Ushering in responsible boardrooms

Companies Bill, 2012 has introduced significant changes in the provisions related to governance, particularly the role of directors. This is set to significantly change the manner in which listed and other prescribed class of companies operate in India.

The Board of Directors now has additional powers on behalf of a company through resolutions exercised in board meetings to include issue of securities in or outside India, diversify business, and approve amalgamation, merger and takeover.

The requirement to have at least one woman director for a prescribed class of companies will encourage gender diversity. The requirement for at least one resident director will increase the local presence of directors.

Enhancement of the fiduciary duties of directors to act in accordance with the articles of association provides statutory backing to judicial pronouncements.

Restrictions placed on directors by way of non-cash transactions involving directors, insider trading and provisions for class action suits by shareholders would minimise corporate delinquencies.

An independent director has been defined to exclude nominee directors, and the importance and role have been enhanced by prescribing a code of professional conduct, the minimum number of independent directors in public companies, and the role and functions. Additionally, at least one-third of the Board in listed companies should comprise independent directors where the Chairman is a non-executive director, and at least half the Board should comprise independent directors where the non-executive Chairman is, or related to the promoter. The tenure of office for an independent director is a maximum of two tenures of five consecutive years with stipulated cooling-off periods.

An independent director will no longer be entitled to stock options but may receive fees and profit-linked commission, subject to prescribed rules. They would be appointed by constituting a data bank maintained by the Ministry of Corporate Affairs. From a liability perspective, immunity from civil or criminal action is available to independent directors and they are also excluded for retirement by rotation in listed companies.

However, the Securities and Exchange Board of India and the Ministry of Corporate Affairs have different compliance requirements with respect to the independent director’s integrity or relevant expertise/ experience, examination of the independence of their relatives, qualifications and so on. This may lead to hardship and increased cost of compliance for companies.

Audit committees have been entrusted with the additional responsibility of establishing a ‘vigil mechanism’ for directors and employees to report genuine concerns. The majority of the audit committee members should be independent and financially literate.

Other committees of the Board have assumed significance under the Bill. The Corporate Social Responsibility Committee formulates policy for spending at least 2 per cent of the average net profits of the immediately preceding three years on CSR activities. A Nomination and Remuneration Committee is required by every listed company and other prescribed companies to formulate policies relating to the remuneration of directors, key managerial personnel and other employees, criteria for determining qualifications and the positive attributes and independence of a director. Further, the concept of Stakeholders Relationship Committee has been recognised to resolve grievances of security holders.

The Bill has also significantly enhanced the disclosures and responsibility affirmations the Board should make in its report including

risk management policy of the company;

design and operating effectiveness of internal financial controls in listed companies;

formal annual evaluation of performance, including that of various committees and individual directors;

reasonableness of the remuneration of key managerial personnel, directors and senior management vis-à-vis the performance objectives of the company;

ratio of remuneration of each director to median employee’s remuneration;

contents of CSR policy and explanation for not spending the money set aside;

particulars of contracts or arrangements with related parties and justification for such transactions;

composition of the audit committee, in particular where the Board had not accepted any of its recommendations;

voting rights not exercised directly by employees in respect of shares to which the scheme relates;

reasons for voluntary revision of financial statements or Board’s report — a company can undertake voluntary revision if the directors have reason to believe the statements do not comply with the statutory provisions for any three preceding financial years after approval from Tribunal.

There are stringent fines and punishment prescribed for contravention and for fraudulently inducing persons to invest money in a company.

The Bill, in effect, reminds people at the helm of governance of their duty to act in good faith in the best interests of the company, employees, shareholders and environment, and avoid undue gain or advantage and situations of conflict of interest.

Arvind Nath, Associate Director, contributed to the article.

The author is Partner, Price Waterhouse

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