financial statements. Financial year should be aligned to uniformly
end on 31st March. Option to maintain books in electronic form
should be given to companies. Books of accounts should be
preserved by a company for a period of seven years.
9.4 Companies should have the option to keep records outside the
country also along with safeguards providing for access and
production of such records if needed.
9.5 Small Companies should be given exemptions/relaxations in respect
of disclosures relating to financial statements.
Continued…
9.6 The financial statements should be signed by
MD/CEO/CFO/Company Secretary, wherever applicable,
even if they were not present in the meeting which approved
the financial statements. All directors present in relevant
meeting to sign financial statements. Dissenting director also
to sign with dissent note.
9.7 Listed companies should put full financial statements on
their websites. Companies should be allowed to use
electronic means for circulation of financial statements.
Revision of financial statements should be allowed only in
extreme situation such as those dictated by change in law.
9.8 The Companies (Transfer of Profits to Reserves) Rules, 1975
and The Companies (Declaration of Dividend out of Reserves)
Rules, 1975 may be done away with. Provisions relating to
payment of Interest out of capital [existing section 208] may be
deleted.
Continued…
9.9 When Central Govt approves any basis of depreciation, there
need not be any restriction of writing off of 95% of cost of the asset
over a specified period. The Act should provide flexibility in respect
of rates of depreciation for infrastructure or similar projects.
9.10 Rotation of auditors not be mandated in Law. Auditor to
be prohibited from performing certain non-audit functions/services
to be specified in Law/rules. Disqualification of auditors to be
suitably mentioned in the Law/rules. Basic duties and liability of
auditors should be in the Act itself. Quantification of penalty for
auditors to be prescribed.
9.11 The committee felt that since statutory audit is conducted by the
statutory auditor appointed by the C&AG in the manner directed by
him, the test/supplementary audit is superfluous, as it would duplicate
audit work already done by statutory auditor. Further, where any
directions are given by the C&AG to the Statutory Auditor not in
accordance with the Accounting Standards, the Statutory Auditor
may be required to mention the same in the notes to accounts.
Continued…
9.12 Investors to be educated to understand
financial statements. Shareholders
associations to be enabled to take part
actively in this regard.
9.13 Enabling provisions for empowering
Central Government to order Cost audit in
certain cases should be retained.
Government approval for appointment of
Cost Auditor for carrying out such audit is
not necessary. Special Audit need not be
continued.
Continued…
10. Mergers and Amalgamations
10.1 A single forum for approval of mergers and
acquisition schemes in a time bound manner to be provided.
The concept of “Deemed approval” concept to be provided in
cases where the different regulators do not intimate their
comments timely. In stead of existing requirement of
separate reports from Registrar of Companies (ROC) and
Official Liquidator (OL) in respect of affairs of the company,
provisions should be made for time bound responses from
them in response to notices.
10.2 Valuation of shares of companies involved in
schemes of mergers and acquisition by independent
registered valuers (rather than court appointed valuers)
should be made mandatory.
10.3 In view of inconsistency in approach followed by
various Courts/State Governments, there is need to clarify issue
regarding payment of stamp duty on Court Orders sanctioning
schemes of merger/acquisition.
Continued…
10.4 The concept of Electronic registry should be
evolved. Jurisdictional issues vis-à-vis stamp duty should
be resolved to enable single registry. Further, the Act
should provide for compulsory registration of all property of
company above a certain value.
10.5 „Contractual mergers‟ and „Cross Border mergers
and acquisition‟ may be suitably addressed in the new Act.
Specific provisions needed for allowing merger of listed
company with an unlisted company and vice versa.
Mergers among associated companies, private companies
or companies where no public interest is involved, should
be allowed through a less stringent framework.
10.6 Subject to safeguards relating to liquidity
test/security pool, any Corporate Debt Restructuring (CDR)
proposal approved by 75% of secured creditors in value
should be sanctioned, notwithstanding the minority dissent.
Continued…
10.7 The need to file separate scheme for reduction
of capital simultaneously with the scheme for mergers
and acquisition should be avoided.
10.8 instead of existing provisions of section 396,
provisions should be made to empower Central
Government to approach Court/Tribunal for suitable
order for amalgamations of two companies in public
interest.
10.9 The fees paid by Transferor Company on the
authorised capital should be available as a set off to the
transferee company upon the sanction of the scheme.
10.10 A Non obstinate provision to be introduced to
ensure that the assets and liabilities of transferor company
absolutely vest in the transferee company notwithstanding
anything to the contrary in any other law.
Continued…
11 Investigation
11.1 Instead of separate provisions for both inspection and
investigation under the Act, a single comprehensive process of
investigation, may be provided for, including powers to inspect.
Comprehensive framework for carrying out investigation to be
specified in Law.
11.2 The liability for compliance of Law should be on the
company management. This should be combined with a system
of oversight through random scrutiny of documents.
11.3 On the basis of technical scrutiny, the Registrar may
have the power to call for any other relevant information,
documents or records as required under Law.
11.4 The Govt may appoint an officer of the Govt or any
private professional as inspector to carry out investigation.
11.5 The Serious Frauds Investigation Office (SFIO) should
be strengthened. A separate statute may be framed for SFIO.
SFIO should also assist in capacity building for similar
organization that may be set up at state level.

