Comments
Companies Act, 2013 has brought renewed focus on corporate governance. The first tranche of draft rules, now open to public comments, is spurring companies to assess their preparedness for the new regime.
Diversity and independence
The requirement for at least one woman director applies to listed companies and other public companies exceeding a threshold limit of paid-up capital or turnover. While listed companies have one year to comply, others have three years.
In public companies exceeding the threshold limit of paid-up capital, turnover, outstanding loans and so on, independent directors should comprise one-third of the Board.
The other classes of companies would continue to be governed by the relevant regulations. The Board composition of listed companies would continue to be governed by clause 49 of the Listing Agreement. The Securities and Exchange Board of India has floated a consultation paper to align clause 49 with the new company law.
CSR initiatives
The draft rules emphasise that corporate social responsibility (CSR) should not be limited to donation or charities, but have a larger social objective. Activities that solely benefit employees and/ or their family members, or which are in the normal course of business would not constitute CSR. Companies have a fair degree of flexibility in structuring initiatives — they can set up a trust, foundation or society to implement the CSR programme. Alternatively, it could be implemented through other organisations that have a track record of at least three years in related areas.
The CSR Committee set up by the Board should prepare a transparent monitoring mechanism. The companies should report, in the prescribed format, their CSR initiatives in the Directors’ Report and on the company Web site.
Only activities within India will qualify. Tax deduction for CSR spend will depend on provisions under the Income Tax Act. Reporting should be yearly from financial year 2014-15.
The Government has adopted the ‘comply or explain’ approach, and no specific penalties are prescribed for non-compliance provided there is adequate disclosure on reasons for failure. However, responsible corporate citizens would like to set benchmarks for socially responsible behaviour, and would be wary of reporting a failure.
Board disclosures
The Board of directors should provide several mandatory disclosures in its report related to risk management policy, compliance monitoring process, CSR initiatives, contracts with related parties, and so on. It should ensure that robust internal processes are in place to support the disclosures; non-compliance could have severe repercussions.
One hopes that the final set of rules notified by the Government would address the grey areas and lay ambiguities to rest, giving corporate governance a major boost.
The author is Executive Director and Leader, Risk Advisory Services, PwC India
Pankaj Tewari, Senior Manager — Risk Advisory Services contributed to the article.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.