Continued…
12. Offences and Penalties
12.1 The Law should encourage compliance through self-
regulation. It should clearly define the rights of stakeholders and
means of redressal of their grievances. State to discharge an
important responsibility not only in framing the Law but also in its
effective implementation, enforcement and administration.
12.2 There is need for a regime of penalties commensurate
with the offences. Penalties regime for corporate should be in the
nature of monetary fine since company being an artificial economic
person cannot be imprisoned.
12.3 The liability of the Board of directors to be clear and absolute. A
clear regime for identification of Officers-in-default also to be
necessary. Specific rules for fixing criminal liability in appropriate
cases should be framed. The liability of CEOs/CFOs/Company
Secretaries as well as other officers of the company who are in default
to be specifically provided for. The professionals advising the
companies on various matters also to be held liable if found not to be
diligent or law compliant.
Continued…
12.4 The Company Law to provide for an in-house structure for
levying non-discretionary monetary penalties only (i.e. in respect of
offences not involving imprisonment). Central Government (and its
officers) to be vested with powers to levy such monetary penalties.
Mechanism to transfer eligible proceedings from courts to in-house
structure to be suitably provided for.
12.5 The penalties may be classified in the form of two self-
contained schedules –one for monetary penalties and the other for
those involving imprisonment, with or without fine. The Law to lay
down the maximum as well as minimum quantum of penalty for
each offence. The Law to provide for suitable deliverance in
respect of repeats offences.
12.6 In case of fraudulent activities/actions, provisions for
recovery and disgorgement to be suitably provided for. The issue of
“Phoenix problem” to be suitably addressed through a combination
of disclosures, insolvency processes and disqualification of
delinquent directors. The Law to provide for lifting of the corporate
veil to check any fraudulent activity.
12.7Law to provide for special powers to compel filing of documents,
with enhanced penalties for persistent default.
Continued…
13. Restructuring and Liquidation
13.1 An effective insolvency system is an important
element of financial system stability. There is a need for
an effective Insolvency framework, which enables
resolution of insolvency in a timely and efficient manner.
Corporate insolvency may be addressed through
Companies Act. A separate Insolvency law is not
necessary at present.
13.2 A definitive and predictable time frame is
needed for rehabilitation and liquidation process.
13.3 The law should strike a balance between
rehabilitation and liquidation process. It should provide
an opportunity for genuine efforts towards revival. Only
where revival/rehabilitation is not feasible, winding up
should be resorted to.
Continued…
13.4 Both debtors and creditors should have fair
access to insolvency system. Rather than net worth
erosion principle, test for insolvency should be default in
payment of matured debt on demand within a
prescribed time [liquidity test]. Debtors seeking
rehabilitation should be able to approach Tribunal only
with a draft scheme. Creditors being at least 3/4th in
value may also file scheme.
13.5 A limited standstill period is essential for
genuine business restructuring to be regulated through
Tribunal‟s Orders during which there is prohibition on
unauthorized disposition of debtors‟ assets and
suspension of actions by creditors to enforce their
rights. The law should provide for appropriate
prohibitions on certain Debtors‟ rights [transfer, sale or
disposing of assets etc.] subject to certain exemptions
on initiations of insolvency.
Continued…
13.6 There should be duty on companies to convene
creditors and shareholders meeting on default in
payments to creditors to consider suitable steps to
protect interest of stakeholders, preserve assets and
adopt necessary steps to contain Insolvency.
13.7 The debtor assets should be subjected to
supervision or management of impartial, independent,
and effective Administrator.
13.8 Provisions should be made for setting up of
Committee of secured creditors to safeguard their
interest and provide a suitable platform for creditors‟
participation in the process. The law should also
provide for mechanism to recognize and record claims
of unsecured creditors.
Continued…
13.9 A Panel of Administrators and liquidators should
be prepared and maintained by an independent body
out of experienced and knowledgeable Insolvency
Practitioners. Private professionals should play a
meaningful role in all aspects of insolvency process.
The law should encourage and recognize concept of
Insolvency Practitioners.
13.10 The law should prescribe a flexible but
transparent system for disposal of assets efficiently and
at maximum value. Secured creditors‟ claim should
rank pari passu with workmen. Public interests,
Government claims should not get precedence over
private rights. Revival plan should be required to be
approved by secured creditors holding 3/4th of total
value to be binding on all creditors.
Continued…
13.11 Establishment of NCLT would provide a major initiative for
insolvency system reforms in the country and should be enabled
quickly. NCLT should have general, non intrusive and supervisory
role. The Tribunal should adopt a commercial approach to dispute
resolution observing the established legal principles of fairness in
the process. Selection of President and Members of the Tribunal
should be such so as to enable a wide mix of expertise for conduct
of its work.
13.12 Provisions relating to rehabilitation cess should be
replaced by the concept of “Insolvency Fund” [Fund] with optional
contributions by companies. Government may make grants for the
Fund and provide incentives to encourage contributions by
companies to the Fund. Companies which make contributions to
the Fund should be entitled to certain drawing rights in the event of
insolvency. Administration of the Fund should be by an
Independent Administrator. Insolvency Fund should not be
linked/credited to Consolidated Fund of India.
Continued…
13.13 A suitable framework for Cross
Border Insolvency which provides for
rules of jurisdiction, recognitions of foreign
judgments, co-operation and assistance
among courts in different countries and
choice of law is required. The
Government may consider adoption of
UNCITRAL Model Law on Cross Border
Insolvency with suitable modifications at
an appropriate time.